Thursday, April 20, 2006

Guest Blogger Jake Barnes: Steve Forbes is Right: Bring on the Flat Tax

V Note: I introduce to you another important guest blogger: Mr. Jake Barnes. He is a corporate lawyer from New York City who prides himself on having little time for your bullshit. As we all enjoy being 360 days away from another tax day, Jake has some ideas about how wrong our tax system really is for Americans.

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Cost to the US government per year of selected targeted tax deductions and credits:

Health care deductions: $120 billion
Retirement deductions: $105 billion
Dividend tax discount: $80 billion
Mortgage interest deduction: $75 billion
State and local tax deduction: $50 billion
Child Deduction: $35 billion
Low-income tax credits: $36 billion
Life insurance deduction: $25 billion
Stepped-up basis for estate tax: $40 billion

Total: $566 billion per year, not including random deductions like hybrid cars, college
expenses etc. (data collected from MSN.com)

No public official would ever advocate for a $566 billion dollar spending spree on a
mish-mash of social programs. Indeed, the entire federal budget in 2006 will only be
$2.1 trillion. A whopping 25% of our budget is essentially devoted to targeted tax
breaks.

I point this fact out to lay the ground work for my argument, which is: Our tax system is a complicated, unfair, regressive disaster that is not consistent with our liberal values. Each spring, every working American spends hours and hundreds of dollars compiling documents, consulting with "tax experts" and stressing over refunds. For most, it is a humilating, privacy-invading affair that is both pointless and, at best, revenue neutral for the US treasury. At worst, it costs our government thousands of dollars to needlessly examine tax returns in order to "ensure" that the middle class spent their money on a house, having children, buying health insurance, hybrid cars, college, or any other number of random "acceptable" expenses.

This need not be the case: instead, we could, like Ireland, adopt a flat tax. The critics of the flat tax often come from the left, and their criticism is the same, it's regressive. Well, yes it is at the high margins, but so is our current tax system. A flat tax, like the one proposed by Steve Forbes is actually extremely progressive for virtually the entire middle class. Forbes calls for a $36,000 standard deduction and a 17% flat tax for every dollar earned beyond that. This means that if you make 36,000 or less, take it easy around tax season, because you will never have paid taxes and never will. It means that if you make $50,000, you will simply pull out a calculator and calculate 17% of 14,000. No deductions, no mess, no formulas.

I will not argue the precise numbers because I have not done the math. (although Forbes has and he claims that such a plan would actually increase revenues by 10-15%) It doesn't matter. My proposed plan is this: large standard deduction, no activity-specific deductions, and a flat rate.

I make this argument for two reasons: first is principle, second is practicality. First, it is astonishing that in a nation that prides itself on liberty and the individual's ability to create her own destiny that we allow the federal government to tell us how to spend our extra money. For all the rants we hear from the political right about how the federal government takes our money and spends it--we hear surprisingly little about the government's extreme use of tax incentives. This is bizarre. When the government takes our money in taxes, it is without regard to our personal choices. It is an admission by us as a society that certain things must be paid for, like wars, roads, schools, interest on the national debt (more and more each day, but I digress), and healthcare. This is a reluctant communal act and one that we all must accept in order to live in a safe community. No one but anarchists deny this reality. But forever conservatives complain about how the government "takes" our money and "spends" it. This is not correct. We as a community "need" certain things and together we "pay" for these needs through the only possible method: tax collection and government expenditures.

What should offend every liberal person (and I use "liberal" in the enlightenment sense) is when the government conditions our tax burden on personal choices. This is an utmost invasion of privacy. Obviously, certain criteria must be used when determining who pays taxes, but these choices should be as impersonal and uninvasive as possible. Income is the blunt number we tend to use and so it will continue under a flat tax regime. (i.e., first XX dollars are not taxed, after that the income is taxed at XX amount). Anything beyond this basic set of criteria smacks of overt and offensive paternalism. Why should our tax burden be affected if we buy a house or attend college or buy a hybrid car, or engage in any number of other arbitrary activities? The proponent of such deductions would claim that such activities are positive for the community and should be encouraged. This line of reasoning is widely-accepted by both political parties.

