Wednesday, April 14, 2010

The Flat Tax: A Superficial "Solution"

In recent years two proposals—the flat tax and the fair tax—have been presented to simplify the tax code and make it more "equitable". Each makes similar claims. Each is based on similar premises. And each is lacking, for neither addresses the fundamental cause of the current system’s complexity and "inequity".Today I will look at the flat tax; tomorrow I will examine the fair tax.

The flat tax proposes that income be taxed at a flat rate—less than 20 percent being the most common. All tax payers would pay this rate, regardless of income. The flat tax would eliminate all deductions, credits, and loopholes, and with it the myriad forms currently required by the Internal Revenue Service. Advocates of the flat tax generally claim five benefits to their proposal:
  • Faster economic growth
  • Simplification
  • Equity
  • Increased freedom
  • Increased economic competitiveness
On the surface, these alleged benefits certainly seem attractive. Who would be opposed to economic growth, or a simpler tax system, or increased freedom? But the flat tax will not achieve these ends, for it is founded on the same premises as the current system--your property belongs to the government.

The complexity and inequity of the tax system is not the cause of the nation’s economic ills, or the decrease in freedom, or America’s declining competitiveness in the global economy. The cause of these problems—as well as the complexity and inequity of the tax system—is the fact that government has expanded beyond its proper functions. More fundamentally, the cause is altruism--the belief that morality requires self-sacrificial service to others.

According to altruism, we have a moral duty to help others, and if we refuse to do so "voluntarily", then government may properly force us to "volunteer". Taxation is but one manifestation of altruism. Social Security, Medicare, public schools, public libraries, mass transit, and myriad other government programs are others.

When government operates on the premise of altruism--forcing individuals to sacrifice for the "public welfare"--politicians and bureaucrats become a magnet for individuals and interest groups to seeking special favors from the government. The tax code is no exception. Loopholes, special deductions, credits, and other preferential treatment in the tax code are designed to encourage/ reward certain types of behavior while discouraging/ punishing others. The result is an increasingly complex tax code that provides tax authorities with unilateral discretion to interpret and enforce that code. While removing the complexity is certainly a step in the right direction, it does not begin to address the underlying cause.

Consider a paper backing the flat tax published by The Heritage Foundation, a conservative think-tank, which stated:
There will never be a tax that is good for the economy, but the flat tax mores the system much closer to where it should be—raising the revenues that government demands, but in the least destructive and intrusive way possible.
In other words, proponents of the flat tax accept the premise that a destructive institution should be a part of society. Rather than call for its elimination, they seek to minimize its destructiveness. They cannot imagine a government support solely by voluntary contributions.

Proponents of the flat tax believe that government has a right to forcibly take our money, that everyone must pay his “fair share”. They simply want to dicker over what is “fair”. In conceding that government may take our money without our consent, proponents of the flat tax will be powerless to dispute claims that a particular percentage is not fair. They will be powerless to counter political pressures for additional credits and loopholes.

In short, by failing to address the fundamental issue, the flat tax will be left open to the same political considerations that have created our current complex and “inequitable” tax code. By failing to defend the individual's right to his property, and demanding that government be limited to the protection of that right, advocates of the flat tax have conceded morality to the statists.

Similar objections pertain to the fair tax, which I will look at tomorrow.


Mo said...

i think a flat tax can be a transitional phase to voluntary donations wouldn't you agree. Between it and the fair tax it stands as the better of the two.

But I do believe that if government spending was reduced to its proper functioning the tax system would not be an issue.

Rational Education said...

Brian, Thanks for this post on taxes that is well integrated with fundamental principles and succintly communicating the ideas with elegant simplicity.

There is a lot I could learn here!

Brian Phillips said...

Mo-- Yes, a flat tax could be used as a transition, if it were advocated that way and its advocates called for a reduction in government spending. But I haven't found them doing that.