We were told four years ago that 17 million people went to bed hungry each night. Well that was probably true. They were all on a diet. But now we’re told that 9.3 million families in this country are poverty-stricken on the basis of earning less than 3,000 dollars a year. Welfare spending [is] 10 times greater than in the dark depths of the Depression. We’re spending 45 billion dollars on welfare. Now do a little arithmetic, and you’ll find that if we divided the 45 billion dollars up equally among those 9 million poor families, we’d be able to give each family 4,600 dollars a year. And this added to their present income should eliminate poverty. Direct aid to the poor, however, is only running only about 600 dollars per family. It would seem that someplace there must be some overhead.–Ronald Regan, A Time For Choosing
So as I recently went to the Western Conservative Conference I saw there a debate between proponents for the flat income tax and a national sales tax (called the FAIR Tax) square off on the merits of their respective plans. Now I will admit that I have traditionally been in favor of something like the FAIR tax as I believe it is more ethical to tax consumption than income, but the debate I saw (in conjunction with something I recently saw on how to reform welfare) has switched me to the flat income tax. What caused this switch was that the people I saw arguing for the FAIR Tax seemed to rely almost exclusively on emotional arguments (and I have a real distrust about the word Fair) whereas the flat tax people made the central thrust of their argument about facts and realities. Also when one of the few logic based arguments made by the FAIR Tax people was that it would eliminate the IRS my rational brain stood there thinking…wait you’ll still have to have some kind of organization designed to collect tax revenue and investigate fraud (and an IRS by any other name would still smell just as rank) so I found this argument a little lacking.
But let’s get onto why I like the flat tax not just for the reasons portrayed at the conference but in general.
First off, before any liberal tries to get into this argument let me shut down their bullshit right from the get go. Be it a flat tax or the FAIR Tax, it’s going to be progressive in the sense that people who make more are going to pay more. People who pay 30% of $40,000 are paying less than people paying the same rate on $400,000. And people who are going to make more are going to spend more. So liberals BS claims about those who make more should pay more are completely invalid—it is only when you have the kind of deduction and exemption heavy system that liberals love that you find a tax system where the vast majority of the tax burden is on the back of the middle class.
Further part of the problem with the FAIR tax is that is it gives a refund to people based on their income to counter for the taxes on the first $25,000 or so under the idea that the money you need to live shouldn’t be taxed…which means that not only collecting information on sales taxes the federal government will still be collecting information on income and distributing refunds…is it just me or, despite whatever the ideal of the system is supposed to be, does this seems like it will only lead to more bureaucracy. I know that bringing such pragmatism into a discussion of two ideal situations may not be fair…but the fact is that sometimes ideals do become policy and I worry that this plan would only lead to more bureaucrats looking at more things with more ways to ruin my life.
Also the FAIR Tax, as far as I can tell will do nothing to solve the 150+ means tested programs (usually collectively known as welfare) that we have the federal government giving out…
…However the flat tax could solve these incredibly stupid systems.
So first let’s get to the flat tax and only the flat tax and what it will be.* We will switch the entire revenue gathering system of the United States over to a single income tax**. There will be no corporate tax, no tariffs, no Medicare, no social security deductions, no capital gains, no federal tax on gas or phone service or anything but income. Just a flat tax at the same rate for income. There will be no deduction for any reason other than a simple $30,000*** deduction for everyone. The tax will be set at 25% (that may seem a bit high, but trust me you’re paying more than that right now when you factor everything else in that this is getting rid of). Are $30,000 and 25% ideally the best numbers to work with? Probably not, but they’re much simpler to use and make general calculations than $31,250 and 22.4% or whatever may be the ideal economic values. So if you make $40,000 a year, you’ll deduct $30,000 and pay a tax of 25% on the remaining $10,000…meaning that your after tax take home pay is $37,5000…which is probably more than you’re taking home right now unless you have a great CPA who knows every deduction in the book…and at $40,000 you can’t afford a CPA that good. In fact at 25% with a $30,000 deduction you’d have to be making well over $100,000 before your take home pay might actually go down. Based on some very rough calculations****, this would bring in about 3.1 Trillion dollars a year in to the federal coffers (this is opposed to 2.77 Trillion brought in by federal government in 2012 from taxes, social security, fees and all other sources of revenue…so even to stay revenue neutral we could go down in the rate but 25% is so much easier to do calculations with). Most of the reason why we take in more money is that there are no more deductions for those making large quantities of cash to use and get an effective tax rate that is lower than the actual top rate. Now the rich are paying more in taxes but their money will not be getting put into places that are only there because the government wants them there. Remember every deduction isn’t really you spending money on what you want, it’s spending money on what the government wants you to spend money on which is not always the most economically beneficial area. Overall even if the take home pay of the rich is reduced slightly, their investment expenditures will in all likelihood be far, far more economically beneficial. And this is not even remotely considering the fact that with everyone below $100,000 easily taking home more money will have major economic booms (as will the elimination of all the other taxes). Just this simple change will be shoving a syringe of adrenaline into the heart of the economy which would yield growth and benefits for decades to come before we even saw a slow down (think of what we could get if we also had regulation and tort reform to accompany it).
