A Better Tax System

For anyone who owes money to Uncle Sam, April 15th is not a day you look forward to. Even if you’re getting money back, Tax Day can cause a migraine by virtue of the sheer volume of paperwork required to comply with federal and state tax laws.

What’s even worse, though, is hearing people like Kevin Drum claim that a flat tax would be unfair:

It is dishonest to pretend that flattening tax rates has any connection to simplifying the tax code. It is dishonest to pretend that a flat income tax is “fair” while conveniently forgetting to suggest the same for Social Security taxes. It is dishonest to pretend that “income” is the same for everyone while failing to even mention capital gains, tax shelters, corporate perks, deferred compensation, pension contributions, stock options, or the thousand other options the wealthy have for making money that doesn’t quite count as “income.” It is dishonest not to mention that simple arithmetic guarantees that any flat income tax proposal would raise taxes for practically every middle class family in the country.

No, Kevin, a flat tax would be the very definition of honest. Flat means FLAT. Everyone pays the same rate. The problem is you fly off the handle with assumptions about how those at the higher end of the income scale will maintain every bit of legal income deduction they now enjoy.

Flat tax would have two benefits. First, it’s fair. Second, it’s simple. The simplicity part comes from the complete elimination of adjustments. Your gross income is your AGI, period. This means eliminating all deductions (including mortgages and charitable contributions), shelters, itemizing, and so on. Under a flat tax, everyone should be able to file using a single form. Income x tax rate = your tax bill

Let’s also consider the fact that a flat tax would eliminate the build-in disincentive toward working. Right now you can actually take home more money by making less in some circumstances. Those near the top or bottom of a particular tax bracket have a vested interest in keeping their income down.

But perhaps the fairest tax system would be the national sales tax. At first it sounds unappealing, but Lesley mentioned this the other day and the more I think about it, the better it sounds. First of all, it removes all disincentives for working. You get to keep whatever you make — all of it. It also encourages saving. Lord knows we need more of that. And finally, the wealthy would still pay a lot because they own more expensive cars, homes, and toys. They buy more expensive food, eat out more often, purchase more services, more luxury items, etc.

Another vital benefit to the national sales tax would be the transparency of the system. Right now it’s tough to get a handle on what you pay in tax. There’s income tax, sales tax, property tax, Social Security tax, gas tax, luxury tax, death tax, tax, tax, tax, tax. What do you really pay each year? Have you ever added it all up? It might surprise you.

With a national sales tax, you would see exactly what you’re paying every time you buy something. Of course, this assumes the other taxes were eliminated in favor of a single tax. Again, this would be eminently fair. But those on the left (I do love how they call themselves “progressives”; they’re progressive toward higher taxes) — would never abide by anything so simple and fair. The entitlement mentality seems to preclude rational thinking where taxes are concerned.

The little dribs and drabs of exemptions, shelters, deductions, and other adjustments are the current system’s way of trying to restore some semblance of balance. But this is punishing the wrong party. If we want simplicity and equality, then that’s the kind of tax system we should be seeking.

A national sales tax — or, barring that, a truly flat tax — is the proper way to acheive this goal.

  4 comments for “A Better Tax System

  1. David Krych
    April 16, 2004 at 7:43 pm

    This is just plainly wrong when it comes to what happens with tax brackets. You can never “take home more with less pay” under the current system. Tax brackets are the tax rates on marginal income, not total AGI. The fact that so few people understand this is one of the problems with the current system. You pay 15% on your income up to a certain amount, and then 20% on your income above that amount up to the next bracket border, and so on. Under absolutely no circumstances could you give up money and end up with less. If more people understood this, the flat tax would be DOA.

    I’m all for taking away the deductions that make the system so puzzling, but as Drum notes, looking up your income is the least confusing part of the system. You could easily fill out a single form with a progressive tax system as easily as a flat one. The left is against the flat tax because, all else equal, the rates are more punitive on the middle class and poor, to the benefit of the rich, than the current system. Similarly, because the rich can afford to save more than the poor and middle class, simply because their basic needs are a smaller portion of their income, taxes on consumption favor the rich.

    Of course, the claim here is that all else is not equal, because flat tax proposals also imply a drastic reduction in tax shelters, which disproportionately favor the rich. But again, those could be eliminated just as easily without changing the actual brackets. But change will not come easily. The mortgage interest deduction can never be removed politically, much as I would love to eliminate it (I’m a renter, and it’s blatantly discriminatory against renters). For homeowners, suddenly paying off housing would become substantially more expensive. It would more than offset any cut in the rates.

  2. Ron
    April 17, 2004 at 1:31 am

    David– thanks for the info on the tax brackets. I just did my own taxes but didn’t know they worked that way. I guess TurboTax hides a lot of the dirty work, eh?

    I would have to disagree with you about why the left is against the flat tax. From what I can see, the left is against the flat tax because everyone would pay the same percentage of their income. That’s fairness and equality personified. The left doesn’t want that. Instead, they feel “equality” would be for the guy making a million dollars a year to pay 50% of his income and the guy making $20,000 a year to pay nothing.

    That’s not fair. That’s redistribution of income. I’m operating from the premise that our country is predicated on providing equal opportunity, not forced economic equality through the redistribution of wealth.

    I understand your point about the basic necessities consuming a smaller portion of the wealthy person’s income, but it seems a nonsequitur. What a person chooses to do with their post-tax money is up to them. We’re not talking about just the basics.

    Taxes on consumption do not favor the rich. They hit the rich much more. Rich folks buy expensive cars, boats, aircraft, homes, jewelery, vacations, and would pay a lot of money in tax on those items. The higher a lifestyle one wished to lead, the more they would pay into the tax system. Conversely, the simpler a lifestyle, the less they would pay regardless of income.

    That seems fair to me. No?

    I think Stephen Moore explained it better than I could: http://www.cato.org/testimony/ct-it68.html

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  4. Ruth Kight
    September 19, 2004 at 3:32 pm

    Why not have all the people that have finished paying their mortgages, continue to pay them, but send the money to the Federal Government now. What’s wrong with that? Since savings are money that has already had taxes paid on it, you want these retired people that have been saving for 30, 40, or 50 years and have already had a portion of their income sent to the Federal government during this period to now start sending the Federal government money from their savings that they’re living on through their luxurious purchases, like rent or property taxes, electricity, food, clothing and other luxuries. These retired people grew up without HDTVs, computers, and CelPhones. All the current items that make our standard of living so desirable to the rest of the world. Now that they’re ready to live off of their savings, you want to take away another percentage by adding this load to their backs. SHAME! SHAME! SHAME on you!!!! If the politicians hadn’t squandered all that pork and raided the Social Security System for every Tom, Dick, and Harry with a boil on it’s butt, maybe the people that had no choice back then but to have that money removed, wouldn’t have to be concerned about another possible crash….

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