If I were to say to you, "It doesn't matter how much money or how little money you make, or how much or how little you spend, we're all going to pay the same tax rate," your first reaction would be, "Well, makes sense to me."
That was certainly my reaction when Steve Forbes proposed a flat tax system during his Presidential campaign in 1996. While I gave the publishing magnate a less than 17 percent chance of actually winning the Republican nomination, I paid close attention to his point, well-received on both sides of the aisle, that our tax system was inherently unfair, unwieldy and complicated, and reform was necessary.
But my research then, and my belief now, is that the "flat tax" proposal Steve Forbes proposed, and most if not all such proposals prior and subsequent to Forbes', are incapable of meeting the revenue needs of the government of the United States while still preserving our institutions and protecting our citizens.
Forbes was certainly not the first to point out the flaws of America's system of collecting the funds necessary to run our government. From the founding of America to today, leaders and citizens have debated the pros and cons of taxation as a means to "establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty for ourselves and our posterity".
But no one denies that these principles, espoused in the preamble to our Constitution, are necessary to uphold, with our labor, our honor and our dollars.
So as our society has evolved over 232 years, so has our system of taxation, and no longer is it possible to say, "Okay, you earned $5000.00 this year, give Uncle Sam $500.00 and he'll protect you." What we earn, what we save, what we spend is all relative to factors that make a flat-tax system unworkable.
A simple but telling example of the fallacy of flat taxation rests in pure geography. According to the U.S. Census Bureau, the state with the lowest household income is Mississippi, at $34,500.00. (see:
www.census.gov/hhes)
. I'm confident this does not come as a surprise. What is surprising is that the state with the largest household income, based on the same census data, is New Jersey (can you say "Tony Soprano?"), at $60,000.00. But the most telling statistic rests in the corresponding Consumer Price Index for each state. In Mississippi, the CPI is 169.7, while in New Jersey, it is slightly higher at 181.8. One would assume that living in New Jersey would be much more expensive than living in Mississippi. But Mississippi families pay .5%
more of their income just to survive than do residents of New Jersey.
This would seem to indicate that our current tax system is "regressive", that is, skewed toward the wealthier citizens. Many in the upper middle class and beyond would argue the opposite. But most data indicate that almost any system of taxation is "regressive", based on definition and practical application.
The value-added tax, or VAT, has been offered up by some economists as a "flat tax" which could replace the income tax as the government's main source of revenue. The VAT is a sales tax which is applied to a product at all levels of its "life-span", from production to consumption (
www.investorglossary.com/value-added-tax.html). The website indicated gives an example of a tree, which is taxed at the point it is cut down, taxed again at the mill, again at the manufacturer who turns it into a table, again at the trucking company who transports the table to the retailer, and again at point of sale. Obviously, the bulk of the tax is then paid by the ultimate consumer, because all the entities, from lumberjack to truck driver, will pass their costs on to the buyer.
The VAT is a regressive tax because the wealthy, with their income now non-taxable, can continue discretionary spending for such things as a new table, and still afford to invest and spend at will. The middle class family is left to determine if a heavily-taxed item is a necessity, or a luxury.
Another potential problem with the VAT also applies to the flat sales tax proposal put forth by organizations such as FairTax.org. A 30% sales tax as proposed would cause many products to be manufactured and sold on the "black market", through cross-border or Internet transactions. Tax evasion would become the norm for major purchases, especially in households where income was below the median. But the wealthy would certainly not miss an opportunity to take advantage of these shady offerings, and the U.S. Treasury would be unable to maintain the revenue stream necessary to meet the government's Constitutional obligations as a result.
The Hall-Rabushka flat tax proposal of the early 1980's, proposed by two fellows of the Hoover Institution, was a variation of the VAT that would apply to businesses and individuals. It made adjustments for the inherent "regressive" nature of the tax by taking into consideration a company's or individual's income, material costs, pension contributions, etc. In other words, it weighed itself down in much the same way as has our current, convoluted tax system.
William G. Gale, a Brookings Institution fellow and proponent of the flat tax, pointed out that "many of the gains (attained through the flat tax) are also available through judicious reform of the income tax, in particular by making the taxation of capital more uniform." Reform, then, according to Gale, could solve many of the problems of the current tax code.
One of the most recent proponents of the flat tax has been Daniel J. Mitchell of the Cato Institute. In Cato's July/August 2007 Policy Report, Mitchell argued the merits of the flat tax by pointing to the various countries and protectorates that have adopted such a method of financing their government programs. Estonia, Latvia, Serbia, Slovakia, Mongolia, Kyrgyzstan, Macedonia and Montenegro are among the 19 economic "powerhouses" that have found merit in such a system. Would we trade our system for theirs?
Alas, it takes great political will to achieve even small, incremental change in such a vast wasteland as is represented by America's tax system. And until Congress can muster such will, or until we elect a President willing to take on the special interests that most benefit from the convoluted nature of our current code, then modest reform is all we can hope for.
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