Government bureaucrats are like the carpenter who only has one tool in his tool box - a hammer. To him every problem looks like a nail. For the bureaucrats every problem can be solved by increasing taxes. However, the current tax system is filled with loopholes and as such is a maze of hidden breaks for the wealthier citizens since the lower class has no loopholes. This doesn't mean that the wealthiest don't pay taxes. However, due to these loopholes there is great disparity in the "Effective Rate". For example, according to the Tax Policy institute households earning more than $1 million pay 29% of their income while households making $50 to $75,000 pay only 15%. According to the IRS 1,500 households making more than $1 million a year paid no Federal income tax in 2009. But that is out of 238,000 families or less than 1/2 of 1%. However, unencumbered by facts, Obama wants to increase the tax rate for the wealthy on top of the Government spending increases that will already result in increases to everyone.
There is much talk on the other side now of a "Fair Tax" especially from Herman Cain. In order to understand this better, I recently read "The Return to Prosperity" by Arthur Laffer one of the leading economists in the country. Laffer’s key point is that a Fair Tax would broaden the tax base increase revenue and be much more transparent. Here is a brief recap of what I took away from this:
- Laffer proposes a Flat Tax on:
- Personal Income - with very minimum deductions such as mortgage payments and charitable contributions.
- Business Tax - a flat tax on income that does not include taxes on goods purchased from other companies.
- NO PERSONAL SALES TAX - unlike Cain's 999.
- In analyzing data from 2007 Laffer used a 13% Flat Tax when using the targeted revenue requirement (at the time) of $2.4 Trillion.
- However, the Flat Tax Rate is a political decision that would be based on the size of the Government budget - that is the bad news.
- So, in order to calculate a Flat Tax Rate we would need to have a "Complete" Federal Budget that included Medicare, Social Security, and Wars etc. It would have to be honest and transparent with serious measurement of the Executive and Legislative branches of government.
- The good news (in my opinion) is that a Flat Tax Rate would also be transparent. (Rate X Income = Tax) and we would be able to measure bureaucratic performance based on the rate.
- The result "could be" an electorate and their representatives that would place more focus on the size and costs of the Federal Government.
- If we were to seriously consider a Flat Tax we should first:
- Eliminate Departments that are not required by the Constitution.
- Eliminate redundant Agencies (See Senator Coburn's recommendations).
- Work to eliminate waste and improve productivity in the remaining Departments.
In doing this we would by default be focusing on Government Spending which is the real culprit. We would begin with the question: "How much of my income do I want the Federal Government to take"?
It also seems like the same approach could be applied to State Governments (especially in Illinois).
I've tried to present the highlights of a Fair Tax System however, like any other there are details to be worked out. If you’re interested in this approach, Laffer presents many tables to illustrate his approach and calculations and it is an easy read.
God Save the Republic!
