The Wall Street Journal-20080128-FAST Makes Waste- At Least in This Case

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FAST Makes Waste, At Least in This Case

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Steve Forbes's op-ed on the Fair and Simple Tax ("The Giuliani Tax Cut," Jan. 24) was disappointing. While he bemoans the nine million words of the U.S. tax code, Mr. Forbes does not propose replacing or improving it, only offering taxpayers the FAST alternative on a volunteer basis. While individual taxes are indeed complex, I imagine most of those words cover corporate taxation and its variants. The average individual does not have access to the many ways corporations can legally shield income, so FAST may be fast, but it may not be fair. FAST also preserves "prized deductions" and multilevel rates that seem oddly similar to the present system.

The flat tax is a brilliant idea proposed by Milton Friedman in "Capitalism and Freedom" (1962, University of Chicago Press). After a certain exclusion commensurate with the size of a family to cover a basket of essential commodities -- food, clothing, housing, health care -- everyone would pay a single rate on the incremental income with no other deductions. For those earning less than the exclusion, there would be a "negative income tax," a payment to the family that would replace in a single transaction the mess that constitutes our current welfare programs.

Unlike the step function characterizing the Forbes-Giuliani plan, the Friedman plan provides the incentive to work hard and to save at the margin, where it is most effective.

Friedman also pointed out that savings and investments are hurt to the extent that dividends and capital gains are paid or realized in after-tax dollars at the corporate level and taxed again at the individual level when received. Since eliminating corporate taxation would be politically unpalatable, a fair and flat tax ought to be coupled with the tax-free treatment of dividends and capital gains. An immediate effect would be a benefit to all nest eggs and fixed-income individuals, thus potentially easing the burden on Social Security.

As long as the current tax system is tolerated even in parallel with a putatively simpler system, the effect of FAST may not be realized as Mr. Forbes and Mr. Giuliani envision.

Michael Avari

Garden City, N.Y.