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.