There are three reasons we should consider a flat tax:
1) It is simple - How much time have you spent filling out your Social Security returns? None. Why? Because it is a simple flat tax.
2) It doesn't require significant collection efforts. Sales taxes require a fair amount of paperwork by the collector (i.e. retailer) to report and remit. Plus, depending on what is exempted, it could be very complicated and prone to abuse and fraud.
3) It can be as fair or progressive as we want it to be. Consider these two scenarios.
A 10% tax on everything over $25,000:
A person making $25,000 or less would pay no tax
A person making $50,000 would pay $2,500 (10% of $25,000) or 5% of their total pay.
A person making $100,000 would pay $7,500 or 7.5%
A person making $1,000,000 would pay $97,500 or 9.75%
A 20% tax on everything over $50,000:
A person making $50,000 or less pays nothing.
A person making $100,000 pays $10,000 or 10%
A person making $1,000,000 pays $190,000 or 19%
As you can see, we can set the rate and the exempted amount wherever we would want to get the effective rate desired for various income levels. In example 2 above, the person making $1,000,000 makes ten times the person making $100,000, but pays 19 times more in taxes. Still, he pays no more on each incremental dollar than anyone else. It achieves both progressivity and fairness.
7/21/1992
Good Intentions, Not Such Good Outcomes
With the recent outcry for change in this country, I have been contemplating some of the change that has been called for in recent years. This has included elimination of tax shelters for the wealthy, increased taxes (including luxury taxes) to reduce the deficit, an increase in the minimum wage, extended unemployment benefits, reductions in military spending, a new civil rights bill, anti-discrimination laws to protect Americans with disabilities and more stringent laws to protect workers and the environment.
Interestingly, each of these proposals, representing a liberal or populist point of view, were enacted. Now we find ourselves in a protracted recession, yet we believe the solution to these problems is to follow the Democrats further down the primrose path of populist policies.
Consider the effects that some of the policies above have had on our economy. The elimination of tax shelters, one of the great populist policies of the past decade, led to a tremendous drop in real estate investment. In turn prices fell, greatly excacerbating the S&L mess. The luxury tax on cars and boats led to mass layoffs in those industries. The reduction in military spending, while promising to be beneficial in the long run as production switches to wealth creating industries, has in the short term displaced thousands of workers. The civil rights bill and to an even geater degree the Americans with Disabilies Act, while certainly necessary, will hamper our global competitveness as businesses try to absorb the economic impact of these laws.
The Clean Air Act and efforts by OSHA to protect workers are also placing increased burdens on business at a time when they can least afford it. A perfect example is a requirement by OSHA that drycleaners meet stingent exposure limits for solvent vapors within their operations. The deadline, which is rapidly approaching, will require many operators to make major investments in new equipment to meet the new guidelines. Most of those affected are older family operations. Rather than making the investment, many are choosing to retire. Unfortunately, because of the increased regulation, the value of their businesses are next to nothing. As a result the nest egg they were counting on for retirement has been wiped out, forcing them to live on social security and putting a further drag on our social services. And this represents just an infinitismal portion of our vast economy.
As for the minimum wage, we can never raise it enough to provide more than a subsistence wage. Whenever it is raised significantly, employment will eventually drop and prices will rise, making the new wage no better than the old one. The answer is to provide the education, motivation and training so that our work force can excel in higher value added, hence higher wage, employment. We can then let the truly low wage, low value jobs migrate overseas.
Much is made of the unfairness of a system where many become wealthy while others cannot find employment. Yet wealth and employment are inextricably linked. Put in an unusual way, if each employee generates an annual profit of $1,000 for his employer, would you rather the employer earn $5,000 or $500,000 each year. In one case you have five employees, in the other five hundred. Rather than look at the employment however, we look at the profit and consider it unfair. In turn, we look to tax the profit, taking it from productive investment and placing it in he government's trust, one of the least productive investments we can make. The end result is less private employment and more government dependence.
This country has great problems, but we have even greater potential. By providing education, motivation and hope to our underprivileged we can eliminate the scourge of drugs and crime in our communities. Each time a person is
turned from a government dependant to a productive member of society, our spending needs drop and our revenue increases. Outside of education, the government cannot encourage this effectively. Government cannot make a poor person wealthy, nor even comfortable.
Interestingly, each of these proposals, representing a liberal or populist point of view, were enacted. Now we find ourselves in a protracted recession, yet we believe the solution to these problems is to follow the Democrats further down the primrose path of populist policies.
Consider the effects that some of the policies above have had on our economy. The elimination of tax shelters, one of the great populist policies of the past decade, led to a tremendous drop in real estate investment. In turn prices fell, greatly excacerbating the S&L mess. The luxury tax on cars and boats led to mass layoffs in those industries. The reduction in military spending, while promising to be beneficial in the long run as production switches to wealth creating industries, has in the short term displaced thousands of workers. The civil rights bill and to an even geater degree the Americans with Disabilies Act, while certainly necessary, will hamper our global competitveness as businesses try to absorb the economic impact of these laws.
The Clean Air Act and efforts by OSHA to protect workers are also placing increased burdens on business at a time when they can least afford it. A perfect example is a requirement by OSHA that drycleaners meet stingent exposure limits for solvent vapors within their operations. The deadline, which is rapidly approaching, will require many operators to make major investments in new equipment to meet the new guidelines. Most of those affected are older family operations. Rather than making the investment, many are choosing to retire. Unfortunately, because of the increased regulation, the value of their businesses are next to nothing. As a result the nest egg they were counting on for retirement has been wiped out, forcing them to live on social security and putting a further drag on our social services. And this represents just an infinitismal portion of our vast economy.
As for the minimum wage, we can never raise it enough to provide more than a subsistence wage. Whenever it is raised significantly, employment will eventually drop and prices will rise, making the new wage no better than the old one. The answer is to provide the education, motivation and training so that our work force can excel in higher value added, hence higher wage, employment. We can then let the truly low wage, low value jobs migrate overseas.
Much is made of the unfairness of a system where many become wealthy while others cannot find employment. Yet wealth and employment are inextricably linked. Put in an unusual way, if each employee generates an annual profit of $1,000 for his employer, would you rather the employer earn $5,000 or $500,000 each year. In one case you have five employees, in the other five hundred. Rather than look at the employment however, we look at the profit and consider it unfair. In turn, we look to tax the profit, taking it from productive investment and placing it in he government's trust, one of the least productive investments we can make. The end result is less private employment and more government dependence.
This country has great problems, but we have even greater potential. By providing education, motivation and hope to our underprivileged we can eliminate the scourge of drugs and crime in our communities. Each time a person is
turned from a government dependant to a productive member of society, our spending needs drop and our revenue increases. Outside of education, the government cannot encourage this effectively. Government cannot make a poor person wealthy, nor even comfortable.
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