August 29, 2005

Flat Tax - Equality In Taxation

From the Wall Street Journal's

Next month's report of the White House tax reform commission will likely stop short of advocating a complete scrapping of the tax code. But look for it to have warm words for how well the flat tax is promoting economic growth in the more than dozen places--ranging from Ukraine to Hong Kong--that have adopted variations of it.

Any realistic discussion of whether a Flat Tax would be good for America would necessarily depend upon knowing the specifics of any given proposal. For example, what would be included within taxable income? What types of exemptions would be permitted? What would the tax rate be?
However, I have to admit that I really, really love the concept of a Flat Tax.
Under the current system, American citizens are not taxed in an equitable matter. Income tax rates increase as a citizen's income increases. For all of the Democrats' whining about George Bush's "tax cuts for the rich", those people in the highest income bracket are still paying 35% of their income to the Federal Government in taxes while the lowest income bracket merely pays 10% of their income to the Federal Government in taxes. Think about that. Over a third of an individual's income must be paid to the Federal Government. When you add state income taxes (which are similarly structured), property taxes, and sales taxes, an individual can end up paying over half of his/her income to the government in taxes. The current system essentially penalizes those that work hard to make a better life for themselves (o.k., I guess it also does penalize those members of the "lucky sperm club" e.g., Paris Hilton, that merely inherit their income).
I have no problem with paying a larger amount of taxes than those that make less money than I do. However, why should I pay a much higher percentage of my income than they do? Do I consume more in governmental services? No. Do I require greater protection from the armed forces? Of course, not. I have a bigger bank account.
Clearly, no one could disagree that the "rich" and upper "middle class" pay a higher percentage in taxes - after all, the percentages are black and white. However, let's take a quick look at two taxpayers to drive the problem home. One taxpayer, who is married and files jointly, earns $55,000 in taxable income and is within the 15% tax bracket. Another taxpayer, who is married and files jointly, earns $180,000 in taxable income and is within the 33% tax bracket. The first taxpayer would end up with a tax bill of $8,250 while the second taxpayer would end up with a tax bill of $59,400. In other words, the second tax payer pays $51,150 more in taxes than the first tax payer. Is this fair? Of course, not... unless you believe that the government has the right to redistribute wealth amongst its citizens.
Under a Flat Tax, everyone would pay the same percentage of their income in Federal Income Taxes. People would be treated equitably.
Let's assume that a hypothetical Flat Tax would be 17%. Under our example above, the first tax payer, who earns $55,000 in taxable income, would pay $9,350. This is a slight increase due to the increase in rate from 15% to 17%. However, the second tax payer, who earns $180,000, would still pay $30,600. While the second tax payer would have a significant savings in taxes ($28,600), the second tax payer is still paying $21,250 more in taxes than the first tax payer.
For as nice as a Flat Tax may be, I sincerely doubt it will ever come to fruition. Why? Politics. Does anyone honestly believe that the accountants and tax lawyer lobby would not throw a lot of money at the politicians to avoid losing their cash cow.
Moreover, the Democrats will characterize a Flat Tax as "tax cuts for the rich" (after all, the rates paid by the highest income groups would fall, so therefore tax liability would fall as well). Under the example above, the Democrats would characterize the first taxpayer (i.e., the one making $55,000 in taxable income) as somehow being required to shoulder a larger burden in taxes - even though the second taxpayer (i.e., the one making $180,000) would still be paying over $21,250 more in actual taxes. It will make no difference that the increase in rates for the lower income earners or reduction of rates for the higher income earners would be done to equalize the tax percentages or that the higher income earners would still be paying a substantial amount more in taxes. In the Democrat's view, the higher income earners should be footing a larger percentage of the bill. For example, after Bush's tax cuts lowered the top rate from 39% to 35% the Democrats angily derided such a reduction as evidence that his entire tax cut policy was meant to profit Bush's wealthy contributors - even though the lower rates were reduced as well. The Democrats have no interest in tax equalization and will use any such proposal as proof positive that the evil Republicans are somehow out to screw the poor. The Democrats have made a huge investment in class warfare. It defines their entire tax policy.
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