Taxing the Rich or a Flat Tax for All?


Taxing the Rich or a Flat Tax for All?

Explaining the apparent inconsistency in Americans' preference for both policies

Raising taxes on the wealthy “appears to be what the people want when you survey them,” Gov. Jerry Brown said in 2012 while he was promoting his Proposition 30 tax hikes.

A strong majority, 55 percent, of voters passed Brown’s tax increases, which featured a temporary income tax increase on the state’s wealthiest residents.

Gov. Brown was right: The public does favor raising taxes on the wealthy. Reason-Rupe national telephone surveys find about two-thirds of voters consistently support tax hikes on upper-income households. But the most recent Reason-Rupe poll finds a similar share, 62 percent, favor a flat tax in which everyone would pay the same percentage of their income in taxes.

The poll finds the flat tax has broad appeal that extends across income groups. Sixty-two percent of those earning less than $30,000 a year favor the flat tax, as do 73 percent of those making more than $110,000. And 66 percent of Republicans, 68 percent of independents and 52 percent of Democrats support a flat tax.

So what explains the apparent inconsistency between implementing a flat tax and raising taxes on the rich?

Many Americans believe the wealthy are paying fewer taxes than the middle class right now, either through lower tax rates or thanks to tax loopholes and creative accounting.

When Reason-Rupe asked Americans to explain their support for raising taxes on the rich, a little more than half said higher-income households can afford it, with some going so far as to say the wealthy don’t need the money. The next most frequent explanation was that the wealthy pay less in taxes than the middle class.

“The wealthier people have taken advantage of the tax code and us,” said one Reason-Rupe respondent.

“There is a loophole where they aren’t paying their fair amount” and the rich are “getting a free lunch,” said other survey respondents.

While many Americans believe the wealthy are successfully avoiding their tax obligations, California’s tax receipts show this simply isn’t true. The top 1 percent of taxpayers paid 50.6 percent of all state income taxes in 2012. The top 5 percent of California households, those making around $200,000 a year or more, paid 70 percent of total state income taxes in 2012.

California’s reliance on the income taxes and capital gains taxes paid by its richest residents will likely become even more dramatic in coming years as Prop. 30’s impacts are fully felt. And while he hasn’t given up on taxing the rich, the rainy day proposal Gov. Brown has been pushing shows he at least recognizes the dangers that come with relying on unstable tax revenue streams.

“The business cycle and the stock market are historically volatile, with good years followed by bad, with painful regularity,” Brown said. “And while we know our revenues will fluctuate up and down, our long-term liabilities are enormous and ever growing.”

Brown knows the stock market has been on a remarkable run and many of the state’s housing markets have been recovering. But when the next economic downturn arrives, and it will, sooner or later, the governor knows it will hit the state’s wealthiest residents hard, which means it will hit California’s tax revenues equally hard. And yet, Sacramento isn’t in a hurry to fix it.

“I’m not sure broad tax reform is going to be part of the 2014 agenda during this election year,” California state Senate leader Darrell Steinberg said. “In Brown’s second term, it certainly should be a major issue.”

If they ever get around to tax reform, a flat tax would bring simplicity to the tax code and reliability to the state’s revenue stream.

Emily Ekins is polling director at Reason Foundation. This article originally appeared in the Orange County Register.