Tuesday, August 23, 2005

Proposal Two: The Flat Tax

Proposal two in Mark Satin’s radical middle agenda is the implementation of a flat tax. Mark writes:

Our current tax system is wasteful beyond measure. Simply complying with the tax code imposes national costs exceeding $150 billion annually. And despite its ostensible “progressivity,” the code -- now 60,000 pages long -- is so riddled with loopholes that wealthy Americans end up paying far less than they should…
A flat tax should be adopted instead. A flat tax would scrap the entire tax code and tax all Americans at the same rate. Wage, investment, and pension income tax would be collected from individuals. A tax on profit would be collected from businesses. All deductions and credits would be eliminated…Virtually the only income not subject to tax would be a generous personal exemption -- say $20,000 for a single adult and $40,000 for a family of four. That’s why the flat tax would be more progressive, in practice, than today’s so-called progressive income tax.

I am certainly a fan of tax simplification. It is basically impossible for the average American to prepare their own taxes without help from either a computer program or a tax preparer. And even then, the system is a Gordian Knot of deductions, rules and penalties.

But is a flat-tax the answer? I don’t know that it is. My primary concern is that, even with Satin’s allowances for the poorer earners among us, it seems like a rather regressive idea. If the flat tax was at, say, 17%, that 17% taken out of a $50,000 salary is a much greater burden than the 17% taken out of a $400,000 salary.

If we’re going to go with a complete-overhaul (and I don’t see how tinkering with the current system can work), then I’m much more inclined to support a Value Added Tax (VAT). I’ve written about the VAT before (here, here and here) and have discussed its advantages and drawbacks at length.

A VAT is a type of sales tax . In his writings, Satin dismisses the effectiveness of a national sales tax because it’d be too easy to cheat. But a VAT is notoriously difficult to cheat because it is structured so that taxes are paid at each step of a product’s manufacture and distribution and not just at the point of sale.

Given that a VAT would be an effective system of tax collection, it would also be more progressive than a flat tax in that it taxes expenditures, not income. There would of course be products exempt from a VAT (fruits, vegetables, mortgages, etc.) but most everything would be taxed in lieu of an income tax. The transition can be rolled out slowly over a course of years to prevent the inevitable sticker shock that will come when all our goods are more expensive. But that extra expense will be more than made up for by the savings we would have in not paying an income tax.

If you are poor and buying mainly sustenance goods, you’d pay very little tax. If you are rich and buying luxury items by the boat loads, you’d pay a ton of taxes. In that way it is progressive. It also would promote savings as it would entice people to think twice about purchasing the plasma TV they don’t really need and can’t really afford.

But there are drawbacks. As long as there can be an income tax, the federal government might feel obliged to levy one. And that can only be prevented by repealing the Sixteenth Amendment (not an easy task). Plus, a VAT can be raised a quarter point here and a quarter point there to pay for new, potentially unneeded programs—making it a far too easy way to tax us heavily.

But if we’re going to support a radical change to the tax system, a VAT allows for more flexibility and more fairness than would a flat tax. Its drawbacks are certainly less problematic than the current system and, with the proper thinking and planning, a VAT could be the answer to our tax woes.


At 10:29 AM, Blogger Maggie said...

Let me suggest another option...a graduated "flat" tax. This would be a system without loopholes, credits, deductions, exemptions, etc..., but would maintain graduated income tax rates as people's income grew. 4, 5, 6 income brackets, I don't know what would be most appropriate. The lowest income bracket would pay nothing, but everyone else would pay x%, y% or z% of their salary in taxes period. This would actually create/sustain higher burdens on those who can most afford it. The specifics of tax rates and tax brackets would have to be worked out so to maintain adequate federal income, but that is beyond my expertise.

I have not heard much discussion of the serious loss of jobs this or any other real tax simplification plan would create -- IRS agents, Tax Attorneys, CPAs. Nor have I heard any estimates of how much money true tax simpliciation would save the country in administrative costs.

At 5:08 PM, Blogger Tom Strong said...

Those are good questions, Maggie.

Truth be told, I find the whole discussion of tax reform somewhat overwhelming...there are so many if's and but's that go with each proposal. I can agree broadly that some kind of tax reform/simplification is attractive, but beyond that it remains hard to say which plan is best.

At 7:05 PM, Blogger gljunket said...

I've learned a lot from your debate, and appreciate the sincere thoughts by all. You're a terrific resource, and I am also "somewhat overwhelmed." I don't want to clutter up your comments with mine, so I've posted my reactions on my journal, where I invite anyone (except spammers) to visit and comment. Thank you.

At 11:47 AM, Blogger J. James Mooney said...

