Why a Flat Tax is a Horrific, Immoral Idea

It always amazes me when I’m listening to talk radio and I hear these whiny right wingers say, “why can’t we have a flat tax—it’s not fair, it’s not fair, it’s not fair!  We can’t tax the producers more!”  The notion in and of itself is flat ass wrong, but the part that amazes me is that it seems like a lot of Democrats can’t even explain why.  Don’t kid yourselves—the flat tax is a horrible idea, because where a progressive tax is both fair and reasonable, a flat tax is inherently unfair, immoral, and would only exacerbate the yawning gap between the richest 1% in this country and everyone else.

First, let’s just deal with the basic issue of fairness.  Flat tax proponents argue that it isn’t fair to tax a dollar earned by person A more than a dollar earned by person B, and on the face of it, that does seem reasonable.  That is, of course, until you actually pay attention to the basic fact that this doesn’t happen.  A millionaire and a person who makes $50,000 a year, pay the exact same rate up to $50,000, it’s just that the millionaire is going to pay taxes on his $50,001st dollar, and every dollar after that, with an increasing percentage when he reaches certain income thresholds.  But this doesn’t change the fact that for every dollar we earn, every American is taxed exactly the same rate, whether it’s dollar 1, 5, 50,000, or 1 million.  At least this is true theoretically, until you account for all the loopholes in the tax code, which tend to benefit the rich far more than the poor, if only for the fact that the rich can afford to hire accountants.

Second, there are two basic reasons a progressive tax system makes sense: 1) the more money you make, the more you inherently benefit from government activities, and 2) the less money you make, the less you can afford to pay taxes.

The first reason I’ve explained before, but it won’t hurt to do so again.  A millionaire stands to gain a lot more from government activities than does someone who makes $50,000 a year.  The police and fire that taxes pay for protect property equally, but a millionaire’s home and possessions are likely worth a lot more than some peon making 50K, so in this sense they benefit much more from this protection.  Similarly, a millionaire’s business benefits from a trained, educated workforce; that same police and fire protection; roads, rail, and other transportation mechanisms; and if it’s an international business, they may receive military protection as well.  A millionaire’s business may also be eligible to win government contracts, or receive subsidies or tax breaks from the government.  Our peon, in comparison, benefits much less on all of these accounts, if for no other reason than they own and operate much less.  Therefore, a tax rate that increases as income increases makes sense, because the people that make the highest salaries benefit from government activities the most.

The second reason is fairly simple: people that don’t make very much money can’t afford to pay taxes, or to put it another way, taxing people who can barely afford clothes, food, and a roof over their head, is immoral.  Remember, we’re only talking about people who are working, because if you don’t have a job, you aren’t being taxed, so the whole Republican line that if you’re poor you don’t have a job, or aren’t working hard enough, doesn’t fly.  There are a lot of people that work 40+ hours a week at jobs that are incredibly taxing, and they’re still barely able to climb above the poverty line.  They are called the working poor, and our country is full of them.

In this vein, Republicans are often heard complaining that some 50% of Americans don’t pay any taxes, but that is only because those people are so poor that they don’t even make enough money to enter the first income bracket, and in any case, taxing the poorest Americans wouldn’t raise much revenue anyway.  By imposing a flat tax, we would be taxing people in poverty at the same rate as millionaires; does that really seem like a good, or moral idea?

Republicans also like to say that 20% of taxpayers pay 80% of the taxes, but again, that is simply a reflection of the fact that we live in a society where there is a massive inequality in the distribution of wealth.  Even so, a flat tax wouldn’t change this dynamic.

