The ideas of Karl Marx are alive and well—in the U.S. tax code. One of the planks of the Communist Manifesto, which states the conditions necessary for a transition from a capitalist to a communist society, is “a heavy progressive or graduated income tax.” A progressive tax system is one in which the tax rate increases as the taxable amount increases. Since the permanent adoption of the income tax in 1913, the United States always has had a progressive tax system.

The original income tax consisted of a 1 percent tax on taxable income more than $3,000 ($4,000 for married couples). A series of surcharges of up to 6 percent were applied to higher incomes, with the maximum rate being 7 percent on taxable income more than $500,000. During World War II, the tax rate for those in the highest income bracket reached an astounding 94 percent. The Internal Revenue Code of 1954 resulted in 24 brackets with rates ranging from 20 percent to 91 percent. The top rate remained at 91 percent until 1964. Under the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986, the top marginal tax rates were lowered to 50 percent and 28 percent, respectively.

The Economic Growth and Tax Relief Reconciliation Act of 2001 established the current tax brackets of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. This progressive system results in Americans who earn the top 5 percent of income paying about 57 percent of the income taxes. Those who earn the top 50 percent pay about 97 percent of the income taxes. This means that the bottom 50 percent of wage earners pay only about 3 percent of the income taxes. It is clear that any talk of the “rich” not paying their fair share is bogus. Tax cuts benefit the “rich” because the “poor” not only don’t pay taxes, but they also usually receive a refund on top of that due to refundable tax credits like the child credit and earned income credit.

Unfortunately, tax reform plans usually focus exclusively on simplification of the tax code rather than on making the code less progressive. And, even worse, no major tax reform plan even hints at lowering America’s overall tax burden.

The most radical tax reform plan is a consumption tax in the form of a national retail sales tax called the FairTax. The FairTax has been introduced in the U.S. House of Representatives by John Linder (R-GA), and is promoted heavily by Atlanta radio talk show personality Neal Boortz. The FairTax would replace with a national sales tax not only the personal income tax, but also the corporate income tax, estate tax, gift tax, unemployment tax, Social Security tax and Medicare tax. Additionally, every family in America would receive a monthly rebate to offset the taxes paid on basic necessities.

The federal government, ever wanting to increase its revenue while at the same time making Americans feel better about paying income taxes, has its own tax reform plans. In 2005, the President’s Advisory Panel on Federal Tax Reform released two tax reform proposals. The Simplified Income Tax Plan would create four tax brackets (15, 25, 30 and 33). Excluded from taxation would be 100 percent of dividends and 75 percent of corporate-stock capital gains. The Growth and Investment Tax Plan would create three tax brackets (15, 25 and 30) with tax dividends, capital gains and interest received at a rate of 15 percent. Social Security and Medicare taxes would remain unchanged.

The tax reform idea that has been around the longest is the flat tax. Under a flat tax, there are no tax brackets—everyone’s income is taxed at the same rate—and generally without deductions. First proposed by economist Milton Friedman in 1962, the flat tax entered the mainstream through a 1981 Wall Street Journal article by two Hoover Institution economists that later grew into a book. After the Republicans gained control of the Congress in the election of 1994, House Majority Leader Dick Armey (R-TX) pushed the idea of a flat tax.

The most recent, and very prototypical, incarnation of the flat tax is that of Steve Forbes, former Republican presidential candidate (1996 & 2000) and overseer of the Forbes publishing empire. In his book Flat Tax Revolution, Forbes calls for a flat tax of 17 percent on all income, with the exception of capital gains, Social Security benefits, interest earned and dividends received, along with “generous exemptions for adults and children.” Like the government’s tax reform plans, Social Security and Medicare taxes would remain unchanged. Under the Forbes Flat Tax, no taxpayer would have to itemize deductions for medical expenses, home mortgage interest or charitable contributions because there would not be any deductions for these things.

The arguments for a flat tax basically come down to two things: simplicity and fairness. There is no doubt that a flax tax would greatly simplify the tax code. This would result in the elimination of compliance costs, as well as a tremendous reduction in the complexity, number and length of income tax forms. However, whether a flat tax is fair or fairer is quite subjective.

Like all major tax reform plans, the Forbes Flat Tax is revenue neutral; that is, the federal government would be funded at the same obscene level that it is now. Yet, under the Forbes plan, a family of four would pay no federal income tax on its first $46,165 of income; a family of six would owe nothing until its income exceeded $65,930. Not only would many families pay no income tax, they still might get a refund because of the refundable child credit and earned income credit included in the Forbes Flat Tax plan. This generosity comes at a price, however. With a revenue-neutral tax, a lower tax bill for some Americans means that other Americans will have to pay more.

The truth, then, is that the flat tax is not flat at all. In fact, no one actually pays 17 percent, and everyone doesn’t pay the same percentage. Progressivism doesn’t require graduated tax rates. In fact, the flat tax is actually more progressive than our current system. The flat tax effectively has its own tax brackets: the single bracket, the single mother bracket, the married bracket and a series of married with children brackets.

The budget of the United States for FY 2009 is now more than $3 trillion. The national debt is fast approaching $10 trillion. The war in Iraq is costing more than $200 million a day. But like a flat coke or a flat tire, flat is not always a good thing. Although it is certainly true that the current U.S. tax system is too complex, too confusing and too intrusive, what really needs to be flattened is skyrocketing congressional spending, not the procedure used by the government to extract the wealth of its citizens.

Laurence M. Vance holds degrees in both accounting and economics. He is an adjunct scholar of the Ludwig von Mises Institute in Auburn, Ala., for which he has written numerous articles on taxation.

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