Did Adam Smith claim that we should be free to make rational economic decisions except when the government arbitrarily decides that we spend our money doing X, then we should ignore our personal evaluations and do X? And by arbitrary, I mean arbitrary. Where are the government studies that hybrid cars produce a better environment than all of us driving Honda Civics or taking public transportation? Or that buying a house is better than investing in our economy through the stock market? Or that giving money to the opera is better than starting a business that will employ a dozen hard-working people? There are no valid studies, and it really doesn't matter. We are free people, and we should spend the money that is not necessary to run the government however we choose.

The point is that a society becomes macromanaged the moment we allow the government to tell us what we can spend money on in order to avoid tax liability. Taxes are not punishments or rewards. Taxes are revenue streams to our government that are necessary to live in a civilized society. Any time the tax code goes beyond this necessary goal it begins telling us how to live our lives. Taxes should be as low as possible for everyone, regardless of your education level, your living situation, your family decisions, or the car you drive.

Second, practically, why should people who are earning such small incomes even be forced to even fill out a tax form? It's pointless. With a large deduction, earners would not have income witheld until they hit the magic limit. After they hit the limit, he/she would be taxed at "X" amount. No determination would have to be made about whether something is deductible or not. The wealthy cannot set up friendly "charities" that do little other than throw tax-payer funded parties for friends. No more massive subsidies for million-dollar mansions. No more secret-subsidies for health insurance so people will clearly understand what an important role federal dollars play in our healthcare system. No more arbitrarily discounted rates on dividends--they are income same as everything else. IRS payroll would be slashed as no less than half of the tax returns would be eliminated (yeah--I can't believe it either, but $36,000 is the median household income in America). We collect virtually no tax money from this class anyway (90% of tax revenue is collected from the top 25% of earners) so why waste everyone's time and money? No more special interests looking for a tax-friendly policy--make it on your own--or don't make it--the tax code is through playing favorites.

Our tax system is offensive to the liberal notions that made this nation great and in the real world it is corrupt and inefficient. Steve Forbes should not be our President, but he has the right idea about tax reform.

11 Comments:

Blogger Phil said...

I believe that if you eliminated income tax altogether and simply raised sales tax to something like 20%, that would work too.

Would anyone object to paying $2.40 for a Big Mac instead of $2.16?

12:30 PM  
Blogger Blondesurferdude said...

The sales tax is very regressive (because poor people spend a higher percentage of their income than rich people). Also states claim it as one of their major sources of tax revenue, and wouldn't let the federal gov't infringe on it.

12:57 PM  
Blogger Sean said...

Check apttax.com
Great concept, but will never happen.

1:10 PM  
Anonymous jake barnes said...

Certainly a national sales tax could work in conjunction with a flat income tax. This would encourage savings and a modest Value Added Tax that excludes food would not be offensively regressive

1:19 PM  
Blogger Blondesurferdude said...

It would be better if there were just a tax on consumption, but not charged at the register. So just all savings are tax-free. You create your tax-free savings account, and your taxable income is your income minus deposits in your tax-free savings account and then minus whatever standard deduction would be appropriate. Then you could make it however progressive you want depending on the value of the standard deduction.

4:05 PM  
Blogger Blondesurferdude said...

However, Jake, I should note that you are in blatant violation of your own edicts. Why is encouraging saving over consumption or food consumption over other types of consumption any less of a heinous violation of liberal principles than encouraging charitable giving over personal expenses? You gotta go all or nothing. You, sir, cannot be in favor of a sales tax without being a hypocrite.

4:07 PM  
Blogger Sean said...

Did anyone even bother to look at the APT tax???? You need to.

5:57 PM  
Anonymous jakebarnes said...

this does not violate my principles. I acknowledge that governments must make some decision in what tax, my contention was that the line should be drawn at income, sales, or wealth or some other large non-discriminatory category. We have to tax something.
As far as the food break goes, that is only an attempt to recreate the progressive nature of the flat income tax (36k deduction). Everyone must eat and this concession acknowledges the potential regressive nature of a food tax. Note however that this tax exemption will not distinguish btw "good" and "bad" food, but will apply equally.

6:02 PM  
Blogger Blondesurferdude said...

Everyone must eat, but that doesn't mean that everyone has to eat the same amount, or spend the same amount on eating. Not taxing food expenses alters the price of food relative to other goods. By your same reasoning, shouldn't clothing fall under the same category? Why not housing?

8:18 PM  
Blogger Sean said...

Get lost hippy!

9:36 PM  
Blogger Phil said...

But doesn't sales tax cover this "tax on consumption"? What's the difference?

8:22 AM  

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