Fair Not Flat

"In Fair Not Flat Mr. McCaffery lays out the case for a consumption tax. . . . [His] argument is well worth pondering. . . . If anyone can rally a spirit of bipartisanship to the whole rancorous debate about taxes, it is Mr. McCaffery."—Bruce Bartlett, The Wall Street Journal

"Ed McCaffery is brilliant. He is very knowledgeable about our tax code and he speaks English. His new book takes on the flat-tax advocates by showing that our system can be both fair and simple."—Patricia Schroeder

"Ed McCaffery pumps more logic into this one book than most do in a lifetime of writing. If you want to correct the foibles of our present tax system, Fair Not Flat is the one essential book you must read."—Bob Packwood

"Fair Not Flat is a readable, interesting and comprehensive view of how to make the American tax system better."—Bill Bradley

Edward J. McCaffery is the Maurice Jones Jr. Professor of Law at the University of Southern California and Visiting Professor of Law and Economics at the California Institute of Technology.


An interview with
Edward J. McCaffery
author of Fair Not Flat: How to Make the Tax System Better and Simpler

Question: No one likes to pay taxes. But is the income tax system so broke that it needs a complete overhaul?

McCaffery: Well, yes, and that's a large part of the reason I wrote Fair Not Flat. To explain how badly broken it is, why it needs repair, and how we can make that repair happen. The wealthiest people in the United States with property pay little to no taxes today, while ordinary wage earners like you and me can't escape from paying high taxes, ranging from a third to half of our earnings! Add to that the tremendous complexity and inefficiency of our system, and you have what I take to be a disaster on your hands.

Q: OK, so the present system isn't fair to everyone. Can't we just reform it or close the loopholes in the tax code to make it more equitable?

McCaffery: If we try minor, ad hoc reforms just to close loopholes here and there, we do nothing about the deep, fundamental, and structural problems in the tax code. These all relate, as I explain in the book, to our obsession with taxing savings directly. Until we rethink that, tax reform is doomed. Take, for example, the Tax Reform Act of 1986. This was a major piece of bipartisan legislation—the centerpiece of Ronald Reagan's second term as president—and it did indeed close a vast array of loopholes and lower tax rates. But less than two decades later, we're right back where we started. The income tax is still far too complicated, inefficient, and fundamentally unfair. Worse, we can see in hindsight that the Tax Reform Act of 1986 mainly shored up the income tax's status as a wage tax—it did nothing about the surprisingly simple ways in which the rich can avoid taxes. Until we fix that, we're stuck with a system that overburdens the working classes while letting the wealthy off scot-free.

Q: There have been a variety of proposals for a flat tax on income—from folks like Congressman Dick Armey, Senator Arlen Specter, and presidential candidates Steve Forbes and Jack Kemp. How does your proposal differ from theirs?

McCaffery: My plan, the Fair Not Flat tax, is progressive. It won't raise tax rates on the middle classes to pay for tax reduction for the rich. You can get almost all of the benefits of these flat tax proposals—in terms of simplicity, economic efficiency, and the fairness of the tax base—without abandoning America's longstanding and sensible commitment to at least moderate progressivity in tax burdens. The wealthy can and should pay a bit more at the margins of their luxurious lifestyles.

Q: But how does it work? What does it mean to have a progressive national sales tax?

McCaffery: A supplemental tax on spending for the wealthiest individuals would make the sales tax progressive. Under the system I propose, a family of four would pay no tax on their first $20,000 in spending, and 10 percent on the next $60,000. Only the few families who spend more than $80,000 a year would be subject to the supplemental tax. Necessities would be taxed less than ordinary and luxury items. And no one would be taxed directly on savings or investments. It's that simple.

Q: This sounds like the USA Tax plan that was proposed about seven years ago by Senator Pete Domenici and then-Senator Sam Nunn. Is your proposal any different?

McCaffery: Yes and Yes. Yes, it is very similar to the Nunn-Domenici "USA" or "unlimited savings accounts" plan, proposed in Congress in the mid-1990s, and I give credit to that proposal in the book. But the Fair Not Flat plan differs from that proposal in being more technically consistent and in substituting an actual national sales, or value added tax (VAT) for the lowest brackets of the tax. That latter change poses a huge and welcome simplification for most Americans: they'll no longer have to fill out tax forms or file tax returns.

Q: So this is a national sales tax?

McCaffery: Everyone would pay taxes on the things, or the goods and services that they buy. Then the upper middle and upper classes would fill out a "supplemental spending tax" form every April. As I said, only families of four spending more than $80,000 need pay this supplemental tax, and at rates starting at 10%. For these relatively affluent families, this tax adds to the actual sales tax or VAT to get progressivity. Rates keep going up, until families that spend more than a million dollars a year ($1,000,000) on themselves pay a total tax on their marginal purchases of 50%.

Q: But isn't it dangerous to tax consumption? Spending is the engine of the economy isn't it?

McCaffery: Funny, that's the most common question I get, and the one I use to start the Question and Answer section at the back of Fair Not Flat. Look, consumption is good. And it is the engine of our economy, especially now that we are in the throes of a recession. But taxing consumption won't slow down our economy further as many fear. Under my plan, tax rates wouldn't increase for any but the wealthiest spenders. For many lower- and middle-class Americans, taxes would actually decrease. And with that money, a vast majority of Americans would be able to spend more if they wanted to. With my proposal, we'd be increasing consumer confidence, and making spending more possible than ever before.

Q: But doesn't taxing the wealthy more amount to class warfare?

McCaffery: Well, there are some who would call my proposal that. But that's not the case at all. What I propose in my new book is class teamwork. Most wealthy people, as books like The Millionaire Next Door teach us, want to and, in fact, do save and invest their riches back into the economy. And there's no reason to tax them when they do. Capital helps us all. It keeps interest rates low, and that's good for homebuyers, students, and workers. I'm not proposing that we simply tax the wealthiest people in our country. Simply those who spend the most. I think that's fair, and I think it's in line with classic American values.

Q: Why do you recommend an end to the death tax?

McCaffery: We should kill the federal gift and estate or so-called death tax for the simple reason that dead people don't spend. We shouldn't punish people for working hard, saving well, living prudently, and dying with savings in store. My Fair Not Flat tax has an automatic mechanism for taxing heirs when they spend instead of when they inherit. It's all simple, consistent, and fair. We should tax people when they spend, not when they work or save, and we should do so at moderately progressive rates, so that luxurious living bears a higher tax burden than ordinary living. Dying and giving aren't the kind of activities that the federal government ought to be taxing.

Q: Well, that's all interesting and persuasive, to us anyway. Do you think anyone in Washington will listen?

McCaffery: Well, I sure hope so. I found with Taxing Women, my first book, that there is a tremendous interest in—a palpable hunger for—proposals to make the tax system better, fairer, and more in step with the times. Tax is so complicated, people need help seeing through the morass to get their way to seeing more hopeful possibilities. This time around, I tried to write an even simpler book to read about this complex subject. The hope is that lots of people can read it, understand it, and help get involved in trying to make this massive tax system more equitable. If I succeed in that-if people get empowered to stand up and call for change—I think Washington will have to listen. Let's all hope so, anyway.


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Edward J. McCaffery
Fair Not Flat: How to Make the Tax System Better and Simpler
©2002, 192 pages, 2 line drawings, 11 tables
Cloth $28.00 ISBN: 978-0-226-55560-7 Paper $18.00 ISBN: 978-0-226-55561-4

For information on purchasing the book—from bookstores or here online—please go to the webpage for Fair Not Flat.

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