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Real Tax Reform: Implement the Flat Tax Now!

July 14, 2003


The liberal Democratic mantra that sounds off every time a tax cut occurs at the Federal level is that the rich benefit the most at the expense of the common man, whoever that may be.  Every Democratic candidate for President has used this class warfare argument to criticize the recent tax cut that will soon take effect.  Of course, this political propaganda fails to mention that those in the upper income brackets pay the most Federal taxes, thanks to the progressive Federal income tax system that taxes those who make more pay a higher percentage than those who make less money.  The idea is based on the "Robin Hood" principle that taketh away from the rich and redistributes it to the poor through many different entitlement programs.  This so called ability-to-pay principle says that those in the upper income bracket can afford to give up a higher percentage of their income, and that it will not be as painful for the rich as it is for the poor, who give up a smaller proportion of their income in taxes.

This idea, though, is built on many false premises.  One great untruth is the notion that incomes, in real terms, will become more balanced between the haves and the have nots.  The large percentages taken from those in the upper income level (I prefer that terminology than the rich, for where is that line drawn?  If you make $100,000 a year and have 3 children, and both you and your spouse work 50-70 hours a week to make that income, I do not consider that family RICH - BUT MOST DEMOCRATIC LIBERALS DO!!!) will be given to the poor in welfare benefits to lessen the gap between those who have earned more and those who have earned less.  Yet, if one examined where most of those monies ended up, one would find that a large percentage of those expenditures are for the sprawling bureaucracy that administers the welfare programs.  And of course, such a program provides a disincentive to those who have earned less, because they can receive money for doing less.  They know if they work harder and make more money, they may not qualify for the government subsidized housing, food stamps, Medicaid, the earned income tax credit, and the list goes on and on.  The Clinton welfare reform program only slowed the growth of the total amount spent on social welfare programs by the Federal and state governments, it did not lessen it.  And the great social welfare programs begun by Franklin Roosevelt, which mushroomed under Lyndon Johnson, did not, after 70 years, lessen the gap between the "haves" and "have nots".

Two things have provided for an ever-increasing middle class since the Great Depression, narrowing the gap between the "haves" and "have nots".

  1. First is the increased levels of education among the masses.  A larger percentage are graduating from high school and pursuing additional education and training from post-secondary institutions than ever before.  Yes, I know there needs to be greater improvement in the educational system (K-12) in this country, from both public and private schools.  But it is still a fact that more people are graduating from high school and colleges than in the 1930's, 1940's, 1950's, 1960's, 1970's, 1980's, and 1990's.  This better educated workforce can then make higher incomes, for they are more qualified for jobs that demand greater skills and will pay more for the increased production these workers can provide.

  2. Second are the tax cuts at the marginal levels to ALL AMERICANS, providing greater incomes to the masses.  The Reagan cut of the early 80's and the Bush tax cuts of 2001 and 2003 have, and will, provide greater incentive for all to work harder and make more money for a simple reason:  one gets to keep a larger percentage of the after-tax income because of these tax cuts.  This movement to reduce taxes also applies to reducing taxes on businesses, allowing their profits to increase, which then allows more money for businesses to replace depreciated capital and for businesses to invest more for capital to expand production, which increases jobs for all, which in turn provides greater incomes, especially for those who did not have jobs before the business expansion.

Another false premise is the notion that if we tax those in the upper income levels at a higher percentage, they will pay more taxes than if we taxed them a lower percentage.  If that were true, why not tax everyone who makes more than $100,000, 90% of everything they make above that amount.  You and I both know why that would not work, for the explanation is as simple as the nose on your face.  Individuals, if taxed at that rate, would either quit working once they reached that income level, or they would attempt to tax-shelter much of that greater amount, or they would cheat more to evade paying the money that they had earned.  I would argue that even today, before the top rate was lowered from 39.5%, that neither Donald Trump, Ted Kennedy, John Kerry, Michael Jordan, Oprah Winfrey, or even Eminem, paid almost 40% of their income in Federal income taxes.  Yet, the myth persists that a progressive tax system raises more revenue from those in the upper income bracket.  We need to be more honest with the American people and quit playing the class warfare game on tax cuts in order to gain politically.  What would end this nonsense and make paying taxes much simpler and actually a lot more equitable (NOT EQUAL - WE DO NOT WANT THAT!) to those in the lower income levels?

THE FLAT TAX IS THE ANSWER!!!

Most recently, Steve Forbes, and there have been many others, has proposed a proportional tax that would raise the same or more revenues as the current system does, yet be more fair to those in the lower income bracket, give greater incentive for most Americans to work harder and make greater incomes, and actually tax those in the upper income brackets a higher real percentage than many are actually paying now.

My proposal (the % rate I am suggesting is an approximate rate) would be to tax earned income for a family of four earning $40,000 at 0% (basically a $10,000 credit for each dependent), and tax all earned income above $40,000 at 18%.  So if a family of four made $80,000, $40,000 would be subject to a tax rate at 18%, which would mean their total tax bill (income and social security taxes combined) would be $7,200.  Their gross tax rate would be 9% - 7,200/80,000.  The individual family of four earning $580,000 would pay $97,200 in income taxes:  their gross tax rate would be 16.8% - 97,200/580,000.  This proves to the liberal that the rich would still pay more in actual total dollars in taxes and a higher percentage of their gross income than do those who have lower incomes.

What about unearned income from investments and savings?  First, let's continue the President's plan to not tax dividends.  That argument against double taxation has been made over and over again (even old Alan Greenspan fully supports it, so I won't rehash that view).  On capital gains and income from savings plans, at this time I propose an argument that even the liberals would probably support.  All those individuals who had earned income of less than $250,000 could have up to $50,000 per year in tax free incomes from savings and investments.  The tax rate on unearned income for those who made more than $250,000 in earned income would be taxed at 18%, unless it was a capital gain which occurred from an investment that was held for three years or longer (ARTHUR LAFFER HAS PROPOSED A 0% CAPITAL GAINS TAX ON INVESTMENTS HELD FOR 3 YEARS OR LONGER).  Both tax proposals on unearned income would provide greater incentive for savings and investment and therefore would continue to provide cheap capital for business investment.  At the same time, accelerate and expand business tax credits for buying new capital and for creating jobs in the economy.

Economic growth and jobs created in our capitalistic economy occur when the individual consumer, the taxpayer, and private businesses are given greater freedom to "seek their own self interests", as Adam Smith so eloquently stated in 1776, in his book The Wealth of Nations.  The flat tax on earned income, and the tax incentive for businesses and individuals on income earned from savings and investment, will allow for economic prosperity to flourish for all.

An added benefit to this more simplistic approach to income taxes would be the ease with which most Americans could then fill out their tax form each year, probably simplifying it to a small postcard for most.  The huge IRS bureaucracy could basically be eliminated, saving money, headaches, and possible harassing government intrusion from an unchecked governmental agency.

A final advantage to this tax system goes to satisfy the rich liberal elite class in this country who demand that the RICH pay more in taxes than the poor in both percentage and real amounts.  This flat tax would accomplish this goal, for it would eliminate all deductions, loopholes, and tax shelters that people like Ted Kennedy use currently to pay very little in real percentages.

 

Copyright Copyright 2020 by Kim B. Deffenbaugh & America's Voices, Inc.  All rights reserved.
Kim B. Deffenbaugh is an educator, poet and high school guidance counselor in Indiana who recently began writing political commentary and poetry.  His work is published at www.poetsforthewar.org and on America's Voices.  You can e-mail him at kdeffenba@americasvoices.org.

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