President Obama claims that billionaires should not pay a lower average tax rate than janitors – and almost everyone would agree with that remark. Almost certainly, the remark is reflected in the current reality of the U.S. tax code. Few janitors – with the exception perhaps of those employed by Warren Buffet – pay higher average tax rates than the well-off. Most janitors pay no federal income taxes at all and may even be net recipients from the IRS through the earned-income credit.
If we tweak the President’s words just a little to say that janitors should pay exactly the same average tax rate as billionnaires, then I am on board for this ride to tax reform. For this is the nature of the flat tax proposal in its most unblemished form.
This would require the elimination of the payroll tax and the corporate income tax. it would require the withdrawal of all tax credits throughout the entire economy. It would require the elimination of all personal exemptions, irrespective of income level.
Such a solution draws all employed individuals/households into the income-tax net – bringing all 50 per cent of the households that currently do not pay income taxes – but do pay payroll taxes – fully into the federal income tax system. This is good for democracy, because it confronts everyone with the marginal cost of government as outlined in their regular pay packet. No one, henceforth, will vote for bigger government knowing that it is costless to his own paycheck.
Because the rate is flat, the average equals the marginal rate, mimimizing the excess burden that is always associated with an income tax. Because exemptions are prohibited by law, there is no point in diverting resources wastefully into rent-seeking for special interest sub-groups. Wealthy individuals who currently support charities in part for the tax deductions, henceforth, would support them because of the benefits that they are perceived to provide.
GOP presidential candidates have run on the flat tax proposal before; but they have never gained the White House on that issue. However, times are changin’ and it now may be within the realms of possibility for a Democratic incumbent to run for re-election on the flat tax, as his only hope for victory. That would be an enormous high five for Democracy!