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Why a flat tax is flat evil

2004.03.31 — Business | Taxes | by BB Rodriguez

Flat land

A flat tax is for flat-earthers. [source]

Steve Forbes is fond of appearing on Fox News and squeezing in a mention of his pet issue, the flat tax. He made it the main plank of the platform when he ran for president. Other conservatives stump for it now and then, but Forbes is a nut for it. And now, the Bush administration has imposed it on Iraq.

The advantage of a flat income tax system is obvious: one rate, few deductions, no loopholes. And it's "fair" in Forbes' mind; everybody pays the same rate. What a wonderful world, right? But the problems with a flat tax are enormous and fundamental.

We have a type of flat tax in place now; it's state sales tax. If you live in a state with, say, 6% sales tax, it doesn't matter if you're an heir to the Wal-Mart fortune or Joe Blow from Kokomo, you pay an extra 6% on nearly everything you buy. This seems very democratic to people like Forbes, and for other reasons its acceptable for its purpose (the big expenses for poor folks—rent, mortgage, and groceries—are generally exempt; saving is rewarded). But it's not fair for income tax.

Note: There are other kinds of flat taxes, too. Property taxes are based on the value of the house. Since the wealthy spend a smaller percentage of their income on housing, they also pay a smaller percentage of their income in property taxes. And Social Security taxes are not just flat, they're regressive. Wealthy folks stop paying on income above $80,000.

Our... tax system is multi-tiered so that people with low incomes pay little or nothing and people with high incomes make up for it.

Our current, progressive tax system is multi-tiered so that people with low incomes pay little or nothing and people with high incomes make up for it. People who are wealthy have benefited more from the way society is structured (it rewards brains, planning, guts, and trust funds), so they should contribute more to its continued existence—and not just more in real dollars but more as a proportion of their income, since more of their income is disposable.

This creates a benign redistribution of wealth that helps fuel America's powerhouse economy better than any other. Money that, in a strictly capitalist society, would be invested in stocks and bonds, bidding up the value of corporations for no purpose, is instead recycled into the pockets of ordinary consumers who then spend it on consumer goods that they themselves labor to produce.

Sound good? It's a load of horseshit.

Forbes and others made claims that the rate for the flat tax would be around 17%. That's a lot lower of a marginal rate than many of us pay (and Forbes says that the first $15,000 would be exempted, so poor people would pay nothing.) Sound good? It's a load of horseshit.

The only way the flat tax rate could be 17% is if nearly all deductions were eliminated. In 2001*, 96% of taxpayers paid an effective tax rate of less than 15% in 2001 because they took big deductions for mortgage interest, dependents, 401k contributions, and such.

* 2001 is the most recent year for which tax information is available. Since Bush's tax cuts favored the rich (top rate fell by 6.6%; low income folks got almost no relief), the differences now are even greater.

The top 10% of earners made more than $93,000 each in 2001. Together, they made about 43% of all the income in America and paid about 65% of all income taxes. A flat tax would reduce that 65% to about 43% (flattening it to equal the percentage of income they made). But cutting their taxes would force us to raise everyone else's. Since those making less than $15,000 would pay nothing, that means that taxpayers making between $15,000 and $93,000 would see their federal income taxes rise substantially.

Flat taxers also claim that a flat tax system would simplify tax preparation and eliminate deductions and loopholes. Not true. While the initial legislation to implement a flat tax might reduce the deductions and loopholes, they would quickly find their way back in. After all, special tax deductions are the most powerful tool the government has to reward certain behaviors, like buying a house instead of renting. Such deductions are good and warranted, but with all such things come complications and unintended loopholes.

...any realistic flat tax rate has to be somewhere between the lowest current rate and the highest current rate.

Flat taxers try to dupe ordinary Americans into accepting a huge tax hike for themselves while the rich get a huge tax cut. And they do it with subtle appeals to "fairness," "simplicity," and examples of liar's math.

The truth is simple: any realistic flat tax rate has to be somewhere between the lowest current rate and the highest current rate. It obviously couldn't be lower overall. Any way you cut it, that's a squeeze on working families and a break for rich ones.

 

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