Thoughts on Sen. Wyden’s Fair Flat Tax Act of 2005

A couple of weeks back, I was invited to sit in on a conference call about Senator Ron Wyden’s (D-OR) Fair Flat Tax Act. The Fair Flat Tax Act of 2005 is based on several principles: relief for middle-class and lower-income taxpayers, tax simplification, tax break and loophole elimination, exemption of state and local taxes, and encouragement of savings and investment. It proposes reductions in the number of tax brackets, increases to the standard deductions for single and married filers, modifications of corporate aircraft deductions, and a number of other changes.

I’ve held off writing anything about this until now for a couple of reasons. I’m not a tax expert or a fiscal policy wonk, so evaluating the plan meant doing some research on numbers that I didn’t have at my fingertips. Also, because the only literature available on the plan is through Sen. Wyden’s web site, and none of it includes any of the figures the plan is using for revenue or expenditure projections or comparisons to current revenue estimates, it was difficult to get a grasp on exactly how the plan would affect overall revenues or changes in the balances between income levels and business income.

Apart from the name — “flat tax” always makes me think of that creepy Steve Forbes stare — the plan has some laudatory goals: treat work and wealth equally; end the discriminatory treatment of renters; increase revenue to pay down the debt; etc. The Wyden aides on the call said they expected President Bush to begin pushing his own idea of tax reform (presumably they’re expecting it to be labelled a “flat tax” as well) and that Sen. Wyden’s proposal is an attempt to get out ahead of the GOP for the next year.

That’s a good thing. But after some time to look at the numbers and some emails with one of the Senator’s staff, there’s something lackluster about FFTA2005 that makes my heart thump a little more slowly with dread.

During the conference call, my question to the Senator’s staff was how the ratio of corporate income taxes to personal income taxes in general revenues* was going to be affected. The point had already been made that the plan would reduce the deficit by $100 billion. In answer to my question, we were told that the increase in corporate income tax revenue under the plan would account for the bulk of the reduction, although we were then told that the $100 billion was actually spread over five years (the plan has a sunset of 2010). This is one of the points I made sure to check, because my understanding is that the deficit is calculated on a year-to-year basis, and reducing the deficit by $20 billion in each of five years doesn’t really mean you’re reducing it by $100 billion.

As we’ve seen though, in Iraq and on the Gulf Coast, $20 billion doesn’t go as far as it used to. That’s why I turned to the people who have the figures on these things, the Bureau of the Public Debt. According to them, the public debt as of 1 December was $8,107,952,560,719.68 (that’s $8.1 trillion). Their helpful little guide to the debt explains the difference between the debt and the deficit. Back in January, the administration forecasta record $427 billion deficit for the fiscal 2005 budget, up from $412 billion in fiscal 2004. That number was reduced in August to $331 billion. That was before Hurricanes Katrina and Rita.

Over the past four fiscal years (2002-2005), the total debt has increased by an average of $531.5 billion. The annual reduction in the deficit proposed in Senator Wyden’s plan is less than 4% of that number. The Bush administration’s budgets have increased the size of the deficit each year, but even if it stayed at its current level, the debt would exceed $10.75 trillion in five years. With FFTA2005’s reduction of the debt by $20 billion for each of those five years, it would still be $10.65 trillion. That’s trading an increase in the debt of 32.7% for an increase of 31.5%.

The Oregonian ran an editorial on Saturday (3 December) about a City Club of Portland lecture by David Walker, Comptroller General of the US Government Accountability Office (MP3 file). Walker is particularly concerned by out-of-control spending, but sees a problem that cannot be solved by program cuts alone. The editorial makes this note about one of his points: “‘Very few tax cuts stimulate the economy,’ and almost none pay for themselves, he said.”

The Concord Coalition, which is one of the groups promoting Walker’s current Fiscal Wake-up Tour, estimates that accumulated deficits over the next 10 years will create another $5.7 trillion in debt — that’s $3.6 billion more than the estimates of the Congressional Budget Office (both figures are in addition to the current debt). Where the CBO’s estimate is based on several years of stable deficits which miraculously shrink sometime after 2010, the Concord Coalition makes several assumptions they consider more realistic (like the 2001 and 2003 tax cuts being made permanent and continuing but decreasing expenditures in Iraq and Afghanistan) which predict that the deficit will reach more than $500 billion by 2010 and increase to nearly $900 billion by 2015. Against these types of numbers, even $100 billion of deficit reduction every year wouldn’t do much. The FFTA2005 plan is one-fifth of that.

My concern with FFTA2005 is that it’s a little bandage for a bleeding artery of a problem, and not one of those new-fangled bandages made out of shrimp shells, either. While I applaud Sen. Wyden’s initiative at addressing the issue and seemingly sincere interest at closing some loopholes (although I don’t see anything about, say, offshore headquartering in the Bahamas or Caymans), the actual effects seem far too small to effect real change. It comes off as like wonky fiddling with the edges; an attempt to make it look like something is being done without actually addressing the problem. Any fiscal benefit it might make could easily be swallowed up in the next hurricane season, terrorist attack, or half-year of combat operations overseas.

During one of my exchanges with Sen. Wyden’s office about the FFTA2005, the phrase “the perfect being the enemy of the good” was brought up in response to my criticisms. There’s no doubt that FFTA2005 would be better than the steadily-mounting deficits of the Bush administration, but kicking the fiscal ball five years down the road isn’t exactly what I’d consider to be a good plan. If I was a strategist for a fiscally-conservative Republican with aspirations for the 2008 presidential election (not that that’s likely to happen), and FFTA2005 became the Democratic alternative to the administration’s own tax plan next year, I think I could make a good case that the plan doesn’t address the problem of the national debt and the deficit seriously enough, that it lacks — in the words of the Oregonian editorial paraphrasing David Walker — “the courage and will to stabilize the deteriorating economy with major spending cuts, tax increases, or both.”

* According to a 2003 report from the Center on Budget and Policy Priorities, the share of corporate income tax receipts has dropped from more than 20% of total federal tax revenues in the mid-1960s to just over 7% in 2003. In the same period, corporate taxes have gone from 4% to 1% of Gross Domestic Product.