Should we replace our tax law with a flat tax or a national sales tax?

Nat'l Tax

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by Tony Palmentera

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The question posed is overly simplistic, and allows for only two options. The answer is yes, to both taxes, and yet no to both. There are several reasons to switch to a flat tax, most of which is equality in taxation. Sales tax, as opposed to existing income tax, incentivizes saving, investment, and production. The main problem with simply moving to a flat tax is that the equal tax rate includes most of the same inefficiencies as the current progressive income tax, in terms of Dead Weight Loss (DWL) and causing a need for wealth redistribution by taxing the lower middle income citizenry into poverty. The problems with the sales tax are DWL, and transfer of DWL from incentives to consume to disincentives to consume. The oversimplistic question of what to do with out current tax system is answerable, however. It includes property tax.

There is only one tax in the history of humanity that carries with it no DWL distortions on surplus or demand; property tax. If free market economics is the presumed standpoint, then eliminating interferences, distortions, and perversions of the markets should be JOB ONE. I suggest a FLAT property tax. Flat tax has the advantage of fairness, but when placed on income it creates DWL distortions. If placed on property it has no such problem. Also, the problem of taxing the lower middle class into poverty decreases due to the low percentage of homeownership among the $45K-$70K annual income bracket (devoid of foolish government programs that may interfere in the housing market, of course). In doing so, the need for wealth redistribution reduces, and pressure on government welfare budgets lessen. This results in lower taxation on the property owning tax base, which is overwhelmingly made up of corporations. Corporations own a high percentage of American property, and a huge concentration of the most valued. This tax, therefore, is carried on the back of corporations more than American homeowners. This still would be a moderate tax rate, because it isn't the only tax in the system I advise adopting. The flat property tax is simply a base for a tax system built on limited interference in the market and the highest achievable equality in both oppurtunity and result.

The second tax I suggest is a REGRESSIVE income tax. With a flat property tax as a base, tax evasion and deficit spending become nearly impossible by nature. Taxation of every individual costs us an estimated $200 billion dollars a year, as referenced from research done on the Fair Tax national sales tax proposal. With way less individual tax tracking, effeciency is somewhat achieved. However, the problem of some level of wealth redistribution persists. This will always occur, but the ability to limit it is there. The main expenditure in welfare is Social Security. A regressive income tax could be setup on Americans to cure most of the problem. True, some DWL is enevitable, but fairness of saving your own retirement, to the extent that is possible, is the main concern and worth the minimal trade-off. The tax would go from the current tax rate of around 30% of income to 0% somewhere in the middle class. I could be more specific, but the idea is what I'm trying to get across. This REGRESSIVE income tax incentivizes earning more money, as opposed to disincentivizing it like our current PROGRESSIVE income tax does. This would allow, if the currency is stable, citizens making $30K annually and more to save all of their own retirement without any investments over a 25 year working career. Worked into this is the cost of medical care from retirement till deah. So Medicare and Social Security would only apply to about half of the people it does now. Only people making $29.9K annually and less would require assistance. Those making $0 annually will be completely subsidized, while everyone else will only be subsidized to extent of need. For exapmle, the citizen making $29.9K a year will only need a few dollars a month to subsidize his nearly complete retirement/medical savings accounts. Again this seriously cuts the dependency on redistributed wealth, to about 25% of the total need now.

The third tax that makes sense is a PROGRESSIVE sales tax. This tax would overlap the regressive income tax to the extent that no citizen ever pays over 30% of thier income through the combined taxes. In other words, it is possible to be subject to the sales tax, the income tax, and the property tax simultaneously. It is possible for taxation by only one, two, or none of them. But excluding the flat property tax, no citizen can be taxed any higher than a set rate for both taxes. So one person may pay 30% income tax, another 30% sales tax, and a third person may pay 15% sales tax and 15% income tax. And due to the fact that only spent capital is taxed, this tax rate can be effectively very low on even the wealthiest of individuals. This tax again creates a DWL, but fairness is achieved with minimal distortion. This tax enables those who have more expendable income to be taxed on consumption. This tax would not apply to food, clothing, energy, or any other necessity as budget determined up to the level of poverty. This is very similar to the Fair Tax sales tax proposal, except this tax is not flat, but rather progressive, it begins in the lower middle class and isn't applicable to all, and it doesn't contain a massive redistribution of wealth up to the level of property through PREBATE checks. A simple card would be issued to all citizens that were exempt totally or partially to any percentage of the tax. Upon paying for goods with this card, like a credit card, it would be swiped to determine what, if any, sales tax was due by percentage for that fiscal year. Each year, or more often, this could be re-evaluated, as with all the taxes. Anyone forgetting their "discount card" or not having one for any reason would be charged full sales tax percentage. The limits on necessity credits are built into the card automatically, so keeping track is purely for self recording. This card eliminates the need to prebate every family in America with a monthly check up to the level of poverty as in the Fair Tax proposal. And again, because the collection of tax shifts from millions of people to a few thousand businesses, tax evasion is very difficult.

