Arizona has just joined nine other states (and 29 countries) in adopting a flat income tax, with a single tax rate on all income above the personal deduction (and a few other deductions, such as charitable contributions).

A flat tax has many good things about it. The tax form is no larger than a postcard. It can be filled out in a few minutes, and the amount owed is always unambiguous.

The usual objection to a flat tax is the idea that people with higher incomes should pay at higher rates. But this confuses two very different things: the marginal rate of taxation and the effective rate. The marginal rate is the rate at which the last dollar of income is taxed. The effective rate is the percentage of income that is actually taxed away.

So, while someone might be in the highest marginal tax bracket, that doesn’t mean he is paying that much of his income in taxes. Indeed, with the tax code’s vast complexity (it runs to well over 73,000 pages) and the endless interplay between the personal and corporate income taxes, someone else’s effective tax rate is unknowable. If your neighbor down the street has ten times your income, all you know for sure is that he has a better accountant and tax lawyer than you do.

But with a flat tax, he is guaranteed to have to pay a higher effective rate than you. This is counterintuitive but true.

Let’s assume a family has four members, that the personal deduction is $10,000, and the flat tax rate is 20 percent.

At an income of $40,000, the family’s effective tax rate is 0 percent. ($40,000 minus $40,000 in personal deductions is zero, times 20 percent is zero.) At $50,000 the effective rate is 4 percent, at $100,000 it is 12 percent, at $1,000,000 it is 19.2 percent. That’s real progressivity, not the smoke-and-mirrors progressivity of the current tax code.

The United States would do itself an enormous favor if it 1) abolished the corporate income tax, for reasons I have written about elsewhere, and 2) adopted a flat personal income tax. Unfortunately, the biggest beneficiaries of the current mess, aside from lawyers and accountants, are the 535 members of Congress, who quietly hand out tax fiddles at the behest of lobbyists and later get campaign contributions from those who hire the lobbyists.

The tax code was amended more than 4,000 times between 2000 and 2010. How many of those amendments were for the benefit of you and me?

tax code reform
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