The Flat tax

Well campaign season is going to be ramping up soon and sooner or later some new versions of this idea will start to materialize.
When I first started thinking about writing about the flat tax idea I thought of some analogies to start out with, something that offered an incomprehensible set of choices or do you remember the movie The Stepford Wives. This was a movie that had a perfect small town where all the wives were perfect, but there was one small catch.

Yet I realized that you probably need to really sit down and examine what is the flat tax and why it might be popular to some. And if it is attractive to some, is there a viable reason?

Taxation has been a part of our country since before we wrote the Declaration of Independence and part of why we were motivated to write the Declaration.
Somehow, some way a government has to be funded and taxes are the vehicle of choice. Taxes come in a variety of packages. There are income taxes, sales taxes, property taxes, value added taxes, creative taxes like the lottery and so forth.

The irony is the government gets to choose how it raises taxes to pay for itself. Our role is to find the politicians and elect them to give us the type of taxes we ..ahem… well…. Huh… accept. And in our country that has always been great fodder for political speeches, yet we still feel we are overburdened by taxes.

Our wonderful elected officials and people trying to be our elected officials spend endless hours trying to convince us they have the answer. So, is the flat tax the answer?
It was our 16th amendment that led us down the road to income taxes: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Or according to a Wikipedia entry the 16th amendment:” allows the Congress to levy taxes on us without apportioning it among the states or basing it on the US census…” And the amendment came about because of the Court case Pollock v Farmers loan and trust Co. that ruled certain other taxes were direct taxes which according to the constitution direct taxes could not be levied unless they were in proportion to the census or enumeration taken for the United States. Another words direct taxes have to be spread proportionally amongst the country based on the population. And I wonder how any type of taxes are going to meet that criteria?

So they worked with it and decided that income taxes were not direct taxes by definition and passed the 16th amendment. And if you know constitutional law passing any amendment is no small feat.

So ever since then our Congress has been grappling with income tax rates. Historically since the 16th amendment we have gravitated towards a graduated income tax and an enormous tax code.

The arguments always try to use the word fair. How do we tax ourselves, as citizens, fairly? And in politics how do we define fair? Yep that is one heck of a kicker. Fair, a wonderful word, spoken so highly of, but absolutely impossible for two different people to agree what is fair for both.

So with an over burdensome tax code and the ill-advised notion of finding fairness in our tax code we have let our Congress choose for us. And now you know one of the trumped up reasons there is a group of people that call themselves the Tea Party. Quite frankly I am surprised it hasn’t gotten more traction. Their lack of success in recruitment though may have something to do with much of the reality of who they are really.

Anyway our wonderful Congress tends to find ways to make the people who care the most about taxes the author or at least the creative force of all our tax law. And this includes large corporations and lawyers. Again you can wonder why the tea party isn’t the majority party based on tax initiatives alone. Oh in case you forgot TEA party is Taxed Enough Already party. Even catchy, huh?

So what about this flat tax, it sounds fair, everyone has the same rate, definitely can completely reduce the tax code, why isn’t this a win win for everyone.
Some will argue that the flat tax is not fair because it creates a greater hardship on lower income people because it is a higher percentage of their budget or what it costs them in basics such as food and rent. For example if the average family of four needs (these are made up numbers for example only) $50,000 to live lets’ say a middle class lifestyle and they have that exact income or the poverty line for three people is around 27,000 (which I think is about correct or just above the figure) a flat rate of 15% takes 7500 away from the middle class family and 4000 from the family just above the poverty line. This means they would have to adjust their budget accordingly or find a way to earn more just to meet their basic needs. And you can argue they just need to earn the difference, but actually they need to earn the difference plus 15% more and mathematically it may be a bit different just to get back to where they were. So now you have people needing to work 2nd jobs etc. just to pay the rent. Is this fair?

