lat tax, those leg irons hobbling America’s most dynamic companies would come off. A flat tax rate of just 20 percent paid by business could lower the cost of equity by one third. For Hewlett-Packard, a technological company, cheaper equity capital would be a wind fall. Hewlett-Packard depends almost entirely on equity financing to make its risky high-tech investments because the company does not want to be saddled with the interest payments on borrowed funds should technology shift or the economy fall into recession. Says Dan Kostenbauder, Hewlett-Packard’s general tax counsel: “Anything tat would reduce our cost equity would tilt the competition in our favor.” (Dishman 45)Smaller firms that now find it difficult to attract high cost equity would also be big winners under the flat tax. Entrepreneur Stephen King, CEO of Tomah Products, a specialty chemical manufacturing company with 51 employees, thrills at the prospect. The sales of his $21 million company are growing by better than 15 percent per year. But because Tomah has a small asset base, it cannot offer lenders sufficient collateral to borrow what it needs to expand. King has been able to attract some scarce venture capital but had to pay a stiff price—a substantial portion of his own stake in the company—to get it. Says King: “Show me a tax system that would lower my cost of equity, and I’ll back it in a minute.” (Dishman 45)Economists judge fairness by horizontal equity, the equal treatment of people with equal income. The U.S. tax system notoriously flouts this principle by taking income two to three times when it is saved and invested, but only once when it is consumed. (Henderson 57)Why should one be taxed twice or three times when one adds to the capital stock while others who consume avoid this double taxation? The so-called flat tax, on the other hand, treats people the same whether income is spent or invested. Under ...