The fourth tax would be corporation specific, and property tax liabilty is taken into consideration. This would be a progressive tax placed on corporate PROFITS, not earnings, and apply less to small businesses and more to large companies. This tax is ultra efficient, even though it does create a small DWL. The reason it is so efficient is because the government never sees this money. The fourth tax is converting our corporate tax into the PROFIT SHARING TAX. The PST would go directly on workers paychecks from their owners profits based on percentage, and hours worked in the pay period. This effectively pays workers more when they work more, and less when they work less. It also incentivizes workers to make the company prosper, as their wages are partially determined by this outcome. Both owner and worker share in successes and failures fairly. This would ultimately lower standard hourly pay to a minimum (for worker reliability and security), and provide competition for jobs and employees at all levels. The increase in income would be progressive like the tax for the workers. Those in the lower middle class or poorer would see a modest increase in yearly wages. Those in the upper middle class may see a higher percentage raise in compensation, and a much larger total payoff. Those working for a small company may recieve less than an employee from a larger comapny. This isn't the rule, however, as the amount of fellow employees and hours worked also matters. This would push employees and employers alike to seek maximum efficiency in workforce size. Again, this is fair. Those who contribute the most will be compensated the most according to percentage of profits, number of employees, and hours on the project. A truely merit based tax. Plus you avoid a huge percentage that gets taken out by tax collectors and government employment when the tax is given directly to the worker without government depletion of funds. This automatically alleviates some of the DWL the tax creates.

The fifth and final tax applies mostly to corporations, but can apply in extreme cases to individuals. The POLLUTION tax is levied on destruction of air, water, land, or life. This tax can be levied through the existing fines system or through a combination of carbon tax for air, a seperate tax on water pollutants, etcetera. I would simply suggest a fine system, based on levels of severity, with pecentages of company profits as finable penalties. The more you pollute, the more you pay of your companies net earnings up to 100% and repeal of your corporate charter, at which time all assets would be sold off to competitors for liquidation of workable capital. This would encouraage cleaner environments, and solve somemore of our wealth redistribution problems. The proceeds from this tax are in effect a welfare payment. This would be payed to every American family according to income, the poorest recieving the most and the richest recieving the least. The principle of fairness applies here too. Instead of immorally redistributing wealth under the guise of morality, you can do it with proper justification. And since we still have 25% of the welfare rolls left, we can't just turn that quarter remainder into the streets. We would pay the welfare, to a very large degree, through this tax (until pollution became too low, as if that is a problem we'd mind having). This paying of the poor more than the rich with this tax revenue is based on the idea that those who have the least only own their immediate environment. In other words, all the poor have is their air, water, and health. The lands they enjoy now isn't the issue with land pollution, it's the fact that the land must be rehabbed at some cost to someone down the line in time and that all those poor who could benefit from that land in some direct or indirect way would be deprived until that land can be replenished. Either way, clean air, water, land, and health is all those people have, so it makes sense that when it is injured, they should recieve the highest proportion of the reparations made for it. It is moral, and it is economically sound.

This tax system effectively lowers welfare spending to a whopping 10% of the original welfare base we have today. Although some welfare will always be needed, our current system just inflates the problem. Under these taxes poverty would reach an all time low in America per capita, while wealth would rise modestly. The middle class would grow on the bottom end by quite a bit, while losing some of the upper side people to new found wealth in the upper class. This could even create a 100% employment nation, without major social spending. Social Security and Medicare would be eliminated in about 50 years (after the last dependent generation died off naturally), and government would find it difficult to spend over budget due to the tight leash the taxpayer has through the property tax. Federal deficits could be eliminated, governmment could shrink by as much as 30%, and taxes could be lowered, with the heavy burden placed on property tax for DWL effeciency. Any additional cuts to military spending or anything else would just be icing on the cake, in terms of how small the government could get. Either way, 30% less government always equals 30% less taxes.

That's my complicated answer to the very simplistic question posed.

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