Issue Position: Flat Tax-Fair Tax

Issue Position

Several Republican politicians, such as Presidential Candidate Mike Huckabee, support Tax Reforms that would replace the current Federal Income Tax system with either a "Flat Tax" or a "Fair Tax". Both are Bad Ideas!

The "Flat Tax", if implemented, would create one tax rate for all taxpayers. Its supports believe that this would spur on economic growth because the resulting tax rate would be about 17% or 18% which is much lower than the current rate that high income-small business owners [primarily people making over $250,000 per year] currently pay, which is 35%. The reason why they believe that a lower tax rate for high income-small business owners would accelerate American economic growth is that when marginal tax rates for businesses are lower, then the optimal production level for American Businesses will expand. They believe that this will lead to higher incomes for business owners and investors, more jobs, and higher wages and salaries for American workers.

I agree with them.

BUT! The problem with lowering the income tax rate for high income-small business owners is that somebody is going to have to pay higher taxes in order make up the lower taxes for high income earners. And that somebody will be THE REST OF US! Taxes on poor, working class and middle class Americans would rise. Everybody would pay 17% to 18% federal income tax on all of their income starting with the first dollar earned. This would represent a tremendous shift of the tax burden from high income earners on to the backs of poor and middle class workers. Even though the number of jobs would rise faster and the wages and salaries of America's workers would rise faster, because of the higher taxes that poor, working class and middle class Americans will have to pay the vast majority of us will be worst off. Virtually all of the benefits of the expanded growth related to the implementation of a "Flat Tax" would go to high income earners. As a result the "Flat Tax" would inevitably lead to a higher concentration of wealth in the hands of fewer people.

Another problem that would arise if the "Flat Tax" was implemented would be a collapse of the housing market. The way the "Flat Tax" supporters achieve a 17% or 18% tax rate is that all income would be taxed at either 17% or 18%. Everybody would pay 17% to 18% federal income tax on all of their income starting with the first dollar earned. There would be no personal exemptions. No exemptions for spouses. No exemptions for children. No incentives to save and invest for retirement. Senior Citizens will pay tax on 100% of their Social Security Income. No Child Day Care Credits. No Earned Income Tax Credits. No tax deduction for State and Local Income and Property Taxes. No deduction for charitable contributions, not even for Church Contributions. NO DEDUCTIONS AT ALL! YOU WILL PAY FEDERAL TAXES ON ALL OF YOUR INCOME!

Most importantly, you will loose your deductions for home mortgage interest and property taxes. As a result your house value will drop about 20%. In fact, it would be more economical for Americans to rent their homes instead of own their homes, especially if they have a mortgage. The reason is that a home owner who rents out their house would continue to be able to take the deductions for home mortgage interest and property taxes and pass those deductions on to the home renter, but that owner could not take the deduction if they lived in the house. Therefore, it would severely reduce the portion of the American public that own their own home. For the vast majority of Americans, their house is there largest net asset. Therefore, the resulting reduction in home ownership would be a step in the wrong direction if you want to see a broadening of the ownership of the assets of this country.

***

The Implementation of the "Flat Tax" would be a disaster, but the implementation of the "Fair Tax" would be a catastrophe!

***

The "Fair Tax", if implemented, would eliminate the current Income Tax and replace in with a 23% national sales tax. Its supports believe that this would spur on economic growth because Income would not be taxed at all. The reason why they believe that not taxing income would expand American economic growth is that when marginal tax rates for businesses is zero the optimal production level for American Business will expand to its highest potential. This will lead to higher incomes for business owners and investors, more jobs, and higher wages and salaries for American workers.

I agree with them.

BUT! The problem with eliminating the income tax for high income-small business owners is that somebody is going to have to pay higher taxes and that somebody will be THE REST OF US! The "Fair Tax" will result in a huge Tax Increase on poor, working class and middle class Americans. Everybody would pay the 23% Federal "Fair Tax" on everything they purchase. This would represent a tremendous shift of the tax burden from high income earners onto the backs of poor and middle class workers. Even though the number of jobs would rise faster and the wages and salaries of America's workers would rise faster, because of the higher taxes that poor, working class and middle class Americans will have to pay, the vast majority of us will be worst off. Virtually all of the benefits of the expanded growth related to the implementation of a "Fair Tax" would go to high income earners. As a result the "Fair Tax" would inevitably lead to a higher concentration of wealth in the hands of fewer people while the rest of up will become poorer. Adding to this concentration of wealth in the hands of fewer people is the fact that high income people spend a much smaller amount of their income and as a result will pay much less than 23% tax on their income. However the poorer one is, the higher the percentage of one's income will be taxed because poorer individuals tend to consume a larger percentage of their incomes.

The implementation of the "Fair Tax" would also lead to tremendous disruption of the American Economy. Just imagine that everything would coast 23% more. In the short term, everyone would buy less, on the necessities. Most Americans will have a little more take home pay to spend but would pay a tremendous amount more for everything they purchase and in the end, the purchasing power of their dollars shrink. The disruption of the economy will lead to unprecedented increases in unemployment at least for a few years and if our economy would ever recover it would take at least a decade.

The "Fair Tax" proponents also argue that people who inherit their wealth don't pay income taxes on their wealth but under the "Fair Tax" these wealthy people will now have to pay the Federal "Fair Tax" on their purchases and that is what makes the "Fair Tax" Fair.

I agree with them. BUT!

This is all just a bunch of infighting among the two sects of the Bourgeoisies Class, those who inherited their great wealth [the Inheritors], vs. the High Income-Small Business Owners. The High Income-Small Business Owners want to implement the "Fair Tax" in order to lower their tax burden. In the process they want to increase the tax burden of the Inheritors. Unfortunately, the "Fair Tax" would also increase the tax burden on the rest of us who make up the poor, the Working Class and the Middle Class. My answer is no thanks. Let the Bourgeoisies find some other why to settle their disputes and keep us out of it!

Finally the "Fair Tax" proponents argue that when the "Fair Tax" replaces the current Federal Income Tax, the evil IRS will no longer exist.

This is not true. First, the IRS should not be treaded as the villain. The IRS is just the government agency that enforces compliance with the tax laws passed by Congress. Second, because of the high 23% "Fair Tax" rates, their will be created an expanded black market and the IRS will still me necessary and utilized to enforce compliance with the "Fair Tax" Laws

Thus, if anything, under the "Flat Tax" will increase the roll of the IRS.

Source