Editor’s Note: This column is the second in my three-part series on taxes; it appeared in the Burlington Free Press in 1996. I have not updated the numbers.
I have met many people who think paying taxes is fair. I have met even more who think our current tax system is unfair.
Taxes on earned income are the most equitable way to raise revenue. Our income comes from our productivity: make a widget, sell the widget, get paid. Taxing land, cars, stock certificates, machinery, bank franchises, electric energy, and insurance is an artificial method to sneak money out of your wallet. Current tax laws do all that and more.
Politicians have made the flat tax this year’s buzz word. Unfortunately, these same representatives just passed the 12th “short term” spending resolution, instead of working on substantive tax reform.
I have long admired the flat tax in principle; in practice it has the potential for burdening the low income taxpayers who today pay little or no taxes and for hammering the middle class taxpayers who pay most of the bills.
We need four canons to make a flat tax work fairly:
- Every wage earner pays a small percentage of his income as tax; income includes interest and capital gains but not dividends.
- Every wage earner files an income tax return.
- Every wage earner gets a substantial “personal deduction” and no other discounts.
- Every wage earner pays a different percentage of any remaining income as tax.
Every citizen owns a piece of the federal government and each of us has a responsibility for its good operation. Let’s set a figure of 4% of income as the minimum cost of governance. Everybody pays that, regardless of their [dire or rosy] straits.
Obliterate the married/single/household head categories. That simplifies our calculations, eliminates all discussion of the “marriage penalty,” and assures we each file a return.
We ought not tax a wage earner for the cost of creating that income. That means we should exempt some common amount for basic shelter, food, and commuting costs but not spare any other expenses. Let us remember that the current tax code grew out of a fairly simple system. Once upon a time, our income tax taxed income; then the politicians and special interest groups changed the code to foster social change. Want everyone to buy a home? Grant a mortgage deduction. Need more babies to work the fields or factories? Create an exemption for kids. Need to work those oil wells? Concoct a depletion allowance. Make the personal deduction $21,500.
After deducting that $21,500 from your paycheck, pay an additional 24% percent on whatever is left.
If you earn less than $21,500, you owe 4% of what you made. Period. If you earn more, the flat tax percentage assures you will pay a little less than today’s tax schedule demands.
“But wait!” you say. “Gomer Gotrocks netted half a million last year. The tax table says he owes $145,072 but under your plan he’ll pay $29,372 less in taxes. He’ll save more than I make in a year!”
Reality check. Anyone clearing half a million a year can find $100,000 in effortless deductions today. With those “small” deductions, the tax table says Gomer now owes only $114,072. That’s a wee bit less than the expected $115,700 flat tax on his half million. Now imagine this dream in living color; Gomer can actually find a lot more than $100,000 to subtract today.
This plan gives folks earning under $8,800 a small financial stake in governance for the first time. It also makes taxpayers earning between $40,000 and $65,000 and those earning over $200,000 pay a little more.
We may have to fiddle with the percentages and deduction. My rates and deductible may not produce enough revenue to run Washington. If that’s true, we have two choices: (1) change the tax rate or the deductible, or (2) put Washington on a diet.
A flat tax and GST would do it, also. The revenue from the GST would be huge and take the weight off individuals.
I presume by GST you mean the Goods and Services Tax which by any other name is a value added tax or a tax on every “exchange” made.
There is no more regressive tax than a VAT. None.
The lowest income citizens buy the most stuff in proportion to their income. A VAT taxes that stuff over and over and over and over again until it is quite possible to pay as much in total tax for an item as the item costs.
The beauty of a flat (income) tax is that it taxes earnings, no more no less.