Wednesday, September 28, 2011

2012 -- Flat Tax Proposals

The GOP presidential hopefuls are in the thick of taking up conservative causes like taxes, social security reform, abolition of the USDOE, and many others. In the realm of taxes I am having a change of heart.

Most GOP candidates are decrying the current tax system and its loopholes for poor working families and the percentage of Americans who actually have to pay any income taxes (non-Social Security/Medicare taxes). The solution, for most candidates, is a flat tax, a tiered flat tax, a consumption tax, or a hybrid of one or more options.

In the past I have expressed opposition to flat tax proposals in that they generally create a tax cut for wealthy taxpayers at the expense of poorer taxpayers. This is still the case, wealth taxpayers are in fact (when you take income phaseouts of certain deductions and credits) paying a flatish tax of 35% or more. Therefore (taking Herman Cain's catchy 9-9-9 proposal) the rich would enjoy a large tax break and Joe the Plumber would go from large tax-credit induced refunds to paying 900 dollars a year income taxes (est 40k income). This is still a factual issue with flat taxes.

However, I'm not sure that "staying the (current tax policy) course" is the right approach anymore. Just this last year, we had a Congress that raised our nation's borrowing level to an extremely high level. (I'm not sure. Was it 14 trillion dollars? That is somewhere around 14 to 7 million times more than most Americans make in a lifetime) President Obama's solution for the current unemployment problem was to request another 300 billion dollars in government spending. The final straw on tax policy (for me) was the president's comments before the debt ceiling was raised that, "he couldn't guarantee Social Security checks" without the extra debt. Now I'm no government budget expert, but when a business needs to keep borrowing just to stay afloat it doesn't take a Harvard education to realize financial catastrophe is nigh at hand.

Now, I disagree with the "lucky duck" theory that taxing the poor is the only way to get the poor off their collectively apathetic arses to demand that the Federal government change. The desire to induce anger is not the best guide for wise fiscal policy. I believe adopting a simplified tax system will do three things: 1.) provide stability for businesses to grow and individuals to invest, 2.) Provide capital to invest in American businesses, and 3.) decrease the "Tax Gap"and end some large drains on the Federal Treasury.

One of the biggest problems in the US economy is the lack of stability in the US tax code. Businesses are ever on edge about what tax laws will end or what new tax laws will be enacted. By enacting a flat or simplified tax system, businesses and individuals can make financial, and more importantly investment decisions, without taxes being such an uncertain variable in the decision making equation.

As mentioned earlier, the flat tax's tax savings for higher income taxpayers would leave tax dollars in taxpayer's pockets. The saved tax funds would in turn (theoretically) likely be used to invest in entrepreneurism, stocks and bonds, or just spent in the open market.

For years National Taxpayer Advocates have stated that the biggest problem in the tax code is the law's complexity. Most Americans want to keep square with the government and pay their fair share. However, the tax code's complexity not only makes it impossible for the average lay taxpayer to be confident that they are preparing their return properly, but it also leaves a perception that other taxpayers are getting away with not paying their share. Such a perception can lead some taxpayers to cheat on their taxes since it appears that many others are doing like wise. The flat tax would provide wage earner taxpayers with easy to understand tax system and change the perception of inequality to one of equity.

The flat tax would also be a means of ending the welfare provisions of the tax code -- the Earned Income Credit, and the Additional Child Tax Credits. These provisions of the code provide lower income taxpayers with children (income between 15 and 50K) with thousands of dollars in tax refund dollars above and beyond what these taxpayers actually paid in. It is estimated that the Earned income tax credit alone cost the Treasury more than 40 billion dollars a year before taking into account the IRS budgetary costs of pursuing fraudulent EIC claims. The refundable portion of these provisions should be done away with.

Whether or not a flat tax would pass is another story. Democrats will fight against such proposals simply for the fact that the flat tax will raise taxes on the poor. However a reasoned approach to this issue might make a flat tax viable by using new credits that encourage retirement savings might keep poorer taxpayers from feeling a pinch.

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