By DAVID MOON, Moon Capital
January 18, 2004
Republicans have lusted after it for years. They've postured, pleaded
and politicked. Finally, they have their Holy Grail of conservative fiscal
policy: a flat national income tax. Starting January 1, the highest
marginal federal tax rate on individual earned income is fifteen percent.
Some people may pay a lower rate, but most taxpayers will simply send the
federal government fifteen percent of their income. No deductions. A
simple form. A simple system. Taxpayers are going to love
Taxpayers in Iraq, that is.
When you have a benevolent dictator, tax reform is pretty simple to
achieve. U.S. administrator in Iraq, Paul Brewer, simply declared the new
tax rate. Giving Brewer the benefit of the doubt, I am presuming he is
benevolent. There is no question he has dictatorial powers. This
requires no legislative concurrence, no national debate. Thus sayeth The
There are still a few nuisance taxes that linger from the Sadaam era, such as
levies on real estate, gasoline and hotel charges. (Interestingly, U.S.
contractors rebuilding Iraq are exempt from the hotel tax. Journalists are
Previously the top Iraqi tax rate was 45 percent. But that number is
irrelevant; no one paid taxes before. The government simply took what it
wanted. Be skeptical if Jack Kemp or Steve Forbes touts a large increase
in Iraq tax collections as a result of the reduction in the top marginal
rate. Of course collections will increase. Anything is greater than
Don't be fooled by claims of better Iraqi taxpayer compliance due to the
lower rates. Yes, there is good evidence in the U.S. that fewer people
cheat on their taxes when the rewards for doing so are reduced. But Tikrit
isn't Knoxville; it's not even Washington. When you live in a country
where you can be stuffed into a meat grinder at the whim of a single man,
compliance with the tax code loses a bit of its societal significance.
The tax experiment in this volatile economic test tube will be
interesting. But it will hardly be conclusive. It may not even be
instructional. I hope that flat tax proponents don't try to use Iraq as
justification for changing our own tax code. Don't get me wrong; I'm all
for a flat tax in the U.S. A simple, low flat tax. Have a single
high exemption that excludes the most impoverished. Then let the rest of
America participate in paying for the functions of our federal government.
The rate should be low enough to influence as few as possible economic
decisions. And it should be high enough that when applied evenly to the
bulk of American taxpayers, it provides, at most, the current levels of
revenue. I'm all for that type of system. But the Iraqi experiment
is fraught with possible statistical traps. It will not be a valid
justification for any change in this country.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).