Flat-base taxation: A new approach to tax reform

by Matthew Glans on October 11, 2011

In a new article published this week in the Weekly Standard, Eli Lehrer, vice president of The Heartland Institute, and Ike Brannon, director of economic policy at the American Action Forum, propose a new approach for taxation and budgets: flat-base tax reform.

Lehrer and Brannon modify Carter-era zero-base budgeting into a new tax reform plan that would require legislators to justify any spending beyond a proven baseline, a bold step that could lead to drastic cuts in spending and taxation.

“Zero-base budgeting, which reached its apogee when the Carter administration applied the concept to most of its 1977 federal budget proposal, is a system for managing expenditures that analyzes programs as a whole rather than only changes in spending levels. It gets its name because it assumes that the ‘base’ budget is ‘zero’ rather than what was spent the previous year. Peter Phyrr, a Carter adviser who published the first systematic articles about zero-base budgeting, says that evaluators should ask two questions: ‘Are the current activities in the budget efficient and effective?’ and ‘Should current activities be eliminated or reduced to fund higher priority new programs or to reduce the current budget?’

Because every expenditure must be evaluated anew each cycle, the process generates enormous amounts of paperwork (a Council of State Governments committee estimated it was three times as burdensome as a conventional process). Zero-base budgeting thus proved unworkable as a yearly exercise. Even the Carter administration stopped using it.

What didn’t catch on for federal spending, however, may have a lot of promise for simplifying the tax code. Rather than a ‘zero base,’ a procedure for developing a better tax code would begin with what might be called a ‘flat base’: an assumption that the federal government would tax all income (by the broadest possible definition of income) from all sources at a level at least sufficient to maintain current levels of revenue—probably somewhere between 15 and 20 percent.

All current deviations from that flat base—deductions, credits, rate changes, special treatment, deferrals, rebates, etc.—would require justification. For any deviation, evaluators would ask two questions similar to those Phyrr devised: (1) ‘What goal or relevance to a national government (if any) does this provision attempt to accomplish?’ And (2) ‘Is this goal most efficiently and effectively achieved through the tax code or by some other means?’ Like the fundamental questions asked by zero-base budgeters, of course, these ‘flat-base tax’ questions would be fraught with political and ideological baggage. Nonetheless, if asked honestly and forthrightly by people of all persuasions, they might produce some surprising agreement.”

The authors contend that while flat-base budgeting is not a panacea for all taxation problems, the process of justification could point the way towards a more efficient means of funding the necessary functions of the federal government.

“While certainly cumbersome in the first instance—developing alternative scenarios for every tax code provision would probably require (temporary, one hopes) staffing increases at the Office of Management and Budget, Joint Committee on Taxation, and Congressional Budget Office—flat-base tax reform would simplify the overall tax writing process going forward. If all rigorous ‘flat-base’ tests were applied to all changes after the adoption of a new tax code, the bar special interests would have to jump to get favors from the tax man would be much higher.

A flat-base tax reform process isn’t a panacea, of course. It won’t, by itself, disarm the special interests that now lard the tax code with narrow favors, nor will it necessarily balance the budget. At the very least, though, a fresh look at tax code provisions could point the way towards a more efficient means of funding the necessary functions of the federal government.”

Lehrer and Brannon’s article, “Let’s Start All Over Again: A New Approach to Tax Reform,” was originally published in the Weekly Standard and can be found online at: http://www.weeklystandard.com/articles/let-s-start-all-over-again_595196.html?nopager=1

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