Well how about the fact that they can budget. If they know they need to pay 15% and they are not beat down by a convoluted tax code where they have to spend money to have someone do their taxes so they can get down to a 15% rate, wouldn’t that be better? Possibly yes. We are all tired of working our way through income tax season. Unfortunately though income tax is not the only taxes we pay. If the middle class family owns a home, there are property taxes. Both families pay sales taxes, then there are innumerable amount of fees to the things we do that various government entities collect to add to their budgets. This eats even more into the budget causing a new cycle of 2nd jobs just to keep up with the basics of living and the income our governments need to survive. And don’t get me started on toll roads, hotel taxes, gasoline taxes, sin taxes etc. that just creep into our expenses till there is a negative amount in the checking account with a third job.
And our wonderful politicians sell us their tax plan in October, we vote for them in November and are even more screwed by them in January.

And now we are back to the question with that monstrously ugly word, what is fair? The more money you have doesn’t automatically mean you are more responsible for what goes on therefore more responsible to pay for it. Some people will say it does. Actually though does it?
I will argue for corporations it is a resounding yes. Corporations take up much more of the government’s budget than an individual in a variety of ways. This post is already too long so will have to save this argument for another day, but it does increase as the size of the corporation increases. Yet it still doesn’t mean corporations need to be completely taxed out of business.

The slippery slope of what is fair is the underlying problem we have with any tax rate, whether flat, graduated, or truly fee based only. Whatever we choose someone will not be happy.

The potential best rate is going to be the one that manages the affairs of government (and you can go back and read the Constitution on what should be taxed as always for the starting point) and doesn’t unduly overburden any member of society.

The flat tax does have the advantage of lessening the burden of paying taxes etc., yet at what point do we start the taxing. Some that support the flat tax say well lets exclude the first x% of income for everyone before we tax. Oops now we are creating a tax code again. And of course who decides what that percentage is? Oh yeah, our wonderful Congress who joyously work so hard with their partners in corporate America to write these laws. Someone somewhere will want to make sure it is fair (based on their version of fair) oh yeah attorneys are good for arguing all that. Hmmmmmm……

The flat tax can tantalize the imagination of many people and possibly many people who earn enough to be taxed at a higher rate than people like myself. Definitely a good idea for them. It is just how do we budget to a flat tax because the rate has to be chosen and what if 15% isn’t enough. Now we have the majority of the country working four jobs to get by. Is that even possible? Okay cut the budget you say, well history has proven that to be easier said than done.

I can understand the romantic lust for people with money to have a flat tax rate. Yet how do you rectify my example families with someone for example who makes 100,000 or 500,000 or more. At even 100,000 you are taxed at 15% so your net is 85,000 which puts you 35,000 over the imaginary middle class threshold of 50,000. And since these are non supported numbers you can easily argue that this is not a good example, yet it gives a reader a starting point that is not unrealistic. And of course if you make more than the middle class norm you do not want to feel like you are middle class. So being taxed at 30% sounds unfair because now you are hardworking and having less in status (and material goods, which is why we work hard isn’t it? Supposedly) Sure for 500,000 you are good right, 15% equals 75,000 leaves you at 425,000. Who wouldn’t want that? Some people would still be unhappy

And based on the thought that no one is going to be happy, I suggest we just tick just about everyone off and tax at a simple graduated rate. And yes this means all earned income is taxed, even for the family of three at 27,000. It would just be their rate would probably be in the low single digit percent vs someone who makes a million being somewhere in the current 30+% rate. And somewhere in these we derive a graduated tax rate and lose most of the current tax code. Are you happy, I doubt it, but we have to fund this government or we won’t be able to bemoan it at every turn. It is the government that has its roots in our Constitution that we need to fund or no matter what we do or say, will all be in vain. I am in no mood to work for someone who doesn’t give a rats ass if I am a human being or not and our Constitution is about the only source of protection anyone on this planet has in the secular world.

And there is not a good tie in to the Stepford wives, and I couldn’t think of any other analogy. We are stuck with something imperfect, which the Stepford wives was about, making the imperfect perfect. Yeah it worked in the movie, but what did they truly have? One giant lie. So I think it is better to be imperfect and trying to find the right answer than thinking there is one right answer and finding out it wasn’t what they advertised or really worked.