No posts in like three days? Someone's slacking.

At 4:05 PM, Blogger Jonathan C said...

Not that it is exactly an unbiased source, but the Brookings Institute makes the claim that a revenue neutral National Sales Tax would be in the area of 23%. OUCH!

What would the corresponding VAT rate be? Also, wouldn't a NST / VAT make it harder for new businesses to start, and stuggling businesses to get back in the black since all businesses would be taxed, not just the profitable ones?

All in all, I agree that a VAT is probably more fair than our current income tax system for individuals, but I don't think I'm ready to endorse it quite yet for several reasons.

At 9:59 PM, Blogger amba said...

We have such ambivalence about consumption. On the one hand, we'd all like to see people spend less (especially less of money they don't even have), acquire less, and save more. On the other hand . . . what would that do to the American economy? I used to be the kind of quasi-hippie who subscribed to the statement (who said it?) "Growth is the ideology of the cancer cell" (except for the growth of my record collection, that is). Now I am aware, though not nearly knowledgeable enough, about the degree to which the security and abundance I take for granted floats on that ever-rising tide. I could probably adjust to a deep recession or depression. Many people would be destroyed by it.

That's why I worry about the VAT.

At 9:19 AM, Anonymous BillG (not Gates) said...

maggie wrote:

"a graduated "flat" tax. This would be a system without loopholes, credits, deductions, exemptions, etc..., but would maintain graduated income tax rates as people's income grew. 4, 5, 6 income brackets, I don't know what would be most appropriate. "

a flat tax with a guaranteed income IS "graduated"...

to use some simple numbers assume:

10% income tax rate w/no loop holes and 10K guaranteed income per adult (18yrs) w/no strings attached

tax rate at 100K is 0% (10K owed, 10K received)
tax rate at 200K is 5% (20K owed, 10K received)
tax rate at 500K is 8% (50K owed, 10K received)
tax rate at 1.0M is 9% (100K owed 10K received)

At 10:29 AM, Blogger Alan Stewart Carl said...

First, a graduated flat tax w/o exemptions is not a bad idea. I suppose our current system was supposed to be pretty much that--but it's been overloaded with exemptions and exceptions. MY worry is that the same thing would happen again. But, in principle, I like the idea.

As for Amba's comments on the VAT: I agree that our economy realies on a very pro-consumerism attitude and any taxation that could reduce spending could hurt our economy. BUT, so many Americans are already living so far past their means, that some downturn is inevitable. The question is--will it happen with a flood of bankrupcies (or worse) and foreclosures...or will Americans get their spending under control themselves.

I think the VAT could actually help prevent the kind of depression you predict by providing the incentive people might need to get their finances under control.

Of course, I am not an economist and, as previously stated, am not 100% sold on a VAT, merely very intereted.

At 3:48 PM, Anonymous Anonymous said...

I am going to throw a curveball into the mix here...

all taxation ultimately ends up as higher prices to consumers except one - the property taxes on land values.

it can not be passed onto the consumer because it causes the landowner to optimize the use of their socially created location which sows the seeds of their own demise in trying to pass it on to a tenant.

now let's look at this in more broad terms...

today this value gets passed onto to a tenant (immediately) or a future purchaser of land as it appreciates in value - yet the landowner does nothing to increase this land value with their own labor - it is purely profit without production.

can't this appreciated land value be thought of then as a "tax" on the wages of those having to rent or purchase a place to stand?

another way to look at this is that the private enclosure of land in a scarcity market creates a legal and monetary obligation on those being excluded.

some of you might recognize this as something different - negative externalities.

why don't instead of allowing the private enclosure of the natural and social commons to accrue benefits to individuals which are not the result of their labor and create costs for society - in the form of negative externalities - we use this as the source of our public revenue instead?

this way we can "kill a few birds" with one stone.

create a market system that accounts for negative externalities at the point of sale and a just public revenue system by ending all government granted privilege?

At 3:51 PM, Anonymous BillG (not Gates) said...


the anonymous was BillG (not Gates)

a Paleo-Green

At 9:11 PM, Blogger Peter said...

the point made that 17% of a 50,000$ salary is far more of a burden than 17% out of a 400,000$ salary. well, Satin also seems to support generous personal exemption (he threw out the numbers of $20,000/single and $40,000/family of 4). The single is generous, the family of 4 should be a little higher. either way, the 17% cut would only be of $30,000 after a single exemption - not a horrible burden once you consider that there would be no more OASDI withholdings either (under Satin's plan).

I think Satin makes a good point here, far better than Point 3. Either way, check out http://americanmoderateparty.blogspot.com


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