Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Flat tax

Jerry Stratton, January 20, 2006

While reading yet another messageboard troll misrepresent flat taxes (“30% of a $100 a week salary can mean not eating several meals, while 30% of a $200,000/year salary means you can’t quite buy that new sports-coup”), I did have an epiphany for one of the reasons flat taxes aren’t popular in Washington: it doesn’t just take power away from the IRS, it takes a lot of power away from Congress.

With the flat tax that I’ve seen as the only flat tax model proposed by flat tax supporters, there is one standard deduction and one standard rate. For example, it might be a deduction of $15,000 and a rate of 40%. Anyone making $100 a week would pay no taxes (under some models, they would get something back), where someone making $200,000 per year would pay 40% of $185,000.

Under this sort of flat tax, there are no tax loopholes or tax breaks. There are only two variables that can be influenced: the deduction and the rate. The only way people would have to reduce taxes and increase take-home pay would be to convince Washington to increase the deduction or to decrease the rate. Since decreasing the rate would reduce Washington’s take-home pay, the only real way for voters and lobbyists to decrease taxes would be to increase the deduction.

This means that there would be a whole lot of people who just don’t care what the tax rate is, or who gets taxed, because the upward pressure on the deduction will go until a significant number of voters fall below the deduction and don’t get taxed at all.

In 2004, the median income in the United States was $44,389. My guess is that the deduction under a true flat tax system would rise to the equivalent of about $30,000 over a few election cycles.

So, what are the disadvantages of a flat tax?

  1. Nobody needs to hire tax lawyers;
  2. Politicians don’t get to complain that the other side wants to raise taxes for poor people;
  3. Politicians don’t get to bribe those below the deduction by adding tax breaks;
  4. Richer individuals will pay much higher percentages of their income than the middle class;
  5. It will be far easier for taxpayers to see what needs to be done to reduce their taxes.

The whole thing would have a tendency to revert to the situation when income tax was introduced, in which the tax wasn’t supposed to affect the average single earner.

Now, the assumption that a straight flat tax is possible is probably a big one. Unless there is some sort of constitutional amendment limiting what Congress can change, the fact is that there will also be lobbying to add special exemptions and deductions and loopholes. My personal preference remains the state-based taxation that I wrote about in Taxes Made Easy rather than a one-size-fits-all income tax. This moves tax control closer to the voter.

The main way that a flat tax would be unfair is that a lot of people wouldn’t have to pay any taxes at all. But a flat tax certainly has the potential to cut the power of both Congress and the IRS. And I can’t see how any flat tax that has the potential to actually be passed will be a burden on the poor. Congressman Dick Armey’s and Senator Richard Shelby’s proposed flat tax, for example, would have had a deduction of $33,300 for a family of four, and that was in 1995 dollars. Their proposal would have indexed the deduction to inflation, making it be about $41,000 today.

I sometimes think that the real reason a lot of politicians oppose the flat tax is precisely because it moves a lot of Americans off of the tax rolls. Not because this makes it unfair to the rich (it probably does) but because it would become a lot harder to justify lowering the deduction in order to fund pork and out-of-control government programs. There’s a big difference between paying a little more this year than last year; and actually having to pay taxes this year as opposed to last year. And there’s not much a congressman can do to punish people through tax law, or use tax law as a carrot/stick, when most people don’t have to pay taxes.

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