Wednesday, April 11, 2007

Flat tax: Fair and simple or Unfair and simple?

The so-called "flat tax" concept has been floating around for about 20 years now. I remember folks like Jack Kemp and Steve Forbes shouting about its virtues. But opponents of the concept, mostly "libs," proclaim that it's a regressive tax, it's unfair, it may lead to bigger deficits, etc.

So who's right? Well, no first world countries have embraced the idea and put it into use. Some former Soviet countries have (read the linked article); therefore, there is no test bed we can look to in order to see its effects.

In theory, though, we can discuss its benefits and drawbacks. First, opponents of the flat tax say it's regressive. I don't see it. It's not progressive, in that higher incomes do not pay a higher rate of tax on each incremental dollar earned. But it's not regressive. Regressive would suggest that each incremental dollar earned would incur a smaller rate of tax. This is simply not the case. In fact, the flat tax is "perfect" in terms of incremental dollars earned. There is no penalty for making more money as with a progressive tax system, nor is there a benefit to working less. If you want to earn more, you can. And at the same effective rate of pay as normal.

I don't see how the flat tax, in its current incarnation, could be considered unfair. Generally, when the media talks about fairness, they mean fairness with respect to the poor. In fact, if anything, the flat tax is unfair to higher income earners. It's just less unfair than a progressive tax.

Here's how the conservative in me sees this: We all can derive the same benefits from the government (federal) by virtue of being a citizen (or legal alien); therefore, we should all pay the same "membership fee" for the right/privilege to derive those benefits. "Rich" people actually use less of the federal government's programs than "poor" people. In fact, most entitlement programs serve poor or less well-off folks. Why should they get to use the benefits of, say, food stamps, and I can't?

Now, before you go off and send me an email telling me what a jerk I am, let me tell you how the liberal in me sees this: Inertia. Let me explain. Poor people tend to stay poor and rich people tend to stay rich; plus, there are a lot more poor people than rich people. It behooves society to provide a safety net that benefits the poor so that anarchy doesn't break out. Plus, I don't want to see homeless and hungry people suffer in the richest nation on the planet. It simply doesn't make sense. And, it's not fair that poor people, en masse, don't have a chance to break out of the rut.

So, is there a compromise? Of course. The negative income tax. I think Milton Friedman conjured this one up. The idea is that if you make under a certain threshold, the government actually pays you to get to that minimal figure. Then that's where the flat tax comes in. The threshold is a moving figure; each year, or 5, or whatever, the government raises it (if there's inflation) or lowers it (if there's deflation). There is a small disincentive for those near the threshold to work. For example, if the income level threshold is $15,000, and my neighbor makes $12,000, he can count on the government giving him $3000. If I make $15,000, I can count on nothing from the government. So my neighbor can work less and get the same income in the end. But this is a small matter. It could be remedied very easily: There could be a sliding scale around the threshold such that the guy who chooses not to work as hard as you (where you are right at the threshold) gets a little bit less than you.

Studies have shown that it's not how much you make that gives you satisfaction. Rather, it's more comforting to know that you're making more than your peers, be they neighbors or co-workers.

I think it's time that the flat tax get another push into the mainstream. It's a sound idea. It seems fair. If the government's accountants can get their heads out of their Social Security asses, they might be able to come up with a rate that actually balances the budget.

What do you think?

The flat tax: It's simple, alluring / But one-size-fits-all idea faces skepticism, too