But still this doesn’t necessarily put it as a more efficient or better system than the FAIR tax by more than degrees one way or another. Both at this point would have eliminated huge portions of bureaucracy that would look at tariff and capital gains, but the FAIR tax would have replaced at least one of these to track sales taxes (keep in mind as the FAIR tax has the refund on the first $24,000, they do have to keep track of your income so the bulk of the IRS may very well still be there albeit changed in form).
But where the flat tax has real potential is that the same data and infrastructure thathas to be collected to tax people can be used just as easily to replace Medicaid, Medicare, Social Security and all other 150+ means tested programs that have become part of the modern entitlement/welfare state.
(when you watch this remember that this was given in 1968 and the dollar figures he gives and the dollar figures I give are almost identical when adjusted for inflation)
In the works of Milton Friedman, F.A. Hayek, and Ronald Reagan you will find an idea called a negative income tax. The negative income tax says that the easiest way to solve the problem of poverty is not to give people housing, and food stamps, and SNAP and Medicaid…no the easiest way to solve the problem of people not having money is to give them money. It’s so simple only a government could be too stupid to not get it. The negative income tax works something like this. Let us say that we agree the poverty line, the line which an individual cannot live below (and I want to make clear we are looking at living, not thriving, not enjoying life…those things need to be earned…just the bare bones minimum is survival) is $12,000 dollars.So we need to make sure that everyone gets at least $12,000 even if they haven’t earned it…why because if people don’t have enough to survive then you get into situations like Les Miserables where you have to ask did he really have a choice in stealing the loaf of bread, didn’t the survival of his family—or worse history has shown over and over again that when you have large groups of people who can’t afford to live they tend to start bloody revolutions…and that doesn’t work out well for anyone. Society to function properly requires a safety net. The problem is that the modern welfare state where, when you know how to use it, you can make the equivalent of over $45,000 a year isn’t so much of a safety net to keep you from falling as it is a laziness couch that will allow you to never do anything.
But even if we just say that if you’re earning less than $12,000 we’ll make up the difference (so if you make $6,000 we’ll give the other $6,000) but anything more than that you’re on your own…well then what you will see is a lot of people not working at all and still getting their 12 grand…because the low end work you have to do for that first 12 grand is usually hard and undesirable work…but if you never earn that first $12,000 you’ll never be in a position to get a job that earns more. So what we need to come up with is a system that encourages people to keep working. So instead of $12,000 let’s look at what it takes for an individual to be in the lower middle class (which should be the goal), let’s say it’s double the $12,000 needed to survive at $24,000. Now the negative income tax works by looking at the difference between those two points (12 and 24 grand and it will pay you half of the difference). So if you make nothing you would take home the $12,000 you need to live (24,000-0/2) but if you make $12,000 then we’ll still give you $6,000 (24,000-12,000=12,000; 12,000/2=6,000) This way at every level there is always incentive to work; even though we are providing the needed funds to survive the incentive to earn more is never taken away.
And to add to this we will add an additional $6,000***** to what you get paid if you earn less than $30,000 if you have a child (this payment can only be made once per child so both parents will not be able to claim it)…because children are expensive. While this admits that children can sometimes be an unexpected accident or the result of a mistake it does not allow for the welfare abuses of the modern system which keeps paying for every new kid. You get to claim one kid and one kid alone…one time is a mistake which we can take pity. Litters are your own problem as you seem to be completely incapable figuring out what causes babies to be made and I have no patience to suffer that kind of stupidity. (In reality people aren’t that stupid they just see that more kids equals more money right now, and low and behold when you subsidize something you get more of it).
Will there be abuses? Of course! As this system will be entirely neutral on the issue of whether you’re married or not, there will be people who has one person earning income and one person claiming they have no income and getting their payment. But first I highly doubt this will be any worse than the numerous abuses of the welfare system by the poor and the egregious use of deductions by the rich that are currently going on right now. Notice also that this system takes away all current punishments that the current tax and welfare system do, which will make it more economically viable for people to get married (or at least live together) which has so many positive effects on the whole of society that when you take a step back and look at the whole, even if the abuses are worse than under the current system (which I highly doubt that could even happen) the final cost to society as a whole will be greatly reduced.
We won’t need Social Security since everyone will have a guaranteed income in their old age if they don’t have savings…we won’t need Medicaid and Medicare because everyone will have money (and getting these systems along with Obamacare out of the mess will drastically reduce costs)…we won’t need HUD because people will have money to pay rent.
