Category | Op Ed

Flat tax now

Published on October 26, 2009 by Justin Hayes

America desperately needs a new tax code. The U.S. Constitution can fit in my pocket, while the U.S. tax code is more than 60,000 pages long and counting. With so many deductions, rules, compliances and other arbitrary mumbo jumbo, the IRS could essentially arrest anyone for violating the tax code; but then where would they get their revenue?

Besides its complex and lengthy regulations, our progressive tax code is simply not fair. The top 10 percent of income earners in this country carry the burden for about 71.22 percent of the income taxes as of July 2009 according to the Tax Foundation. The top 10 percent of income earners include those who make $113,018 or more annually. These are the productive members of society who create jobs and keep the economy running, yet they are forced, under this tax code, to bear the weight for more than three-quarters of the taxes collected in the U.S.

We cannot expect to have a productive economy under this burdensome tax code. Many people demonize tax cuts, especially on high-income earners, but there are substantial benefits for reducing tax rates. Most of these people are small business owners, which means that a tax cut could help them hire more employees, invest in new capital to expand, increase the wages of current employees, and/or decrease the costs of their products to consumers.

There are plenty of alternatives out there. In Georgia, especially, it is hard to have a conversation about taxes without someone mentioning the FairTax. For those who don’t know, this is a plan that would eliminate the income tax and replace it with a national retail sales tax of about 23 percent on all new goods and services. This is actually a good plan, but a cumbersome one to pass. Because the FairTax requires that the 16th Amendment be repealed,
it would have to receive approval by a two-thirds majority in both the House and the Senate as well as receive ratification by three-fourths (38 out of 50) of the state legislatures.

The most practical alternative to the current tax code would be the adoption of a flat tax.  Under a flat tax plan proposed by economist Dr. Arthur Laffer, Social Security, corporate profit, capital gains, estate and gift taxes would all be eliminated. These would be replaced by two flat tax rates of 12.1 percent. One would be on businesses and the other would be on personal income. This rate would also be revenue neutral for the government’s budget according to Laffer’s study. Such a low rate would also create little incentive to evade the tax, unlike our current system.

The Laffer plan retains mortgage interest deduction, charitable contribution deduction and some Social Security Income deductions. It also includes a tax credit for rental expenses to benefit lower-income taxpayers who rent rather than own a home. This would discourage some people from falling into sub-prime mortgage traps and spending beyond their means on housing.

Currently, around 24 countries have flat taxes. Even former communist Russia moved from a top tax rate of 50 percent to a flat tax of only 13 percent in 2001. Since then, the country has experienced greater growth and more tax revenue. Many of its former Iron Curtain neighbors also have flat taxes such as Latvia, Lithuania, Georgia and the Ukraine. Why hasn’t the U. S. jumped on board?

We haven’t made any effort to change our tax code because the politicians in Washington like control. It is not about raising revenue to pay for public expenses. It is about redistributing wealth and regulating behavior. There are tax breaks for homebuyers, giving an incentive for home ownership, which helped cause the housing bubble. On the other end, we are taxed for saving money while one of the major problems with our economy is that we don’t save enough.

Many of our economic problems could be solved if the politicians would stop tinkering and experimenting with our spending behavior. According to the framework of the tax code, Americans just aren’t smart enough to make wise decisions. Yet, at the same time, we have bureaucrats spending $1.8 million for swine odor and manure management research in Ames, Iowa. That money could have been used for a million other, more effective things, but who are we to decide? If we can free up the economy’s movers and shakers, the economy will grow and so will our freedom.

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