Anybody who files taxes every year at the very least has a strong dislike of the process and more likely would describe the yearly ritual as hateful. In 2011, the United States’ tax code comes in at 72,536 pages long. That would make it approximately 59 times as lengthy as the original publishing of Tolstoy’s epic “War and Peace”. The flat tax idea aims to reduce that down to the back of a post card. That has an alluring sound to it, but so did the Siren’s songs to sailors in Homer’s Odyssey.
The idea for a change to a flat tax system has been around since 1981 when two Stanford academics, Robert Hall and Alvin Rabushka, first floated the idea, and then published a book on the subject in 1985. Politicians, mostly from the GOP, have pushed for establishing a flat tax since Steve Forbes sought the Republican nomination for President in 1996. Put in its simplest terms, under a flat tax system all individuals and businesses would pay a fixed percentage of their income, the most common rates proposed being in the range of 15-19 percent, to the government. The “pull yourself up by your own bootstraps” crowd likes this idea because then everyone has the same “skin” in the game. But the issue is more complex than the politics by bumper sticker bunch would have us believe.
True Flat Tax
According to Merriam-Webster a flat tax, or proportional tax is “a tax in which the tax rate remains constant regardless of the amount of the tax base” A true flat tax is simple to understand for the average voter and therein lays the appeal. Everyone pays the same rate, regardless of income. The truth, as so often is usual, is different than the assumption. The most common of the flat tax proposals peg the rate of taxation at 17%, so we will use that number for the sake of argument. First though, we need to examine the current effective tax rates. According to the group Tax Foundation, and using the most recent data available from the IRS, we shall use 6 groups and examine how the flat tax proposal would effect each. To simplify things, we shall use the threshold income amounts for the top 1%, 5%, 10%, 25%, 50% and bottom 50% (minimum wage) income groups. They are:
- Top 1% with income of $380,000 and an effective tax rate of 23.3%
- Top 5% with income of $160,000 and an effective tax rate of 20.7%
- Top 10% with income of $114,000 and an effective tax rate of 18.7%
- Top 25% with income of $67,000 and an effective tax rate of 15.7%
- Top 50% with income of $33,000 and an effective tax rate of 13.7%
- Minimum wage with income of $15,000 and an effective tax rate of 2.6%
As you can see above, under a true flat tax system, if you make approximately $87,000 per year or less, your tax rate, and consequently your taxes would actually INCREASE. Do you folks that fall into the sub-87K category (over 80% of you) feel that your current tax burden is too low? With the proposed true flat tax system in place, upper income people would see their taxes DECREASE to an even lower level than they enjoy now. The bumper sticker says we all have the same skin in the game as a percentage of our income, but when you get down to brass tacks, it is our disposable income after taxes that matters to most Americans and under this proposal, they would see their take-home money decrease. So let’s look at disposable income for the above groups under a true flat tax compared to what they have now.
- Those earning $380,000 would take home $23,940 MORE
- Those earning $160,000 would take home $5,920 MORE
- Those earning $114,000 would take home $1,938 MORE
- Those earning $67,000 would take home $871 LESS
- Those earning $33,000 would take home $1,089 LESS
- Those making minimum the wage of $15,000 would take home $2,160 LESS
A true flat tax drives down the disposable incomes of those to whom it matters most, the lower income folks, the 95% of Americans that spend 71% of the money that drives this economy. The minimum wage employee sees their after tax income drop by almost 15%. That means a lot to someone who is now taking home $281 a week and would see their disposable income fall by $41 weekly. That’s the monthly car insurance money for millions being transferred directly to those few who are the best off among us and need it least. That seems to be an unfair burden placed upon the least among us just so that the wealthiest Americans could enjoy another tax break and stuff more money in the bank. Who out there still believes that the upper crust will go out and be “job creators” and let their benevolence trickle down on the rest of America with more tax cut money?
There are flat tax proposals out there that have various deductions added to help the poor. But those plans would eliminate that main flat tax argument that everyone must have some skin in the game. The Heritage Foundation’s plan, for instance would allow “personal allowances” of $10,000 for a single person, $13,000 for single head of household, and $20,000 for married and filing jointly in addition to $6,000 for each dependent. Only amounts above those levels would be considered taxable income. The Hoover Institute, the think tank where the aforementioned fathers of the flat tax, Hall and Rabushka, work from, would allow $37,750 in household income for a family of four before taxes would kick in, and would index that amount to the rate of inflation. Hall and Rabushka say in their book “To make the tax system progressive, only earnings over a personal or family allowance are taxed.” Wait a minute, did they say make the system progressive? Isn’t that what we have now, and what the would be tax reformers continually rail about? Why yes it is. Some proposals have included family allowance deductions up to $40,000, mortgage interest deductions and deductions for charitable contributions. Where would the deductions and allowances stop? We are now getting off of the postcard and back onto the 8-1/2 x 11 inch stuff.
Next is the question of how to get corporate taxes onto the postcard. How would you figure business income? Tax the gross receipts like they would family income? Somehow I don’t think Mr. CEO would go for that. What then would be allowable business deductions? Most of us would agree that the cost of supplies should be an allowable business expense. But what if Gigantomegacorp bought Widget Inc. to supply their widget needs? How would that be treated? What about Widget Inc.’s profits, or gross receipts, or their supplies, or whatever else? You can see where this headed, yup, right off of the postcard again and back to the paper.
The bottom line in all of this is that the dream of your tax form fitting on the back of a postcard is just that, a dream. Most of the flat tax proposals being floated about out there aren’t flat at all. They are just different incarnations of what we have now, a progressive tax system. Once the Pandora’s Box of definitions and deductions is opened, you will find the special interest lobbyists still converging on Congress like flies to excrement, just as they are now, and before long we would be adding page upon page to the tax code again.
Should the system and rules of taxation be simpler? Yes. Should our tax code be more fairly reformed? Yes. Is a flat tax the answer? I think not. The next time that you hear someone expounding on a switch to a flat tax system, you can be sure of one of two things; that person is either a wealthy individual looking for another tax cut, or they are speaking as a simple fool, one too wrapped up in bumper sticker politics to realize that they are advocating against their own self interests.
