James Pethokoukis

Politics and policy from inside Washington

A zero percent income tax rate

July 14, 2009

Think tanker Peter Ferrara talks up an interesting idea in the WSJ:

But what if Republicans proposed a federal tax reform with a 0% income tax rate for the bottom 60% of income earners?  … Trading an explicit 0% tax rate for the bottom 60% in return for eliminating the refundable tax credits would likely be at least revenue neutral, and probably result in a net increase in revenue. … Moreover, we should then be free to adopt sound tax policy for the top 40% of earners who make 75% of total income. Suppose we tax all of the income of those top 40% once with a 15% flat tax? That would be close to revenue neutral on a dynamic basis (i.e. counting work incentive effects). … All flat tax proposals effectively try to do the same through generous personal exemptions that are tax neutral for low- and moderate-income workers. But the explicit 0% rate would make the reform more easily understood. This — rather than adopting still more refundable tax credits as some conservatives are advocating — is also the way to eliminate the distorting tax preference for employer-provided health insurance. … The economic distortions caused by every other tax preference in the code would be minimized or eliminated entirely in this same way.

My spin: I would like to see a comparison on a revenue and tax efficiency basis of this plan vs. creating a de facto consumption tax by eliminating all taxes on savings and investment.  But it is fascinating as a political framing device. I assume this would also get rid of education and kiddie tax credits, maybe even the mortgage interest deduction? Those would surely raise political hurdles.


Why not just get rid of income tax altogether and raise consumer taxes? It seems to work for Hong Kong, and that way everyone is taxed the same, they just pay more taxes if they buy more stuff.

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