The U.S. federal income tax law is incredibly complex, and the tax return that almost every U.S. adult has to file is bewildering and time-consuming. It's not the number of different rates at different tax brackets, because most taxpayers use a tax table. It's the number of exemptions, deductions, phase-ins, and phase-outs in the tax law, and the multiplicity of worksheets and supplementary forms that have to be filled out to implement them.

The proponents of a flat tax confound these two aspects of the tax law. They want to reduce the number of tax rates and tax brackets to one (1), and the number of exemptions and deductions to -- zero (0)? Well, no, they have a few reservations about that. They want to exempt investment income because they say it's "double taxed."

Some people are even talking about abolishing the income tax and replacing it with a "consumption tax" to be paid at the retail counter. I have a problem with that: a consumption tax falls on consumers, most of whom don't have any money to spare. The least painful way to collect the tax revenue you need is to take it from the people who have the most money to spare, not the least.

Anyway, let's start with the idea of a flat tax, at one single rate, with no exemptions, that nobody has to pay if they don't have any spare money. How is that possible? I propose a tax on income that's available to spend on things you don't really need. Admittedly, that will involve some exemptions and deductions, because you need some calculations to get from total income to spendable income that you don't really need. But let's see how it would play out.

The Plan

We need a personal exemption that's equal to the cost of living: not the cost of scraping by, but the cost of living with dignity. The "poverty line" (in round numbers) is about $10,000 for a single person, and $20,000 for a family of four. We want an exemption that's closer to the median income, which for a family of four is a bit over $40,000. We also want to avoid a "marriage penalty," so the total exemption should be the same whether two earners file jointly or separately. The personal exemption would then be something like $15,000 for each earner, and $5,000 for each dependent.

We only tax net income, net of the cost of earning it, because the cost of earning it is not spendable income. That means work clothes, tools, commuting costs, etc. should be deductible with no threshold.

What about the deduction for charitable gifts? Money you give away with no expected compensation is not spendable income. I could live with that deduction.

What about the deduction for state and local taxes? Many flat-taxers want to abolish that one, and I could agree. Your state and local taxes are (theoretically) paid in exchange for services that you need, but they're part of the cost of living, which we already included in the personal exemption.

What about the proposed exemption for investment income? In a word, baloney. Investment income is spendable income. But what if you don't spend that income, or some other part of your income, but put it straight into investments? Then it becomes part of the cost of earning future income, which I said shouldn't be taxed. That leads to two really novel adjustments to income.

First novel adjustment: money saved or invested is not spendable income, and is therefore deductible from total income. It becomes income when you withdraw it. Any money you get by disinvesting or dissaving, including any money you borrow, is spendable income and should be taxed. In effect, all savings is tax deferred, like an IRA.

How complicated will that be to administer? No problem. You don't have to report every transaction. Your bank or broker reports the balance in each account at the beginning of the year and at the end of the year, and the difference is the amount you saved or dissaved. There is a complication during the transition: previously taxed savings would have to be "grandfathered," but they would eventually disappear, especially if the previously paid tax is applied to taxes due on withdrawn gains.

Second novel adjustment: the corporate income tax is abolished, because it isn't spendable income to anybody. Corporate income is either reinvested as retained earnings, which are not taxed, or distributed as dividends to the stockholders, who pay tax on it as ordinary income (unless they reinvest it). That eliminates the "double taxation" that the flat-taxers wanted to eliminate by exempting investment income.

That doesn't leave much money to be taxed, does it? The tax rate would have to be pretty high; I don't know how high, but anybody with access to the right numbers could figure it out. I'd appreciate it if you'd let me know what percentage you come up with.

But I say to the flat-taxers: you wanted to avoid double taxation, you wanted to encourage investment, and I don't think you wanted to collect a lot of tax revenue from people who couldn't afford it. So here it is. Corporations -- in fact, all businesses -- will be able to put their pre-tax income to work by reinvesting it, but if they want to reward their owners, the owners will pay for the privilege. If rich people really put their vast incomes to work by investing them, and live frugally, they will pay little or no tax, but if they want to live richly, they will pay for the privilege.

All this makes the flat tax almost equivalent to a consumption tax, except that it's a consumption tax with a big, big threshold that makes it less burdensome on the middle class, lets the poor escape taxation entirely, and encourages the rich to invest. That would be a legacy any President could be proud of!