One of the reasons I advocate a flat tax is that it incentivizes wealth-building without a class mentality. It encourages success across the nation without punishing people for achieving that success. I believe this can work and want the discussion to start so that we can get to real change. Debate on this issue is productive. This, however, is ridiculous.
I would offer Americans an even lower flat tax rate–14% as opposed to 17%–and at the same time do more to help low-income people. Boston University economist Laurence Kotlikoff and I have put together a plan that works in the following way.
First we’d get rid of the across-the-board $9,000-per-person exemption in the Forbes plan. Why should billionaires like Bill Gates get an exemption? Forbes is giving too much money away to rich people. We’d save that exemption money and give it instead, in the form of a rebate, to the bottom third of earners, those who bring home roughly less than $25,000 for a family of four.
Second, Forbes ignores the 12.4% Social Security payroll tax (split between employer and employee). Currently, income over $90,000 a year is not subject to the tax. We don’t think it’s fair that a $50,000-a-year autoworker has to pay payroll taxes on all his income while a million-dollar-a-year auto executive does not. Under our proposal all wages would face the same income and payroll tax rates.
We would also use the rebate of tax dollars to the bottom third of taxpayers to solve other social problems. For example, instead of people automatically getting the 14% rebate, we would require them to show that they have health insurance and a retirement pension as a condition. Specifically, to get one-half the rebate (7%), low-income families would have to produce proof of health insurance. This would encourage millions of people who qualify to enroll in Medicaid or in their employer’s health plan. Barring that, families could apply the tax rebate to health insurance they purchase on their own. We propose making the other half (7%) contingent on proof of a pension, an IRA, a 401(k) or some other savings account.
So instead of national health insurance and more government spending on the elderly, we would use our flat-tax proposal to urge people to solve these problems on their own.
With this proposal, we receive a progressive tax system with special incentives and loopholes. Brilliant. This is little different in spirit than what we do today. I can’t comprehend how keeping the same screwed up mentality qualifies as reform. Specifically, who would administer all of this? Some bureaucrat has to sit in a government office and verify health insurance. Some other bureaucrat has to sit in another government office and verify pension accounts. This does not reduce the size and inefficiency of government. The question of affordable private healthcare remains. And if taxpayers have to have pensions to qualify for half of the rebate, why bother perpetuating Social Security? Just funnel FICA into private pension accounts. It also leads to interesting conundrums regarding privacy and self-determination.
Ultimately, though, the obvious flaw is that this plan assumes people won’t do these things if they have money in their bank accounts. It imposes a blatant Nanny State oversight upon poor people, condescending to them that perhaps they’re just not responsible enough to do these things. In some cases, that’s undeniably true, but we can’t legislate against stupidity. If people wish to do dumb things, so be it. No amount of new, creative laws will change the fundamental self-determination, however stupid, that people exhibit.
Worse, the government has shown for decades that it doesn’t trust the citizens who elect it. Like every other tax reform that changed only the redistribution effect, the scope creep of this tax recommendation will not stop with the poor once Congress begins playing with the parameters. Tax reform is essential, but as important as the numerical details are, changing the tax mentality is most important. The flat tax can do that, but not when supporters rig it with patronizing gobbledy-gook.