I've had a couple of people recently ask me about why I'm in favor
of a flat tax, coupled with throwing out the existing tax code completely. There are two facets to my explanation.
The widening income gap
As has been well publicized, the gap between the top 1% of earners in our country and everyone else is becoming a real problem. Republicans explain it away, for the terribly obvious reason that the market sets the wages-- and I agree wholeheartedly on that specific argument! There are nearly infinite useful examples to prove this point; "who am I to say who is overpaid-- lots of people would say I
am, or you are, it's all relative", and "if a CEO can get me a 50 million dollar return, paying him 15 million makes complete business sense" are just a couple from a myriad of common-sense responses.
And most importantly, the same people who would like "special" taxes-- basically penalties-- for people who make an arbitrary amount of money would be the same people
that would cry foul if the same logic was applied to them. "Wealth redistribution" is just not fair, whether the victim is someone who makes 20 million dollars a year, 50 thousand, or 10 thousand.
Unlike the Republicans however, I acknowledge
the income gap as a serious problem. And this flaw might actually be a problem with capitalism itself, as Marx, among others, predicted. Marx's prescriptions
were disastrous-- just go ask members of the former Soviet Union how socialism worked out for them-- but the people on the top of the income ladder in a capitalistic society do seem to reap the rewards disproportionately.
So the challenge is this: how do we get the wealthy to pay more than they already do, without doing ridiculous things like punishing them for their success? And the answer, of course, is a flat tax, coupled with a closing of all
of the deductions that those at the top of the income ladder currently use to lower their effective tax rate.
That means no more 13.9% effective tax rates
for the Mitt Romneys of the country because of low capital gains rates.
Believe me, I'm all for low corporate taxes. But individuals
don't create jobs-- their companies do. We should do away with all favoritism towards those at the top of the ladder. And that will turn around the widening income gap.
I'm sure everyone has heard of this concept called the "poverty trap". Our current system-- where 47% of households don't pay a penny
in Federal income tax, and get a boatload of tax payer-subsidized welfare benefits on top of it-- is designed so that it makes economic sense for people to not
climb the income ladder.
I have a close family member that wanted to start a house cleaning business. But because she gets so many deductions and tax credits, she actually makes
money from her tax return! So it makes more
economic sense for her to live in poverty than it does to start her own business. Contrary to what Republicans might occasionally imply, people at the bottom of the income ladder aren't stupid: they're smart
! They know how to do napkin math just like anyone else.
There is only one word for a system like that: broken.
There is one other point I need to bring up before I get to the meat of the matter; for every dollar we pay in Federal taxes, we lose about two cents
from that dollar to administrative overhead. That in itself isn't disastrous, but then if you go on to take just a few moments to compare the rate of return
for public sector-based investment, such as the social security program, versus the rate of return in even the most conservative
private sector investment, the difference is astounding. In social security's example, you pay into it substantially your entire life, and live below the poverty level when you retire.
Suddenly, public sector investment isn't just about a minor
negative rate of return-- the potential for wealth destruction adds up in a hurry.
Faced with this fact, it generally makes sense to keep as much money in the private sector, where wealth can be created, versus in the public sector where it is destroyed.
Of course, there are some things that we simply have
to accept wealth destruction on account of; anti-trust regulation, protecting our military interests, maintaining our currency, making sure our food and water is safe, keeping our interstate roads and bridges in repair, among other things. But we should be awfully careful to keep this list of obligations as limited as we can, especially when we can solve problems in the private sector and generate
wealth in the process. Which, by the way, is the very definition of what capitalism does and why it works-- it generates wealth, and on its back we have become the most wealthy country in the history of human civilization.
So now let's turn back to the poverty trap by looking at another practical example-- the tax-subsidized food stamps program, which works like this: I hand the government a dollar, and they hand me back 98 cents to go buy groceries.
Any sane person would look at that arrangement and laugh-- it doesn't make any sense! Why not just let me keep the dollar? And on top of the lost two cents, maybe I could have turned that dollar into two dollars, or five dollars, or ten dollars?
However, if someone else
hands over a dollar, and the government turns to me with the other hand to give me 98 cents, I'm not seeing this as the pointless, wasteful, and rather silly exercise that it is. Because I don't have visibility into the loss of wealth generation opportunity, it appears to me that I'm just getting money handed to me out of the ether! Sounds like a pretty good deal!
A flat tax solves this problem, because everyone would pay at least something
in taxes. Suddenly, it would
be my dollar getting squandered, and at that point, it becomes pretty apparent to me that we can do better as a society.
And most importantly, I would avoid going on the system in the first place if I could help it. Why? Because a flat tax is, well, flat
. The only thing such a system incentivizes is moving up the ladder. Goodbye povery trap.
A flat tax should be a bi-partisan no-brainer
In the end, a flat tax coupled with a complete reform of the existing code addresses an issue that the Democrats hold as being the most pressing problem facing our country today-- the widening income gap-- while simultaneously
reforming entitlements, which is near or at the top of the GOP agenda. A flat tax is something that not only has a lot for both sides to like, but such a system also means that United States citizens collectively