Monday, March 7, 2005

On a Flat Tax

The current US income tax code is bloated and filled with money for special interests, within and outside of the government, and must be simplified. Taxes are necessary for a government to administer its functions, but that doesn't mean they should be onerous or seemingly arbitrary.

Some components of the tax code have unintended consequences (well-meaning child tax credits that get spent on big screen TVs rather than food, clothing, and education), have unfair inconsistencies (the marriage tax, where couples filing jointly pay more than if they filed separately), or intentionally kick families while they're down (by the inheritance or "death" tax). The escalating scale that increases taxes on those who work diligently to improve their lot in life and earn more is immoral.

Other tax policies attempt to reinforce beneficial behavior (for example, the mortgage interest deduction that encourages home ownership). Special dispensations written into the current code are misplaced. Beneficial behavior should be encouraged on its merits, not encouraged by bribery.

A predictable tax environment is necessary to efficiently run any business or plan any family's budget. At the same time, liberals exert pressure to raise federal, state and local minimum wages with willful disregard for the laws of the marketplace and the long term effects on labor flexibility.

Something must be done to simplify the US income tax, and control the upward pressure on mandated minimum wages.

Sales taxes affect people unequally based on their consumption, and have the effect of discouraging purchases, thereby reducing the velocity of money through the economy. European value added taxes (VAT) are similar to a sales tax added at each stage of production, with the added insidious nature of being hidden from view: out of sight, out of mind. Hidden taxes such as VAT, or gasoline taxes included in advertised per-gallon prices, are too easily raised.

As sales taxes are often the only source of income for local municipalities, cities and towns too often resort to the tactic of increasing sprawl to create new opportunities for retail which can be taxed.

I also recognize that some folks need to be helped along as they start careers, or in times of need. The tax code should still account for some amount of welfare, or remittances to low income families.

Here's my proposal for a fair tax system for individuals. This could be extended to corporations (though I'll save the discussion of double taxation and whether companies should be taxed at all for a later time).

1. No sales taxes, no VAT. No hidden taxes!

2. Revenue from each taxpayer is shared proportionately at all political levels the taxpayer inhabits: federal, state, county, city. To collect more money, governments must help their citizens earn more money

3. A flat income tax is based on all income from all sources, with no deductions. And no loopholes!

4. The poverty level is defined as a typical annual salary (2080 hours) at minimum wage. This amount is subtracted from total income.

5. A low fixed percentage (defined either constitutionally or legislatively) of the resulting adjusted income becomes either the tax owed (positive amounts), or the welfare received (negative amounts).

6. The tax (or welfare) could be collected (or paid) in quarterly, monthly, semi-weekly, or weekly installments to simplify financial planning.

Here are some example:

- If minimum wage were $6.00 per hour, the poverty level would be $12,480 per year.

- A person who earned $46,000 at a 10% flat tax rate would owe $3,352 in taxes.

- A person who earned $1,000,000 at 10% flast tax would owe $98,752.

- A person earning minimum wage would pay no taxes.

- A person who earned $5,000 at a 10% flat tax rate would be paid $748 in welfare.

This system is fair to the aspirations of all earners, while not burdening those making minimum wage with any taxes whatsoever. It has an added benefit of eliminating tax loopholes, with the effect of keeping down the tax rate.

(Note to those who are stuck on unfair, "progressive," increasing-scale tax rates: even this flat tax is ever so slightly progressive due to the fixed deduction. The million dollar earner actually pays at a 9.8752% rate, while the $46K earner actually pays at a 8.38% rate. The same relationship is true for any given nominal flat tax rate, though exact resulting rates will differ.)

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