Time for a Flat Tax

Who is to blame for the sequestration stalemate? To Leftists like the NJ Star-Ledger's editors, To Save Tax Loopholes, GOP Causes Crisis. In fact, the GOP is rightly holding fast to its determination not to raise taxes to bail the federal government out of the spending mess. The basic problem, Republicans correctly hold, is a spending problem. 

The editors, for their part, actually believe that singling out "the rich" will somehow solve the problem. Of course, that's nonsense, and I'm sure they and others of their ilk know it. For the Left, "tax the rich" is not a practical fiscal suggestion. It is a moral/ideological crusade. They write:

The core disagreement in this crisis is over taxes. President Obama wants to raise money by closing some of the loopholes that favor the wealthy, while Republicans insist on spending cuts alone. 

So let’s look at these tax loopholes. These are the credits and deductions that crowd the code and make it as thick as a telephone book. The big money is in middle-class favorites such as the deductions for home mortgage payments and local property taxes. But the list includes big breaks for hedge fund managers, oil and gas companies, and a long list of special-interest groups that donate big money to politicians in both parties. 

How much do these tax breaks cost each year? More than the entire defense budget. More than Social Security. More than Medicaid and Medicare combined. It comes to a little more than $1 trillion per year. 

And who benefits? You may have guessed already, but this is another case of Republicans guarding the interests of the wealthy elite. The richest 1 percent of American households claims 24 percent of the benefits. The poorest 20 percent get just 3 percent.

Of course, as at least one correspondent pointed out, the editors ignore the other side of the ledger--the fact that the wealthiest pay the lion's share of the federal income tax.

That said, notice the fundamental premises underlying the editors' terminology--namely, "cost" and "loophole."

I left the following comments:

First, let's extinguish a hideous premise. The editors claim that tax deductions are "loopholes" that "cost" the government $1 trillion. But that is a statist premise that holds that the government has first claim on everyone's income, and that any earnings retained by private earners is only by grace of the government. This is morally and factually inverted. All money is first and foremost the property of the people who earned it. Therefor, tax deductions or credits leave more money in the hands of its rightful owners. There is no "cost" to the government, since the government has no inherent claim to that money in the first place. 

Having said that, we must acknowledge that the tax code is an abomination. That "telephone book" of tax preferences is the result of decades of special interest pressures and vote-buying, and is grossly unfair. So, why not throw out the book, and go with a tax that is fair, pro-growth, and justly progressive--a flat tax. That's a compromise that should satisfy both "liberals" and conservatives.

How would it work? See below. 

Steve Forbes laid out one such plan in his book "Flat Tax Revolution." In brief, there would be one rate of 17%, after a single generous personal exemption for every taxpayer and every dependent. In brief, the hypothetical "family of 4" would pay no income tax on the first $46,000 of income, and then 17% on every additional dollar of income. 

This means that a family making $50,000 would pay $680.00 on an effective tax rate of 1.4%; a family making $100,000 would pay $9180.00 or 9.2%; $150,000=$17,680 or 11.8%; $300,000=$43,180 or 14.4%; $1,000,000=$162,180 or 16.2%. 

In other words, the millionaire pays 238 times as much as the lower income family in dollar terms, and 11 times as much in percentage terms. It's progressive; the more you make the more you pay in both dollar and percentage terms. It's fair; every dollar of taxable income is treated the same--i.e., no income discrimination. It's pro-growth; economic success is not penalized by higher rates. Since compromise is the holy grail these days, this is one that every objective person Left or Right should be able to live with.  

Stop blaming Republicans. The code is a bi-partisan abomination. Rather than pick and choose which deductions and credits to get rid of, let's get rid of them all--save one applied equally to everyone--and go with a flat tax.

There may be elements of Steve Forbes's plan that I may not agree with. It's been a long time since I read his Flat Tax Revolution. That aside, if we must have an income tax because of political realities, we can at least fight for a truly fairer one. I believe that a Forbes-style flat tax would be a more moral system than what we have now.

In closing let's listen to what Objective Standard Editor Craig Biddle had to say about the use of the term "loophole": 

To what facts of reality does the word “loophole” refer as used by the media in this context? It denotes various means by which people are still free to act on their own judgment; it specifies aspects of life in which individual rights are not yet being thoroughly violated by the government. In other words, it names a wonderful yet rapidly diminishing thing called freedom—which users of the term “loophole” seek to smear as corrupt.

Related Reading:

In the Spirit of "Compromise," How About a Flat Tax?

"Loophole": Anti-Euphemism of Statists, by Craig Biddle