The Flat Tax – Is It Really All Bad?

A few days ago, Craig examined the Fair Tax which is a tax system based largely on sales tax. Today, I will examine the pros and cons of the Flat Tax which is a tax system based on income taxes with everyone paying the same rate. Because everyone pays the same flat rate and loopholes are eliminated in the process, everyone pays in and everyone pays less than they do under the current system. Estimates often suggest a tax rate of 10-15%. Compare that to current rates.

Often, it is rejected out of hand as a regressive tax. At one time, I too recited the usual talking points on the issue. But after examining the issue during my undergraduate career, I began seeing it in a different light. And in recent years, a few liberal economists (a tiny minority) have begun to soften their position on the issue. The fact is that people would pay the same rate so by definition it is not a regressive tax. A regressive tax is one where those with lower incomes pay relatively more. Under a Flat Tax system, everyone would pay the same.

Today, we are locked into a system that has been rigged for the wealthy and corporations. Credits and loopholes exist for everything imaginable. As a result, of this and recent reductions in tax rates for the wealthy, the lower and middle income earners have picked up the slack through increased property taxes, sales taxes, and various other taxes and fees.

The Unfair “FairTax”

For my first post, I thought I would tackle something that divides Republicans. Gaining momentum in the Missouri legislature has been to exchange the Missouri income tax system and replace it with a sales tax, commonly known as the “FairTax” system. The Missouri House has shown that they are able to pass it, but the Missouri Senate is where the plan has stalled.

In Missouri, the sales tax plan would “not exceed 7%.” Switching to a sales tax-based plan is a bad idea. The champions of the plan argue that everyone will get a probate, or check that would cover the increased cost in taxes on necessities. No incomes taxes and receiving a check by the state each month sounds good right? Re-evaluate this with me with 3 major considerations.

1. The plan does exempt a few services such as tuition paid for education and donations to charities to be exempt. The following is a small list of what would be charged sales taxes that do not currently charge sales tax:

1. Rent
2. Healthcare/Dental Care
3. Prescription Drugs
4. Utilities (including cable/internet)
5. Child care
6. Purchasing cars/homes, etc.

While a 7% sales tax may not be much on a $10 a month prescription drug, it is significant on that home that did cost $100,000, has increased to $107,000. Rent for us college age students would rise from $600 per month to $642 a month.

2.  While the plan said the statewide sales tax wouldn’t be more than 7%, would this bring in enough revenue to Missouri? Because no state has made a transition fully to a “fair tax” system, to reach current revenue estimates, this tax rate could need to be as high as 12%.

Because the plan is capped at 7%, if Missouri makes this transition and were to bring in say $7 billion instead of the anticipated $8 billion, the state would be forced to make cuts to balance the budget. The Missouri legislature just cut over $500 million in General Revenue from its budget, and that was incredibly difficult to do. We will see a tougher budget year in 2012. Do we want to see a change in our tax system to create instability when budget times are already incredibly tight?

Let’s take myself as an example. Under the current tax system, while it is complicated, I hired an accountant to do my taxes. As both full time students, my wife and I had no tax liability (state or federal) and had a nice tax return. This wouldn’t be possible under the “fair tax” plan. The only calculator that I found online to attempt to compare the two systems was on the Fair Tax’s website. This calculator is of no help because it compares a federal “FairTax” plan.

3. An argument for the “FairTax” is that it would lower consumer prices, and increase consumer spending. While saying that if we take away taxes from a business, that they will immediately drop the cost of the product by the amount they are taxed is speculating, let’s go with it.

Because this plan is just for Missouri, would a company decrease their prices in Missouri and not the rest of the country? I don’t think so.
The “FairTax” model plans on consumer spending. The average family is over $8,000 in debt in credit cards alone by purchasing consumable items. Assuming a family does save money under a new system, do they help keep the economy afloat by purchasing a higher taxed item or do they pay down their credit card debt or pay bills with? Or, do they go to Illinois or Arkansas to purchase their $20,000 car instead of Missouri?

I would encourage everyone to read about the “FairTax” before making their opinion. Many research groups (proponents would argue these groups are liberal organizations) have said that moving to a consumption tax in Missouri would increase taxes for 95% of Missourians. During public testimony, dozens of groups testified in opposition to the proposal. Fortunately for Missourians, this proposal will not appear on the 2010 ballot, but this proposal isn’t completely dead yet.

Addressing the National Debt

The national yearly deficits and long term debt in the United States is increasingly in the focus. People, regardless of political persuasion, generally recognize our current path is unsustainable. We got here through increased spending by both parties on programs and wars, as well as through substantial tax cuts for the wealthy.

The question is what do we do about it? While one could write volumes on ideas to deal with the national debt, there are three key areas that I feel deserve more debate:

1) Reforming our approach to assistance to the working class and those in poverty

2) Reform defense spending

3) A very small national sales tax dedicated to debt service