The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. — Article XVI.
The word “progressive” appears nowhere in the 16th amendment. Yet, America has tinkered its way to an elaborate maze of exemptions, credits, and refunds, supported with a “soak the rich” mentality, that wastes economic resources and retards growth. Every few years, politicians promise tax reform only to fail when action becomes necessary. There are occasional blips of rational behavior, but they’re rarely perfect and never permanent. The descent into economic foolishness plods along.
As part of his economic agenda, President Bush established the Advisory Panel on Tax Reform to determine reform possibilities for our ridiculous tax code. Specifically, he expects “a report containing revenue neutral policy options” meeting the following objectives:
o simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;
o share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and
o promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.
I think the “revenue neutral” assumption is a terrible foundational assumption because it implies that our government deserves a specific, minimum monetary amount. When the Congress spends nearly $500 million on two bridges in Alaska, and the President willingly signs the bill over his own protests, the government has shown that taxpayers need to be rethink the government in its entirety. There is no ongoing victory in our battle for economic survival. But this is the mandate from President Bush, so I don’t expect a deviation from that by the Advisory Panel. I’ll accept that grudgingly as I deal with the objectives.
Obviously one of the key expectations of tax reform is to simplify the code enough to reduce cost and administrative burdens; otherwise, why bother? I won’t challenge that. And the third objective also begs little irritation. Again, if we’re not looking to improve America’s economy, why bother with the tax code? We’re screwing it up fine and can continue screwing it up without reform. We can continue electing politicians content with economic suicide; eventually we’ll get the result we seem so indifferent about. But since we’re supposedly interested in true tax reform, I contend that the government’s job isn’t to promote anything economically as much as it is to get out of the way of business, but that’s mostly semantics in the way I read the objective. Thus, I’m willing to let that one slide without attack.
That leaves the second objective, which any reasonable economic thought quickly discredits. This objective does little more than rig the reform system to a predetermined outcome. Being a new homeowner, I will definitely enjoy the tax benefits from homeownership through the mortgage interest deduction. Now that I’m itemizing, I’ll also enjoy the charitable donation deduction. It’s all wonderful and I’ll take advantage of them as long as they’re in the tax code. That doesn’t mean they should be in any final recommendation, though. Not only do those exemptions guarantee a greater level of complexity on their own, they imply that other special favors and handouts are reasonable and justified. That’s how we got to where we are; perpetuating that is absurd. Politics is as politics does, I suppose.
The major mistake in the second objective is the dangerous phrase “in an appropriately progressive manner.” This is garbage. Our progressive tax code is an abomination against every ideal we allegedly possess. It builds an inherent class system into our expectations of who should pay for government and how. It entrenches our economically-ludicrous policies of redistribution, conveying that our poor citizens need to be forever supported by their benevolent economic superiors, while encouraging those most affected by higher rates to buy their way out of high taxes. This is wise? This is fair? How much growth and progress do we destroy because we legislate that success is good, but not too much success? It’s insanity. The Advisory Panel should recommend scrapping the progressive nature of our tax code.
The prevailing ideas for (significant rather than minor) reform are a national consumption tax and a flat tax. For various reasons, I think a national consumption (sales) tax is a bad idea. First, it would require at least one (repealing the 16th Amendment), and probably two (authorizing the consumption tax), amendments to the U.S. Constitution. Even with congressional support, the anti-reform lobbying will be out of control. With a hostile Congress, which seems to be a given with the inevitable talking points and resultant partisan bickering, the anti-reform lobbying will fracture any nugget of support. Yet, “reforming” the Constitution is essential if the Advisory Panel determines that a consumption tax is the solution. If we don’t repeal the 16th Amendment, we’ll soon enough enjoy a consumption tax and an income tax. That’s not particularly good reform.
Second, a basic consumption tax, at whatever rate ultimately reigns, would be horribly regressive. When the poor, who presumably spend the bulk of their income on necessities, face a consumption tax, it will eat away an obscene amount of their ability to afford even food and clothing. The increase in poverty would be atrocious, so naturally exemptions would appear. First it would be food, with all the varying debates on what food. Fruits, yes. Vegetables, yes. Candy, no. And don’t forget the potential to retain a “sin tax” aspect against items such as fast food and cigarettes. We’ve already seen that sin taxes rarely work, so a “consumption as sin” tax isn’t likely to be different.
Then the discussion moves to clothing and medicine. Will only clothing at (favored) discount retailers and only generic drugs, for example, be exempt? It doesn’t end until every lobby has carved out some protection or special tax rate for its preferred item or distribution channel. With the ever-growing list of exemptions, we’d have to return to the income tax, but any rational understanding of our government implies the conclusion that the consumption tax would remain long after the government dusted off the 1040. The whole idea is an economic Hindenberg.
That leaves the flat tax, which has been around for years in various theoretical iterations. My first exposure to it came in the 1992 presidential race, when Jerry Brown ran for the Democratic nomination. I supported him then because of the flat tax, and I’ve thought it our best possible tax outcome since. The guidelines for the Advisory Panel almost exclude the flat tax by definition, but the it should set aside that stupidity. America should adopt the flat tax.
