“The purse of the people is the real seat of sensibility. Let it be drawn upon largely, and they will then listen to truths which could not excite them through any other organ.” ~Thomas Jefferson
Ever since the results of the 2010 mid term elections became final, it was obvious that 2011 would ring in a tumultuous battle royal over the nations discombobulated finances that would carry straight through to the 2012 elections. The budget would be the issue. The people’s purse has not only been drawn upon, it’s been grossly overdrawn. Republicans and their newly minted Tea Part brethren felt empowered that the voters had given them clear and explicit marching orders; “Clean up this mess, now!” President Obama and the Democrats could only brace for the onslaught that was sure to come.
The President had a chance to show some real leadership on at least beginning to get the country’s finances in order but sadly, he walked away from the issue. Rather than pay any credence to the tangible recommendations of the Simpson Bowles panel that he commissioned, The President swatted them away as if they were gnats annoying him at a picnic. Equally frustrating was the President’s apparent lack of interest in a recent GAO study that details billions of dollars of waste and duplication of programs that span across multiple federal agencies.
It was no secret that Rep. Paul Ryan of Wisconsin was going to offer up a federal budget for 2012 that would put Washington on a crash diet, and that the vast bulk of the weight would be lost through spending cuts. What was different this time was the entitlement programs were on the table, and it wasn’t just talk. Even though Social Security got a pass, Ryan’s budget proposal not only touched the “third rail” but grabbed it with both hands, suggesting massive changes to Medicare and Medicaid. Left with no options, and following right on the heels of a highly partisan fight over funding the federal government through the balance of the 2011 fiscal year, President Obama was backed into a position where he had to respond, and so he did with a speech on April 13th. Rather than address the issue at hand, the President used the occasion to kick off his 2012 re-election campaign. Frankly, my reaction to the bulk of the speech was that Vice President Biden got right by dozing off.
I do agree with one critical point that the President made. This fight will be about philosophical differences, not just back room horse trading for dollars. It will in large measure be a referendum on what kind of country America has become and what it will be in the future. My concern is that it will be difficult to create meaningful policy while simultaneously debating the meaning of adjectives. As soon as one says the wealthy aren’t paying their fair share, the battle will surely center on what constitutes wealthy and what constitutes fair. And that will miss the point. While the President talks of raising taxes on millionaire and billionaires, he apparently believes that level of wealth starts at $250,000.
The tax code is not simply a vehicle for collecting money. It is an important tool by which the government promotes and implements social policies. That is why real tax reform is so critical to the outcome of this debate. In that regard, it’s about time that some version of a flat tax got a fair hearing.
There are numerous pieces of empirical evidence to demonstrate how the byzantine complexity of the current tax code creates disparate outcomes and actually hinders effective revenue collection. Government statistics show that some 47% of households pay no federal income tax. That unfairly limits who will bear the burden of any tax increases, and raises the question of why these folks should have no skin in the game. A recent New York Times article about how General Electric made huge domestic profits and yet paid no corporate income taxes raised caused quite a stir. There were no allegations of any illegal or unethical activity. GE’s tax department was simply quite skilled at navigating the often incomprehensible twists and turns of the tax code.
This brings me back to the flat tax. Both the Democrats and the Republicans have talked about closing tax loopholes and limiting deductions and exemptions. That’s nice cocktail reception talk, but given the huge quantities of money that have been spent by lobbyists and interest groups to codify many of these escape hatches, the pressure on lawmakers to back off will be enormous. We will predictably be told by hyperventilating commentators that life as we know it will end if the mortgage interest deduction or charitable contributions are reduced or eliminated. Frankly, life as we know it does have to end if we are going to straighten this mess out. As the old adage goes, the definition of true insanity is doing the same thing today as you did yesterday and expecting the outcome to be different. A flat tax would radically simplify the entire situation, raise more revenue (we can’t afford to be revenue neutral) and still leave some of the sacred cows in place. It would also lay waste to the wholly unproductive tax avoidance industry that currently exists. Sorry accountants and lawyers, we must all share the pain.
The Hong Kong flat tax seems to be the one that people refer to the most when the topic comes up. There are four marginal tax brackets: 2%, 7%, 12%, and 17%. There are no special taxes on capital gains, dividends or inheritance. You can take deductions from a limited menu for items such home loan interest, elderly residential care expenses, self-education expenses and contributions to retirement plans. There are also personal exemptions for you, your spouse, children and dependent relatives. We wouldn’t want to kill all of the sacred cows. The beauty of the flat tax is that it’s totally progressive (that should satisfy the Democrats), and the marginal rates are low (can I get an Amen from the Republicans).
With a modicum of creative thought, the 47% of households that currently pay no income tax could be fit into one of the lower brackets in such a way that it would not impose an onerous financial burden. As for those pesky “wealthy” people, at 17% I would include all income including dividends and capital gains. This would raise a lot of money, eliminate much of the current onerous recordkeeping and put an end to the absurd juggling of carry forward and carry back gains and losses. It would greatly simplify tax planning because you would know exactly how much you owed without having to enter your records into a main frame computer program.
It is clear that to deal with our current financial mess we have to try some new approaches. With Standard and Poors threatening to downgrade the United States if things don’t improve, we simply cannot have the same old tired debates. It is a perfect opportunity to give the flat tax serious consideration.
