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Flat Wrong: The Dangers of Simple-Minded Tax Plans

Posted by Will Rice (will) on Nov 07 2011 at 12:38 PM
FALL 2011 >>

By Mary von Euler    

The Republicans aren’t big on new ideas; the old will often do. The flat tax is an old faithful, proposed by Steve Forbes in his 1996 and 2000 campaigns for the Republican nomination. It’s simple. But simple doesn’t equal fair.

In this campaign, Forbes Redux began with Herman Cain’s catchy 9-9-9 plan. But whether it’s Cain’s 9% flat tax, Newt Gingrich’s 15%, or Rick Perry’s 20%, they’re all variations on the same theme (with vague hints about what deductions they’d allow), so it’s important to really understand what they’re proposing.

A flat tax – 9 percent, or whatever number, on everyone – is the opposite of a progressive tax based on ability to pay. A good way to measure fairness is to look at what’s left to live on after taxes. Take 9 percent from a taxable income of  $30,000, and there’s $27,300 left – making it tough to house, feed, clothe, and educate a family. Another family with an income of $60,000 would have $54,600 after taxes to raise a family – still not easy. But after-tax income for a family with an income of $300,000 is $273,000, and the family does fine, thank you. And 9 percent from $1,000,000 leaves $910,000 – perhaps resulting in only one yacht, but quite a few designer togs, kids at Harvard, vacations in Biarritz, wherever. And a multi-millionaire… you get the idea.

By the way, while Messrs. Cain, Gingrich, and Perry propose the same rate of taxation on everyone’s personal income, that taxation would only apply to wages and salaries. They’d levy no tax whatsoever on capital gains and dividends – the kind of income that rich people like Warren Buffett live on, and that middle-class people like his secretary don’t. (Buffett is famous for noting that his secretary pays tax, under a current system that already affords preferential treatment to passive income, at a higher rate than he does.)

Critics imply that proponents of a progressive income tax want to soak the rich– motivated by hostility, envy, or the desire to make all incomes equals–and in the process,  stifle investment and inhibit hiring. These charges that have always been straw men. Liberals have never proposed equalizing incomes; we’ve always favored stimulating capitalist investment and offering ample incentives for hard work and creativity. In fact, quite a few liberals are comfortably well-off, yet understand the concept of fairness. To paraphrase Willie Sutton, we propose taxing the wealthy because that’s where the money is.

Any flat rate that generates enough revenue to pay for all the government services that the American people want would be far higher than the Republicans will admit. But of course, the real point of their plans is to destroy those government services. If they got their way, it would spell the end of adequate funding for highways, bridges, national parks, clean air, health care, safe food, children’s nutrition, and a host of other necessary public investments.

Contrary to some myths bruited about, the U.S. is in fact one of the least-taxed developed countries in the world. (Cain’s full plan, by the way, includes imposing a new tax on the American people: a sales tax, the most regressive type of all, falling most heavily as it does on the poor.)

To sum up, and according to the nonpartisan Tax Policy Center, a flat tax leads to lower taxes on the wealthy, increases for everyone else. In other words, the flat taxes coddles millionaires and punishes the middle class and poor. But then when it comes to the Republican agenda, that’s nothing new.

Mary von Euler is Secretary of ADA.