Someone new publicly advocates the flat tax every few years. Usually, it gets a little national play before the advocate gets his political legs chopped off. In 1996, it was Dick Armey. Today, it’s Steve Forbes. No doubt Mr. Forbes’s plan (and book) are timed to coincide with the deadline for the Advisory Panel. This article by Mr. Forbes offers a decent introduction. Above all else, I want to highlight this point:
The economic boom the flat tax would unlea
sh would be stupendous, ushering in a long-term, noninflationary expansion of historic proportions.
The practical evidence offered by emerging economies in Eastern Europe shows that this concept is workable, but I’m concerned about the ease with which anti-reform and pro-consumption tax folks will use such predictions to appeal to economic, class-based fears because the way Mr. Forbes phrases it, we’ll all get exceptionally wealthy and be able to roll around in our money. Regardless of the potential rhetorical misperceptions, his point is valid. Moving to a flat tax will foster economic growth. The most obvious, immediate benefit is saving time and money previously wasted in tax compliance. Instead, those resources could be pushed to
more productive economic purposes.
The most useful benefit is tied directly to who would do the pushing. The flat tax allows the marketplace to determine how best to allocate resources. Gone would be the socialist central planning that now occurs through tax subsidies to lesser, insignificant or obsolete businesses. Businesses that aren’t viable should be allowed to die. The market terminates any business not enticing sufficient revenues from customers to meet basic costs. Get the government out of favoring one business just because it will offer jobs or community improvements or whatever and the market will decide what needs to happen. It might be ugly initially, but that’s because we’ve tampered with the system. Once the bureaucratic detoxification occurs, the economic changes will be astounding.
There’s an additional reason for implementing a flat tax. The consumption/sales tax may be re-labeled the Fair Tax in a marketing ploy to make it more palatable, but the flat tax is the true fair tax. In America we supposedly believe that “All men are created equal.” The flat tax is inherently fair, since all people will be paying the same percentage of their income above eventual threshold. The dollar values will change, but that follows the idea that all men aren’t equal in outcome. Any person who puts effort and skill into earning success would no longer see the fruits of that success stolen because it’s considered in excess of necessity. That’s the meritocracy our capitalist society should hold as the example and to which we should perpetually strive. The progressive nature we glorify defeats what’s true with what’s appealing to the masses.
As I’ve already stated, I think progressive taxes for the sake of punishing the rich are a bad idea. Don’t punish incentive because the results of such thinking are detrimental. But some level of progressivity resides in the flat tax, which this article from The Economist indicates. Consider:
A flat tax on personal incomes combines a threshold (that is, an exempt amount) with a single rate of tax on all income above it. The progressivity of such a system can be varied within wide limits using just these two variables.
The least progressive flat tax would set the exemption at $0 and tax everything at the flat rate. That’s stupid, and a non-starter since everyone needs a basic, humane level of income to pay for necessities. Some progressive scheme must end up in the code to account for that. I can live with that. Further analysis can determine the (theoretical) optimum balance between exemption and tax rate, but I think Mr. Forbes’ plan is reasonable as an initial assumption.
The progressivity is where most fiscal liberals will chime in about the warm, fuzzy definition of fair and call for mimicking what we have today or worse. It’s already begun with subtle lies such as this [emphasis added]:
Bush should understand, [Mr. Forbes] warns, that “to tinker with the tax beast won’t work.”
Tinkering, of course, is just what Congress has been doing since the progressive income tax concept was enshrined in the Constitution in 1913.
So we can’t abandon the travesty of progressive income tax rates because it’s enshrined in the Constitution. It’s no more enshrined there than the notion that blue, three-legged aliens from the planet Zoldor live in Peoria. It’s more subtle than I expected to find this early in the current debate, but it’s a bold move. I’ll be surprised if this ignorance isn’t chanted repeatedly in the weeks following the Advisory Panel’s recommendation. Anyone who believes it is a fool deserving of the economic theft that results.
Obstacles to implementation exist. Do we scrap the current system and adopt the new system immediately? That would be outstanding, but it’s not practical. The change is too radical, the need for adjustment greater than merely adapting to a different brand of chewing gum. Mr. Forbes offers an idea, which may or may not be the best possible outcome, but he shows that the obstacles are not insurmountable.
When the flat tax is implemented, you can file your postcard return under this new, simple system, or continue to file your tax returns, with all of their mind-numbing complexity, under the old system. See for yourself which is better. I think most would conclude that the flat tax is best.
As much as it works for the psychological effects, it works for the procedural effects, as well. According to Mr. Forbes, existing taxpayers may choose either method. Once a taxpayer files under the flat tax, though, she is no longer allowed to file under the old system. All new taxpayers would be required to file under the flat tax. This eases the transition to a period of years rather than an immediate, massive switch.
The flat tax always meets enthusiasm before falling to hysterical criticism, but it’s the best tax plan for our economy. It modernizes our government’s economic approach while freeing our citizens to imagine a better economy. The Advisory Panel should recommend the flat tax to President Bush. Convincing Congress and the nation might be politically hard, but the path of least resistance lead us here. Who’s happy with here?