Consider a situation where there is a total of $10 split among 5 people, with each person representing a fifth of U.S. society.  The richest person (top 20%) would get about $8.35, the second richest would get $1.20, the middle would get 42 cents, the second poorest would get 2 cents, and the poorest person would get 1 cent.  Now say we assess all parties with a tax of 20%.  We get $1.67 from the rich guy, 24 cents from the second richest, about 8 cents from the middle, and a total of .6 cents from the poorest two.  So even if we used a flat tax for wealth, the rich would still pay 83% of the nation’s taxes—not because they are being taxed so unfairly, but because they have 83% of the wealth

This graph and corresponding information found at: http://pps.sagepub.com/content/6/1/9

Granted, the numbers I used here represent wealth, not income, but I did so to make a point: wealth inequality is massive in this country, and obviously, lowering taxes on the top 1% isn’t going to reverse that trend.  Moreover, it should be clear to everyone that the conservative idea that wealth somehow trickles down from rich to poor, is not only wrong—both philosophically and statistically—but violates a basic dynamic of capitalist economics: demand, not supply, is what creates opportunity for entrepreneurs and businesses.  In other words, demand creates jobs.

Here’s an example: someone created the phone app/game “Angry Birds.”  The game became hugely popular, and as demand for it grew, other tertiary enterprises grew as well: companies started selling T-shirts, toy birds, stuffed animals, etc., and advertisers were able to reference the game to connect with consumers in ads for other products.  Yes, initially there is an activation cost that is borne by the supplier (in this case the creator of the game), but what that creator did was fill a void in demand—people have extra time and people have phones they can use to entertain themselves with during that time, therefore, by creating a mindless little game people could play on their phones, the creator was filling an unstated, but massive demand for a certain type of entertainment.

But what if no one has any money with which to buy phones?  What if they can’t pay the subscription cost for their network?  What if they don’t have any leisure time to sit on their phones and play “Angry Birds?”  Suddenly, the outlook for the entrepreneur doesn’t look so good—sure, he has an idea for a great product, but no one can afford to buy it—there’s no demand.

What I’ve described is the problem with supply side/Republican economics: suppliers can have all the money in the world with which to invest in research and development and in the creation of new products, but it doesn’t make a damn bit of difference if no one can afford to buy those products.  It is precisely for this reason that many of America’s largest corporations are just sitting on massive piles of liquid assets i.e. cash.  They have plenty of money to boost production and to sell more products, but the consumer is gone.  There’s no demand.

In the end, there is only one way to reverse the trend—we have to tax the rich more, as well as the largest corporations, in effect saying: either you do something with this money to invest in your company, which will produce jobs, or the government will take some of it so that it can stimulate the economy by building roads, employing teachers, reconfiguring the electrical grid, etc., which will inject that money back into the economy where it will create demand.  We also need to pay workers more—a living wage would be a good place to start.  Surely the banks can afford to pay their tellers more than $12 an hour, but they won’t do so voluntarily.  Surely Target can afford to pay its employees more than minimum wage, but it won’t do so volunantarily.

I guess the point is, we have to somehow get more money into the hands of consumers.  This doesn’t mean you can’t be rich, or that we should tax the living daylights out of those who are successful.  What it does mean is that to have a vibrant economy, we have to have a large base of middle class consumers who can afford to buy the products that businesses produce.

The plain fact is that nothing the Republicans are proposing to do is going to help in this regard.  Quite the opposite, in fact; ideas like a flat tax, curtailing Social Security and Medicare, cutting services for the poor, and attacking unions and public employees like teachers, fire fighters, and police officers, will take more money out of the hands of consumers, creating a worse climate for business and job growth.  By proposing such policies, Republicans might as well say, “let the economic free fall continue.”

About The Author: Jay Scott

Comments

  • Reply HITMAN

    “A millionaire stands to gain a lot more from government activities than does someone who makes $50,000 a year. The police and fire that taxes pay for protect property equally, but a millionaire’s home and possessions are likely worth a lot more than some peon making 50K, so in this sense they benefit much more from this protection.”
    No in real terms, the larger your estate and income, the more you pay in taxes, much more than middle class, so a millionaire is paying more in taxes than he gets in return. Say if this millionaire chooses to hire private security instead of paying taxes and using police – his bill would be much lower.

