|
|
Flat Tax harms domestic policyMar 12 '00 Write an essay on this topic.What is often overlooked in flat tax suggestions is the degree to which flat taxes harm domestic policy. Taxes play in important role in policy, and flat taxes undermine those policies. I have lived in a flat tax state, so my epinion here is truly based on experience in addition to analysis. A Flat Tax is a Regressive Tax While a flat tax seems deceptively "fair," it actually creates a highly regressive tax system. A regressive tax system is one where people with less money pay a higher percentage of their income. Would you accept a plan whereby the rich pay 20% of their income in taxes but the poor pay 40% of their income in taxes? I can't believe that anyone would. Yet, because gas and food consumption are essentially steady, the poor pay a much higher percentage of their income in sales and gas taxes. Progressive state and federal tax systems correct for some of this by extracting a higher percentage of income as income goes up. Thus, the entire system evens out, but with a flat income tax, the entire system would become regressive. A Regressive (or Even Flat) Tax Defeats Redistribution Policy Like it or not, one of the goals of a progressive tax system is redistribution of wealth. Of course, flat tax proponents call this "penalizing the rich" whereas opponents describe it as "giving the poor a leg up." I will not engage in the philosophical debate here. What I will point out is that policy makers have favored redistribution, and a flat tax undermines this policy. This is why even many die hard flat tax proponents propose Earned Income Credits and the like - they want a flat tax that doesn't look anti-redistribution, but the truth is that EIC's are just not enough to meet the policy goals. A Flat Tax Defeats Investment Policy Sure, differing capital gains tax holding periods can be confusing, but it has a distinct purpose - encouraging people to hold capital investments for a longer period. And you know what? It works. A flat tax would defeat this important purpose. A Flat Tax Defeats Savings Policy Sure, IRA contributions are confusing, and at $2000, they don't save you that much in taxes. Note, however, that the policy is to encourage long term retirement savings. And you know what? It works. A flat tax would defeat this important purpose. I certainly know that I don't want my 401K contributions taxed. A Flat Tax Defeats Other Policies There are a myriad of other policies that the flat tax would defeat. Another one is home buying incentives. Policy makers have long since decided that buying a home and making charitable contributions are positive activities. Tax rules are designed to encourage these activities. And you know what? It works. A Flat Tax Defeats Revenue Goals Regardless of what analysts say, the flat tax will never generate the kind of income that the progressive system generates. The primary reason is that the tax would simply be too high to be palatable to anyone with the interests of the lower middle class in mind. For example, a number bandied about is 20%. Now consider that the average person now in the 15% bracket actually only pays about 10% in taxes after deductions. Is it realistic to double the tax paid by our nation's lowest earning population? Not really. Thus, the flat tax would have to be lower to be palatable, and would not generate the necessary income. It is for these reasons that as a matter of domestic policy, a flat tax just does not fit the bill, regardless of the complexities of the current tax system.  |
| Read all comments (22)|Write your own comment |
