No

by Tom Koecke

Created on: February 06, 2008

Though it sounds like an equitable idea that everyone should pay their "fair share" for the cost of government, establishing a "flat tax rate" on income would be devastating to the economy, and would put an unfair burden on poor people, especially the working poor. While my libertarian friends cringe at such economic injustice as taxing people at different rates, we must consider that we are dealing with a system in place. If it is to change for the better, it must change for purpose. Establishing a flat tax rate serves no better purpose, and works against the system in place as contrary force.

In other words, until government changes what it does, the flat tax pits the proverbial immovable object against the unstoppable force. It is not counter-balance; it is recipe for disaster.

GRADUATED RATES AND REDISTRIBUTION

The current taxing system applies higher rates to greater amounts of income. Through the net effect of the graduated system and some tax credits, most notably Earned Income Credit, many people actually pay less than zero percent by getting back more than they paid in. The Earned Income Credit applies to low-income people who have earned regular income, and who also have children. The credit often times, though, does not result in more back than paid in, but does serve to reduce the overall tax liability for low-income, working parents.

It is in the targeting of those we intend to help that we must keep focus. For example, the tax rebate given to all taxpayers does spur some spending. However, if people who earned $500,000 last year did not get one, there would be more available to people who need it without increasing the cost. If the threshold were reduced to $150,000, there would be significantly more going to those who need it the most. If the total amount rebated was given to poor people, all of the rebate money would begin circulation in the economy. Any money rebated that does not begin circulation is counter-productive to spurring the economy.

The graduated rate for taxation is based upon "net income," which is another factor to consider in tax legislation for its economic benefit. A person who earns $1,000,000 with no expenses will pay "more than twice" the amount in taxes as someone who earns $1,000,000 and has $500,000 in expenses, because the rate increases as more is earned.

It is in those "expenses" through which "supply-side economics" should be applied, because the "trickle down theory" is substantially flawed.

TRICKLE DOWN AND SUPPLY-SIDE THEORIES

The trickle down theory relies upon supply-side economics in order to derive benefit to the economy. However, it is flawed theory in that it suggests that money rich people are not taxed will be spent employing people. If that were true, then the taxes paid by the people they employ would tend to offset the reduced taxes through the number of people who will derive benefit through increased demand in the market, which creates tax revenue. The increased demand will result in more transactions, and more occurrences of taxation, which is how supply-side theory does work.

However, that which is trickling down from the rich onto the needy person is not a paycheck. The line depicting "needy" is steadily moving toward the average or common person. The answer is not to rely upon trickle down theory, but to apply supply-side taxation deductions as allowable expenses.

A paycheck given to another person is usually deductible as an expense. So is a commission paid to a broker for an investment transaction. If a rich person were to derive more benefit from giving a paycheck than for transacting investments, then some would do it. Those people they employ will pay taxes, perhaps for the first time. They will buy things which will create demand and result in employment for others.

As it is, however, there is more risk and less benefit to employing a person, than to invest in large companies that export jobs. The flat tax rate would compound the benefit to invest rather than to employ, which is counter-productive for the economic realities with which we are dealing.

A BETTER IDEA

The main problems we face in our economy today are the outsourcing of jobs and devaluation of the dollar. It is nice to think of this as "we are all in it together," but that is not the case. If we are going to change "those on public doles" to "employees on private doles," we must do so through tax incentive to private individuals and corporations for actually enacting the transfer.

By coupling a graduated income tax rate with a high top rate on foreign investment income, together with a tax credit 1.5 times its typical value for employing an American worker, we would actually transfer from the government to private businesses a substantial number of the people who currently rely upon government assistance.

If a rich person were to maximize this credit to the point that substantial income could be retained tax free, the benefit of truly employed people creating true demand that will be met by other truly employed people also creating demand, will more than offset what the government would have been paid and would have paid out without all those people employed.

The flat tax rate, however, will not resolve these problems. It will pit the proverbial immovable object against the unstoppable force, creating immense gaps between the rich person and the average person, who will be much closer to needy than rich. That, as Marx forewarned long ago, is the recipe for class warfare.

Though it will not likely result in violent revolution here, it will likely result in socialism through democracy as the gravity of common thought swings the pendulum from what is fair to what is needed. What is fair sounds good, but the flat tax is neither fair nor good.

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