The Freedom to Choose Flat Tax: The First Step to Tax Reform Presented To: The President’s Advisory Panel on Federal Tax Reform Presented By: Stephen Moore Senior Fellow in Economics at the Cato Institute May 11, 2005

Problems with the Current Tax System Lost Economic Output Multiple Levels of Tax on Savings Adverse Impact on Trade by Penalizing Investment Political Instability Costs of Complexity How the Tax System Hurts Small Businesses Unfairness of the Tax Code

Why a Flat Tax Taxes All Income Once and Only Once Eliminates Most Complexity for Individual Tax Filers Fair and Economically Efficient Single Rate Increases Savings and Investment Flat Taxes All Over the World

Political Barriers to the Flat Tax Well-Funded Special Interest Lobbyists Protect Their Loopholes Many Americans Want to Keep “Sacred Cow” Deductions Transition Costs Are Huge and Complicated The Winners and Losers Problem “Middle-Class Tax Hike” Americans Like “Choice”

How the Freedom to Choose Flat Tax Works Establishes a Hall-Rabushka Flat Tax of 20% for Businesses and Workers Allows Every Worker and Business the Choice to Opt In to the Flat Tax Requires that Workers and Businesses Stay with the Flat Tax Once They Choose It No Transition Rules, Simply Amends the Current Tax Code Replaces the AMT with Essentially an Alternative Maximum Tax Integration of the Payroll Tax

The Freedom to Choose Flat Tax: Answering the Critics Large Revenue Losses – Dynamic Versus Static Adds Complexity By Creating Two Codes – Eliminates the AMT Is a Gimmick – Hong Kong System is Optional Tax Cut for Rich – Americans Believe 25% Should Be Maximum Tax Is Inferior to the Straight Consumption Tax – This Is First Step to Tax Reform