J.D. FOSTER: Trump Tax Cuts Good, Flat Tax Better, Unified Flat Tax Best

The two Steves (Forbes and Moore) pressed again for the flat tax in a New Year’s Eve Wall Street Journal editorial. While their arguments are sound, the title said it all: “Trump’s Tax Cuts Were Good. A Flat Tax Would Be Better.” While the flat tax would be far better than current law, we can do better still.

The Hall-Rabushka flat tax has been around for decades. Slowly but steadily, proponents are winning the argument. The federal income tax has become flatter in its rates and the tax base has moved steadily toward economic neutrality, especially with respect to the taxation of saving and investment.

Likewise, with the addition of Iowa and Louisiana, 16 states now have single-rate income taxes and 8 more have the ultimate flat tax, which is no income tax at all.

The progress is encouraging, and the two Steves are right that going all-in on a federal flat tax would be great. But for all its advantages, we have learned a few things since the flat tax was first proposed. We have learned that a unified flat tax for individuals would be even better.

To see the issue, suppose we adopted a federal flat tax. Essentially, that means we tax all labor income at a single rate while excluding saving and the returns to saving at the individual level. In short, it would be a payroll tax.

Great, so now we have three payroll taxes operating in parallel. We would have the new payroll tax cum flat tax. We have the Federal Insurance Contributions Act (FICA) payroll tax funding Social Security and Medicare. And we have the Federal Unemployment Insurance Act (