Republican Presidential candidate Fred Thompson earlier this week announced his detailed plan for partially overhauling the federal income tax. His proposal, among other innovations, would allow taxpayers to choose to calculate their federal income tax liability either with the current, six-tier, progressive schedule or with a simplified, two-tier schedule. Incorrectly described by many publications—including USA Today, The Wall Street Journal, and the Boston Globe—as a "flat" tax, Thompson's plan would primarily and quite simply reduce the number of tax brackets from the current six to two and drop the highest marginal tax rate on personal income from the current 35 percent to 25 percent.

Although this would, in essence, "flatten" the progressive tiering of the U.S. federal income tax, it is not in any way a proposal to create a "flat" tax; it is, instead, a proposal to move the federal income tax to a straight proportional tax, similar to the sales taxes most states and municipalities impose on purchases of goods and some services.

Technically speaking, a "flat" tax is an absolute amount of money imposed on a transaction: fees for driver's licenses, automobile license plates, hunting and fishing licenses are all examples of flat taxes; so, too, in a broad sense, are traffic fines and other punitive fees.

The term "flat" tax is widely and incorrectly used interchangeably with what is properly termed a "proportional" tax, which is an additional fee or charge calculated as a percentage of monetary consideration transferred in an exchange. Sales taxes are "proportional" because they are calculated as a percentage of a sale. Many municipalities have proportional city income taxes since these taxes are very often assessed as a percentage of taxable income.

The federal income tax is neither proportional nor flat; it is, instead, "progressive" because, as taxable income increases, the percentage of tax assessed on the last dollar of that income increases. Each range of income that is subject to a particular tax rate in the structure is called a "tax bracket." The graphic below, drawn from data available at the Tax Foundation, illustrates how the number of brackets has varied over the years, reaching remarkable highs of no fewer than 56 in the years 1918 through 1921, 55 in 1932 and 1933, and 50 in 1922 and 1923.



The illustration above clearly indicates that, while the number of tax brackets has varied considerably over the years, there has been a clear, downward trend over the past half-century or so, essentially meaning that the federal income tax, while still progressive overall, has become a proportional tax over much broader ranges of taxable income.

The highest rate at which any given taxpayer's taxable income is taxed in a progressive tax regime is called the "marginal tax rate" for that taxpayer. In the United States, the top marginal tax rate (the highest tax rate at which anyone's income could be taxed) has varied over time. Although the tax system can be fiendishly difficult to describe in numerical summary—especially with an alternative minimum tax and allowance for different categories of taxpayers, like "heads of household," "married filing jointly," etc.—overall, the highest top marginal tax rate the United States ever had was 94 percent during the last two years of World War II. Almost as high was the top marginal tax rate of 92 percent in 1952 and 1953 (again, notably, war years); and the entire period from 1946 to 1963, except for '52 and '53, was marked by a 91 percent top marginal tax rate. The graph below, again drawn from data available at the Tax Foundation, shows the ups and downs of the top marginal tax rate from 1913, when the uniform federal income tax in its modern form came into existence, through the current year, 2007.



From the graph above, it is clear that the mid-1960s marked the beginning of what would prove to be a long-term, downward trend in the top marginal tax rate, which reached its modern nadir at the very end of the Reagan Administration, when the rate bottomed out at 28 percent. By 1991, during the Administration of George H.W. Bush, it recovered back to 31 percent, and two years later, in 1993, it rose to 39.6 percent, where it stayed until 2001, when tax policy of the George W. Bush Administration and the Republican majority in Congress would resume the long-term downward trend of the top marginal tax rate. As of now, for 2007, the top marginal tax rate stands at 35 percent and will probably remain there for 2008 unless Congress crafts a tax cut for fiscal stimulus because of current economic conditions; but, while the Bush Administration is pressuring Congress to make permanent the tax cuts of 2001 that set in motion the current tax rates, projections of actual tax rates beyond the current year are speculative, at best. Even though the tax cut proposal by Republican candidate Fred Thompson is consistent with the historical trends of both fewer tax brackets and falling top marginal tax rates, the prospect of removing so much potential tax revenue from the U.S. Treasury would face considerable resistance by a Congress likely to remain in Democratic control for the next several years: budget deficits have unambiguously attended lower top marginal tax rates. This can be seen by comparing the chart below, which shows annual federal budget deficits and surpluses from 1962 to 2006, calculated from data made available by the Financial Management Service of the United States Department of the Treasury, with top marginal tax rates for the same time period, as depicted in the graph above.



In fact, the congressional Joint Committee on Taxation earlier this year estimated that a plan with major components of a tax regime similar to Mr. Thompson's would create a net loss to the United States Treasury over ten years of about $2.5 trillion. Thompson dismisses such a dire prediction on the usual supply-side economics grounds that his tax cuts would stimulate economic growth and that projections of federal tax revenue losses from tax cuts are often proven in retrospect to have been over-estimated. The graphics presented herein challenge his representation that tax cuts do not exacerbate federal revenue shortfalls.

Mr. Thompson may actually believe the next President of the United States should further erode the ability of the government to pay for its expenditures, thereby compelling the nation to continue borrowing hundreds of billions of dollars every year from foreign interests; otherwise, he may merely be pandering, as so many Republican politicians have for the past three decades, to an apparently insatiable, desperate need for more and more "tax relief" within the ranks of the nation's voters, or at least within the ranks of those who contribute generously to Republican politicians. In either case, Mr. Thompson is rendering evidence that he is not only a strong contender to carry the banner of the Republican Party into the general election of 2008, but also a complete imbecile. That, of course, is a redundancy of qualifications and qualities.


The Dark Wraith will, however, allow voters to make up their own minds as to whether or not they can afford yet another imbecile to occupy the White House so soon.