Tax day has come and gone but it seems fitting to talk a little bit about how our government collects money. The current tax system in the US is a boon to hyperbole. It’s always described in terms of “-est” or “most”. It’s the biggest, strangest, most complicated/convoluted/unfair system ever devised. Pundits demonize it as being a burden on the poor and unfair to the rich all at the same time. No matter what the state of the economy, it’s always suspected of making things worse.
Somehow the current system is always wrong, but what is the alternative to the progressive income tax? The front runner for alternative has been the flat tax. I would bet the idea has been kicked around economic-nerd circles for decades, but it didn’t enter mainsteam consciousness until Steve Forbes made his presidential run. It’s biggest selling point is that it’s simple. Everyone pays the same tax rate. What that rate is, is up for debate, but it’s for everyone. It’s certainly a simple method, and flat tax proponents also like to call it fairer. After all, if American citizens are all equal, should one American be expected to pay a bigger share than another? ‘Hell no!’ a flax taxer would retort, then promptly drape themselves in an American flag and light off some fireworks.
Equality in taxes is a nice dream but I see some problems. By adopting a real flat tax system, the government would be giving up a large chunk of its ability to set social policy. No more deductions for charity. No more tax incentives for hybrid cars. Good bye to the home mortgage deduction so many love. Okay, we could just keep those deductions in our tax code. Then we’re back to square one. All we would have done is take today’s tax code and set everyone’s tax rate to be the same. So much for simplicity.
There’s another hole in the fairness argument for a flat tax. Citizenship isn’t 100% fair anyway. Our voting system shifts power per voter among the states. Thanks to the Electoral College the presidential vote gives an edge to rural state voters. Women citizens aren’t eligible for a draft or combat. They can have the privledges of citizenship but aren’t required to defend it like male citizens. So if my vote isn’t equal to everyone else’s and I can be drafted but my sister can’t, is it so terrible if rich people have to pay more?
The flat tax isn’t the only alternative. Some people want to scrap the income tax altogether. One idea floated is to create a national sales tax. A sales tax run like your local county’s sales tax is regressive. That’s just high-falootin’ language to say it puts a greater tax burden on low income people. The people at Americans For Fair Taxation think they have solved that issue. Each month they plan for the government to issue rebate checks calculated from the Dept. of Health & Human Services poverty level guidelines.
Sounds lovely, but it does make it more difficult for the government to budget. Tax revenues would become subject to ups and downs of the retail market. I don’t know how that would affect the average citizen’s tax paperwork. On the face of it, you would expect to fill out no forms because your federal tax would get collected at the register, but then how does the government calculate your rebate? Somehow the federal government is expected to know your family situation from month to month so it can send an accurate rebate. I guess with each received check you would have to let the government know next month’s situation but that’s a lot of paper to keep track of. Maybe you could let them know once and then just make adjustments as needed.
I’ll give this plan a win for reducing paperwork. There will still be some, but it will probably be easier than your 1040. I don’t really like that each purchase has such a large tax component to it though. Even though payroll taxes will be abolished, I think this will slow down spending since the perceived price of everything will rise. This will also add a significant amount to the nation’s credit card debt. Every time you charge something, your federal tax will now be included on your credit card. If you don’t pay your bill off each month, then you’ll be left paying interest on your taxes.
I am not sure how this tax effects wholesalers. Lets say my company buys raw materials and produces a finished good. I’m not sure if the Americans For Fair Taxation plan would make me pay the federal sales tax on those purchased raw materials. If I don’t, then many will see this as a plan to cut taxes on businesses. If my company does pay the tax, then these materials will be taxed again and again. They’re taxed when I buy them. They’re taxed again when I sell them to a retailer. Then they’re taxed again when you buy them at the register. Hardly seems fair to me.
Similar to the federal sales tax is a value added tax. VATs are popular in Europe which is one reason why I don’t think they will ever be implemented in the US. The VAT works by continually collecting a fraction of the tax rate along each part of the production line.
Lets say we have a 10% VAT. A quarry sells its stone to a masonry company for $100/unit plus 10% VAT. That’s a $110 per unit. The quarry keeps the $100 and pays $10 to the government.テつ The mason cuts the raw stone into something useful, say a kitchen counter. The counter is then sold to the kitchen department at Home Depot at a rate of $140 plus 10% VAT. That’s $154 per unit. The mason then pays the government $4 on that ($14 – $10). Home Depot then sells me the counter for $200 plus 10% VAT, or $220. Home Depot then pays the government $6 ($20 – $14).
I don’t really see why the VAT is considered such a great system. In the end the government collected the same $20 along the product chain, but with a lot more transactions involved. I still paid $20 in taxes at my purchase so it’s not as if the tax was shared between consumers and businesses. Business simply recoups their VAT cost when they sell their product. It ultimately just gets paid by the consumer. It just adds more complexity and paperwork to an ordinary sales tax scheme. I guess that’s why Europeans love it. More paperwork for bloated bureaucracies to process.
That’s it – Flat Tax, Sales Tax or VAT. Those are all the alternatives to today’s income tax. Well that or if you’re a Buchananite, you would like to abandon all free trade deals, box up everything from National Museum of the American Indian and reopen the US Customs House.
Given those choices I’m pretty happy to stay with the current income tax. That’s not to say it couldn’t use some simplification, but I wouldn’t throw the baby out with the bath water.