And yes there will be morons who blow their monthly check on stupid things. They’ll have to live with that or not. That only further encourages people to be responsible. But yes there will be people who blow it all on the lottery, or drugs, or lobster dinners…as if people aren’t selling food stamps for cash and doing the same thing right now. Yes, any system you come up with will have idiots do stupid things with it…but in this plan and only this plan do you make it entirely their own fault and do not remove all the benefits for working.
And if everyone who makes less than $24,000 gets on this and uses their first kid to get an extra $6,000…a rough guess is that the entire system will cost 1.2 Trillion a year. **** That sounds like a lot until you realize that Social Security, Medicaid, and Medicare are 1.4 Trillion a year. So right there we’re saving $200 Billion. Now add the cost of unemployment benefits, House and Urban Development, and all the welfare and food stamp programs that we will no longer have to pay for. Now think of all the savings we’ll have because there can’t be Medicaid and Medicare fraud (the costs of which the medical industry passes onto you the paying consumer)… and that 1.2 Trillion cost is assuming that the number of people on entitlement programs stays relatively the same and doesn’t drop like a rock as it will when you add the boost to the economy that better tax policy will bring. The costs would further be lowered if, in conjunction with previous suggestions of mine, we do not consider anyone a full legal adult until the age of 26, thus making them ineligible for full benefits until that age.
As you work through in your head how the ripple effects will improve society on all levels, it becomes staggering at how needed this kind of reform is.
Now there are two things I would suggest to make this plan even more effective. The first would if in addition to all this we could pass a Constitutional Amendment that would require a 2/3rd vote in both houses to offer any kind of COLA adjustment to any of the payments made by the federal government (not just the reserve income tax part, but salaries as well), as this will prevent Congress from just placating any group by giving them more money. The second would be that if you adopted this policy that the flat tax rate and the rate paid out in the reserves income tax be linked. So as in my example if the tax rate is 25% then the payment on the difference between the lower and upper limits is 50% (100%- 25%x 2)…if the tax rate is raised to 30% then we only pay out 40% on the difference (100% -30%x2) this way if you want to increase taxes you can’t do it just so you can rob Peter to pay Paul.
The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be wholly legitimate protection against a risk common to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born. F.A. Hayek, Law, Legislation and Liberty.
Now there are still two major objections I foresee to this.
Objections 1: But I still prefer the FAIR TAX!…Fine, but as CATO Institute economists points out it’s easier to jump from a flat tax like the one I’ve shown here to sales tax than to go from the current system to what you want. I think we can all agree this is better than what we have now and it puts you in a better position to push for what you want.
Objection II: But states should be in charge of social safety nets not the Feds. Couldn’t agree more. What’s easier turning the 150+ means tested federal programs over to the states or to turn one over to them. Like the point to the FAIR Tax people above, you’re objecting to a system that would literally help your goal. Take the five steps that are in your direction and stop complaining that it’s not ten.
But, again please remember I used the numbers I used because they’re nice and round and easy for people to grasp in what is already an overly complicated blog. The actual number we would use if we ever got this far would likely be far different (while in parts of country you could survive on $12,000 a year—again survive, not thrive—you certainly couldn’t do it in New York or California and this would have to be dealt even by splitting the difference of bare minimum costs or the states will have to come up with their own internal systems). And for any plan, no matter how perfect the long term benefits there will always be people hurt during the transition. I admit this, but I think generations of prosperity are worth a little hurt now. And given that this plan fixes both the taxation and entitlement state problems with the least amount of government possible (as far as I can tell the FAIR tax only addresses one of these)
*Please keep in mind this is a very general overview. There are some very good and more extensive books on this, I’m just covering some of the broad strokes to get people thinking. Please go read these more detailed books if you want more information.
**And maybe a few fees for specific services. But these will be more to cover costs of the service than actual revenue. And that’s something that no one complains about, be they die hard capitalist to Keynes himself. If you’re getting a special service you should pay for it.
***One can easily argue that we could and should put in deductions for charity, investment, and savings. But I am keeping this out because that begins to ask questions of what is the right amount that will most benefit the economy in general, keep revenue rolling in, and keep the bureaucracy small (keep in mind every deduction creates a bureaucracy to verify it and with the power to control it). Also one must consider the danger that each new deduction, no matter how well intentioned, and even logical at the time, gives implicit cover to the next deduction and the next and the next until we’re back to the crappy system we’re at now. These are all complex issues that do need to be discussed…just not in this blog which is trying to keep this as simple as possible (and even then it’s overly long). There is also legitimate discussion for work requirements or reducing the negative income take for felons to be included, but all of this needs to be weighed against the costs and harm done by any bureaucracy needed and the harm such government power creates.
****I can show you the math and my assumptions based on census and IRS data if you really want to be bored, but trust me this is more or less in the ballpark.
***** You’ll notice that this is where I get the 30,000 deduction, $24,000 plus the $6,000 so you can theoretically have a family of three surviving but having that as no advantage over those who are working for that same 30,000 and not have to pay any taxes.