Yeru,
What do you make of these problems with the "flat-tax"? From www.worldwiz72.com
Flat Tax Fiasco
by Douglas Dunn
Copyright (c) 1998, 2002 Douglas Dunn / Word Wizards communications -- all rights reserved
The simplistic "flat tax" idea is once again rearing its ugly head. In the U.S. Senate, Arlen Specter proposed a flat 20% tax on earned income (working people's wages), from which rich people's unearned income (capital gains, interest and dividends) would be exempt. Congressman Dick Armey supports similar legislation in the House. Former presidential candidate Steve Forbes (who has exhibited virtually no entrepreneurial innovation in his life and became wealthy by inheriting his late father's publishing empire) made as a centerpiece of his failed campaigns a flat tax scheme that salutes the idle rich (as distinguished from hard-working innovators or entrepreneurs who actually earned their wealth) by exempting UNEARNED income gained as a return on investment (not merely protecting the value of the principal, but allowing those who gain wealth without working for it to avoid taxes while those who work hard for what they gain pay all the taxes). Since Forbes' plan reduces taxes on the poorest and especially favors the wealthy, but is supposed to be revenue-neutral (no loss of incoming tax revenues) once again it means the middle class working people would be the ones squeezed to make up for benefits to the rich.
In California, former Assemblyman Howard Kaloogian teamed up (unsuccessfully) with Arthur Laffer and others to introduce a similar proposal for our state. Laffer is the economics guru who inspired Ronald Reagan's "supply side economics." Starting Laffer's theories on cutting marginal tax rates on the highest incomes, Reagan developed a plan to balance the budget by cutting taxes for rich people while increasing spending, resulting in all-time record deficits paid for by the middle class and future generations, and which George Bush (senior) labeled "Voodoo Economics" when he first heard about it in 1980. The essence of Reagan's "tax cuts," which Laffer engineered, was to reduce the progressive character of federal taxes by eliminating the highest tax brackets. Middle-class and low-income working people never saw any substantial difference in their taxes.
Flat Tax Frauds
All of the various proposals (Specter, Armey, Forbes, Kaloogian) are fraudulent. None of them is a true "flat tax." In actuality, each of these proposals recognizes the need for progressivity (the differing relative value of dollars at differing income levels, as discussed below) by allowing a primary exemption -- that no tax will be assessed against a primary layer of income. This creates a "progressive" system with two tax brackets: zero and the top rate. Allowing this primary exemption acknowledges the need to distinguish between the differing levels of marginal utility of money, but goes from one extreme, a "zero" rate, all the way to the other extreme of the top rate in one single jump. Since they have acknowledged the need for at least one level of graduation, it makes sense to phase it in through gradual layers of progressivity, as was done during the prosperous era of the 1950s and 1960s.
Proponents of these "flat" taxes love to point out that it is unfair to charge some people a different rate than others. But under their proposals, some people would pay no tax at all and others would pay the full rate. This is supposed to be more fair?
Problems with a flat tax
The notion of a flat tax does have a certain simplistic, egalitarian appeal. But it has three main flaws: 1) It seeks to improve something that is already completely equal; 2) It forces middle-class taxpayers to subsidize the wealthy (especially those incarnations such as Forbes' that exempt "unearned" income such as the interest on his invested inheritance, so that working people would support the idle rich); and, 3) It confuses much-needed tax reform and tax simplification in defining taxable income with the unrelated issue of whether the rate applied to that income is flat or graduated. Anyone who wants to support a flat tax better run the numbers first and see how much more they're going to pay!
A lot of people don't understand graduated taxes. They think if you make more money you pay a higher rate on your entire earnings, which seems unfair.
Graduated progressive taxes do treat all taxpayers equally. Every taxpayer pays the same rate on equivalent layers of income. People in higher brackets don't pay the higher rate on their entire income, only on the portions of income in the higher layers of marginal income. People, not dollars, are treated equally.
