FAIR VS FLAT AND WHERE WE’RE AT

Over the past two weeks I have done my best to explain the dire need in repealing our current tax code in its entirety. It violates the Constitution as it stood before the passage of the 16th Amendment and the amendment itself, and the unlimited power it grants, violates the spirit of the document it inhabits. Understanding that no mere tweaking of the current code will suffice it would now be necessary to discuss what method of taxation should replace it when we hopefully move on. There are two main alternatives to the current tax code discussed on a national level. One is the FairTax and the other is a flat tax. For the purposes of this particular article we will examine the flat tax plan released by Heritage Foundation this past December called the New Flat Tax.

As the FairTax has enjoyed quite a bit of discussion and examination on this website it is only fair to examine the New Flat Tax first. It is a flat tax rate of 28% on income. It repeals the death tax, payroll taxes, and all excises not dedicated to a trust fund. It is designed to be revenue neutral, it has one flat rate, two credits and three deductions. It caps the rate of taxation to 18.5% of GDP in an attempt to alleviate the stress of additional taxes down the line.

The New Flat Tax, as stated, does have two credits and three deductions within it. One credit is a $3,000 credit for purchases of health care insurance and the other is the existing Earned Income Credit. The three deductions are for higher education costs, charitable contributions, and an optional home mortgage interest deduction. Reading further through the description of the plan there exists an additional credit for research and experimentation. It is merely the continuation of the Alternative Simplified Credit that we have today and not counted with the credits above because it is not available to everyone.

After a thorough examination of the idea it becomes increasingly clear that it does nothing to solve the underlying problems of an income tax. Not only does the Earned Income Tax Credit feed directly into the class warfare debates that continue to mar Washington D.C. it violates the purpose of a flat tax itself. This New Flat Tax also makes the mistake of taxing corporations that will only lead to those same costs being passed down to the consumer in a variety of ways. All it amounts to is a reduction of 7% of the current corporate tax rate. While a 7% reduction is nothing to ignore it loses its luster when realized that we currently operate at a crippling 35% rate which is the highest in the industrialized world. The New Flat Tax plan would still leave us 3% above China and the UK but at the exact same level as Mexico. Most interestingly about the corporate tax level in this New Flat Tax plan is that it does not seem confident that it truly is good for business. For instance it gives business ten years to continue under our current system. In fact, the year after the New Flat Tax is passed the corporate tax rate will still remain at the punitive 35% level. In order not to grant certain companies “tax windfalls” by removing the burdens that they currently strive under the New Flat Tax will decrease the corporate income tax by 1% per year until it coincides with the 28% level that individuals pay. Yes, the last thing we want is the removal of an incredibly burdensome tax code to lead to windfalls in a paining economy….

One might ask how keeping the earned income tax credit could work to equalize a tax code that has removed any and all payroll taxes. The final sentence is the key to understanding this and many other questions surrounding the New Flat Tax. It reads as thus,

“Finally, saving out of either capital income or labor income is tax exempt under the New Flat Tax—but tax is levied on all capital income used for consumption. Thus, upper-income citizens who spend much of their income generated from their past saving will pay a large amount of tax.”

There in black and white is the problem with any tax code that is interested primarily with income. Even a supposed flat tax, new and improved or otherwise, will devolve into class warfare. The same rules espoused above apply to any gift or estate (read death) tax. The passing of such money from one hand into another is not taxed, but the use of that money during consumption is taxed. All savings are deducted from income but are taxed as spent.

The inherent problems should be easily identifiable. Any tax concerned with income will never be flat and if truly flattened will not stay that way for long. The cap of 18.5% is a politically astute tool to keep politicians from easily tinkering with the system away from prying eyes until the cap is removed. One congress cannot constrain another and if the cap becomes a roadblock to congressional authority then it will be removed. Our constitution has only and specifically eighteen enumerated powers given to congress. It does not take an expert political scientist to see that congress has taken upon itself far more than its eighteen appointed tasks to the detriment of the states and people whose control was taken from them. As long as the 16th Amendment remains our government has the legal authority to tax with unlimited access.

This New Flat Tax participates in the same class warfare sphere that has consumed our current code and it is also politically disingenuous. To say that it encourages investment without removing the Capital Gains Tax or to claim that it repeals the death tax without allowing you to spend any money received is tantamount to a lie. Shifting the burden is not removing it, renaming an unpopular political practice does not make it likeable. This New Flat Tax also does nothing to the egregious affront to religious liberty found in the tax code. By classifying the church to a tax exempt charitable status gives the government the right to regulate its speech nullifying in part the free exercise clause of the First Amendment.

The FairTax on the other hand solves many of the problems highlighted by the New Flat Tax. It is a 23% sales tax that repeals any and all federal taxes and the authority behind them, the 16th Amendment. It restores us to constitutional first principles and treats all American citizens equally under the law. It shares the same exemption of higher education costs because it views a higher education as an investment in human capital; for the same reason there is no Capital Gains tax. It ensures the viability of the Social Security system by placing all of the collected money in a general fund allowing the government to fund priorities first including promises already kept. It increases the transparency of government by setting all Americans in a single class, set against any increase in taxes by the government. It does not use an arbitrary designation of GDP as a cap in tax revenue, but only the watchful eyes of 311 million Americans who would notice a single change to the tax code. It removes the class war inhabiting the tax debate allowing congress to more efficiently do its business. It allows American businesses the freedom that comes with a 0% tax rate that will serve as an open invitation to any international competitor ready to reduce the cost of doing business and to access one of the most highly trained workforces this world has seen. The FairTax does not slowly implement itself over the course of a decade; it removes the antiquated framework we currently deal with and replaces it with a simple, transparent, and fair system.

In the 1912 presidential election, the American voter did not have a choice. All of the major candidates supported an income tax. Today we are given an opportunity; tax reform has become an increasingly popular term and shows that people are ready to see a change up to the current system. We can choose to reset ourselves to the system of 1913, or we can carve out a new path. One that takes the government out from behind the pulpit, one that frees businesses to create the jobs we need, one that treats all Americans equally, and one that does not pander to those interested in dictating to us how our money is spent. It seems that the New Flat Tax has gone the way of New Coke. The only problem is that “Classic Tax” is not popular either. In a free market people vote with their wallets, in the free market of ideas people vote with their voice. Support the FairTax, there really is no other option.

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