Donald Sensing mentions that Iraqis will soon have a flat-tax system that's more fair than the American system. He then discusses the idea of a flat tax, and argues that all deductions should be eliminated, particularly deductions for charitable giving and interest paid on mortgages -- but I don't think his arguments take everything into account.

Despite pushes by several prominent politicians and organizations in America to establish a flat-tax system here, the idea has hardly got off the ground. The article cited blames both parties for being to wedded to the home-mortgage deductions and the deductions for charitable contributions.

Obviously, I have a vested interest in the latter myself, since contributions to churches are deductible. But dadgummit, "flat-rate" means flat rate. If the system is ever implemented here (fat chance, I know) then its only hope to survive is to have no exceptions.

I don't see why having two deductions would threaten the survival of a flat tax; there's a potential slippery slope, but I don't see slippage as inevitable if the flat tax is implemented via Constitutional Amendment.

Furthermore, I see no possibility for enacting a flat tax that doesn't incorporate a deduction for the interest home-owners pay on their mortgage. Donald says:

As for the mortgage-interest deduction, that needs to go too, and I own my home and benefit from it. The main objection to its elimination is that home values would plummet if the deduction is removed.

But what that really says is that the presumed tax savings are really ephemeral because the deduction is inflating home prices. So you have to pay more than the home is worth because of the deduction. That means that the deduction is skewing prices and hiding the true value of homes, and that alone is sufficient reason to eliminate it, IMO.

However, various studies (link, link, link, for example) show that eliminating the interest deduction would have very little effect on home values, and the effect would be temporary. Most taxpayers are not in the highest tax brackets, so their deductions are relatively modest.

That may very well be the case (and I hope it is), but I think it would be impossible to convince voters; trying to do so would ultimately doom any attempt to pass a flat tax.

As for charitable giving, Donald notes that:

Actually, I have little reason to be very sorry to see the charitable deduction go. After all, the average rate of giving to churches by Americans is very low, about 2-3 percent at best in oldline churches, maybe a little higher (but only a little) in evangelical ones. It frankly begs credulity that an income-tax deductions is driving such giving. (In fact, it begs credulity that anything is driving such a giving rate, but that’s a topic for another rant.)
However, while the average rate of charitable giving may be 2-3 percent, in my experience the standard deviation is quite high -- that is, 75% of people give less than 1% of their income, and 25% of people give more than 10% of their income. Eliminating the deduction for charitable giving would obviously not hurt the former group, but gifts from the later group (which gives the majority of the money) would be hurt quite badly. I think these numbers are fairly representative of the situation at my church.

My proposal is to enact a flat tax with these two deductions through a Constitutional Amendment that gives Congress the power to eliminate the deductions in the future, but not to expand them into any other areas. Sure, the courts may eventually stretch whatever language is used, but I think this would be a good starting point for the flat tax concept, and it would be a major step forward in the tax revolution.

No discussion of flat taxes is complete without mentioning the Fair Tax Act of 2003 which actually got quite a large number of co-sponsors in the House, but only couple in the Senate. Go take a look, and follow the instructions to write to your legislators telling them to support the law.

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