A flat tax is not a fair tax. A flat tax proposal that is being pushed by some is based on a 23% flat tax on all purchases. This is sometimes described as a consumption tax. A bill has been introduced in Congress in 2005, 2006 and 2007 abolish the Federal Income Tax Code as it is now and replace it with a Flat Tax. Michael Burgess, (R-TX), introduced H.R. 1040, Freedom Flat Tax, in March 2007. It appears that H.R. 1040 was never scheduled for debate and was abandoned. But, the flat tax proponents have not given up and it’s a safe bet that another bill will be introduced in Congress.
Let’s look “under the hood” of a flat tax plan. Proponents almost always use the following arguments for why a flat tax is good for us:
1. The first myth is that a single flat rate sales tax is fair for all, because everyone pays tax on what they purchase - this is not fair for almost all taxpayers that earn a paycheck. The reaon is that most taxpayers must spend all there income to live and do not have money left over at the end of the year, except the a small amount that they have been able to put in a company 401k. This means that since the average wage earner will spend almost all of their annual earning, then they have been taxed on all of their earnings. By contrast, a dentist, a car dealership owner, a shopping center owner, a heart surgeon, a lawyer, a construction company owner, someone with a chain of dry cleaners, a restaurant owner, a shopping center developer or anyone that has earning power far exceeding $100,000 will not have to pay tax on all of their income. Say a doctor earns $450,000 and lives lavishly spending $150,000 during the year. That same person will have $300,000 left over that will not be subject to tax, because it was not spent. That’s not equitable.
2. The second myth is that the tax system is too complicated - the tax system is not complicated for wage earners. They don’t have a complicated arrangement of investments, properties, trust funds and businesses. The vast majority of wage earners can file with IRS Form 1040EZ. The only people that complain about taxes being complicated are the same people that have a many investments, businesses, LLC’s, mutual fund accounts, investment property, rental houses, vacation houses and the like. For wage earners receiving a paycheck with FICA withholding, the tax process is not so complex that they should vote to penalize themselves in the form of shouldering an even higher percentage of the income tax.
3. The third myth everyone pays tax on what they purchase, it close loopholes for credits and deductions and other IRS regulations that create a complex tax system that no one understands - what part of tax credit does someone not understand? A tax credit is created by Congress! not the IRS. Every tax credit is created by Congress as an incentive to encourage certain behavior or to provide an economic boost. For example, there is a tax credit for purchasing solar cells and installing them on house. This was created by the Congress and Senate to reward American taxpayers for helping the environment. It’s logical to believe, that this type of legislation will still be passed in Congress regardless of what kind of tax program in in effect.
4. The fourth myth is that a flat sales tax is better for all because it eliminates double taxation - this is a myth, because the double taxation on estate taxes, for example, only applies to the super wealthy. There won’t be any benefit to most American wage earners. There is no estate tax unless an estate is over $2,000,000 this year and $3,500,000 in 2009. In April 2008, the U.S. Census Bureau a report, Net Worth and the Assets of Households, that the median networth of households in the U.S. was $58,905.00. The point is that very few taxpayers benefit from relief from the estate tax law. This double taxation benefit is also aimed at eliminating capital gains tax. This is actually shameful, becuase the super wealthy derive a large percentage of all of their income from capital gains. To eliminate capital gains tax is to hand over tax free benefits to the super wealthy and this is not at all equitable. This is why the United States of America has an income tax with provisions for tax treatment of capital gains. The vast majority of working taxpayers do not benefit at all from eliminating capital gains tax, because the typical wage earner only has his 401k or IRA’s and these are taxed as revenue when the money is withdrawn. This, by the way, is the subject of another article, because proponents of flat tax rate are suggesting that super wealthy not pay any capital gains tax while wage earners must pay the flat tax rate on withdrawals from their 401k’s and IRA’s as the money is used for purchases.
There aren’t any logical reasons for the working taxpayer to vote for a flat tax. The flat tax proposals benefit the super wealthy more than they benefit the working taxpayer.
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