    “Similarly, a millionaire’s business benefits from a trained, educated workforce; that same police and fire protection; roads, rail, and other transportation mechanisms; and if it’s an international business, they may receive military protection as well.”
    All these are available to everyone else too. Everyone has equal opportunity. So if someone is a millionaire, he must have done something differently than a “peon”.

    “The second reason is fairly simple: people that don’t make very much money can’t afford to pay taxes, or to put it another way, taxing people who can barely afford clothes, food, and a roof over their head, is immoral.”
    No one is advocating higher taxes on the poor. Taxation is a liberal invention anyway, including the highly regressive payroll taxes.

    “demand, not supply, is what creates opportunity for entrepreneurs and businesses. In other words, demand creates jobs.”
    Economic illiteracy at it’s finest. Demand is infinite. I’ll explain:

    “Here’s an example: someone created the phone app/game “Angry Birds”
    Self refuted your own argument from the premise. Exactly someone created the game first, then came the demand. Keynesian demand model you’re proposing is only short-term, in the long term, supply drives demand. That is one of the most well tested concepts in economics. Enlighten me, how much demand was there for cell phones 30 years ago?
    You think people in Bangladesh is poor because they have no demand? They are poor because they have no purchasing power. Guess where purchasing power comes from – production ie supply.

    “But what if no one has any money with which to buy phones?”
    Maybe if you liberals would stop impeding markets, people would have more jobs.

    “It is precisely for this reason that many of America’s largest corporations are just sitting on massive piles of liquid assets i.e. cash.”
    What does that even mean? They are stuffing it in their pillows and sitting on it?
    http://www.youtube.com/watch?v=Wi-D24oCa10

    “In the end, there is only one way to reverse the trend—we have to tax the rich more, as well as the largest corporations, in effect saying: either you do something with this money to invest in your company, which will produce jobs, or the government will take some of it so that it can stimulate the economy by building roads, employing teachers, reconfiguring the electrical grid, etc., which will inject that money back into the economy where it will create demand.”
    Well let’s look at your theory. First off how much would you like to tax the rich? If you combine, federal, state and local, the rich are paying more than 50%.
    Why stop there? If your theory is correct, we should tax them 100%, or close to it. We will have utopia in no time.
    And why just have govt build roads and electric grids? Let’s have the govt build cars, cell phones, tv, grow food. This is after all the conclusion from YOUR logic. Any reason why we shouldn’t?

    Let’s have a broader look at your theory. So you want the govt to tax the money out of the private sector, funnel it through federal bureaucracy, only to trickle it back into the private sector in the form of roads? How much of the money that was initially taxed do you think will actually make it back into these projects? In other words, what is the EFFICIENCY? Do you have any idea what the efficiency of govt is? Obviously not, or you wouldn’t be a liberal.

    Let me give you a simple example. In 126 federal anti-poverty and welfare programs, combined with state and local, the government spends $61,830 on per family of 3 below the poverty line. Except poverty line for family of 3 is $19,090. Now if you can do simple math the money is obviously not going to the poor. That’s because it’s a fallacy to equate higher taxes with money to poor. Because there is a middle man called government and it has a high propensity to waste.

    Examples: Federal govt loses $100 billion in duplicate programs, $90 billion in Medicare & Medicaid fraud etc. Senator Coburn just released his annual waste report (http://www.coburn.senate.gov/public//index.cfm?a=Files.Serve&File_id=b7b23f66-2d60-4d5a-8bc5-8522c7e1a40e)
    http://marathonpundit.blogspot.com/2010/02/stimulus-waste-15-notable-sinkholes.html
    Why can the govt afford to waste to $500,000 for shrimp on a treadmill and $325,000 for a robot squirrel? Because it’s not THEIR money. They are spending someone else’s money. There is not INCENTIVE to be productive or efficient. Can you liberals understand than simple concept?

    ” living wage would be a good place to start. Surely the banks can afford to pay their tellers more than $12 an hour, but they won’t do so voluntarily. Surely Target can afford to pay its employees more than minimum wage, but it won’t do so volunantarily”
    So raise the minimum wage then? So why not raise it to $100/hr? Or $1000/hr?

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