Tax Reform for the 21st Century

I’ve been working through a meaningful discussion on taxation in America over the past few days, and my penchant for pain and political discussion brought it to the surface this afternoon at lunch with my parents.

As we sat and talked, I mentioned this possible flat/fair tax hybrid plan to both of them. As we discussed it, I got more pushback from my father on the realistic ability to get something of that magnitude passed in both houses of Congress.

Imagine this scenario: every American pays the same percentage in taxes. Madness, I know. Let me explain.

At face value, it’s unfair. A liberal asked me the other day why I felt a fair/flat tax hadn’t already passed. I replied that it was simple. I gave the following example:

  • Two families live and work in Nashville. These families both have working parents and two children in public school.
  • Family one brings in $150,000 per year. Family two brings in $50,000. This is the gross amount (before tax).
  • If the “fair/flat” tax rate is 10%, family one pays $15,000 per year and family two pays an equal share (by percentage) at $5,000 per year.
  • The problem? Family one likely lives more comfortably than family two. Giving up 10% and having $135,000 left over compared to $45,00o is a big difference.
  • This is the challenge. Family one is able to do considerably more than family two with the leftover income. It appears unfair. Why not make family one pay more? They can easily pay an additional $5,000 without a massive impact. Not the same for family two.
  • The main concern? Necessity spending. Requiring family two to pay 10% leaves them only $45,000 with which to house, clothe, feed the family. Paying 10% for family one leaves $135,000 for those same needs. Clearly family one should be able to easily meet those needs as compared to family two. In fact, they can meet their own needs at 3x the level family two could.
It is this “inequality” that has kept our country from developing some form of fair taxation. And when I use the word fair, I mean a truly fair across the board system. Not fair based on ability to purchase, but I mean fair based on the level across all taxpayers. Many opponents of a fairer/flatter tax consistently complain that this tax unfairly impacts lower classes. I have heard this argument since I read Steve Forbes’ “Flat Tax Revolution” and Neil Boortz’s “The Fair Tax” books and I realize it is a tough discussion.
So, let’s exclude necessary expenditures like:
  • Food: as in grocery spending and other, but not including restaurants, etc.
  • Shelter: rent and mortgage, but not household spending like furniture, big-screen televisions, etc.
  • Clothing: this is tougher to gauge, but it seems that an excessive clothing spend would be obvious.
  • Transportation: whether bus, bike, train, car, any spend traceable to required travel (school, work, etc.) should be excluded.
Outside of this, everything should all be taxed at 10% across the board. Equal shares pain in for all participants in the society. Anything else is unfair based on “fairness” being a mark of impartiality. Impartial means that all would be treated equally. it either means everyone pays an equal share, or we all pay the same amount. I think we can agree only one of those is possible.
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Another serious concern is that of business taxes. Businesses ought to pay the same 10% individuals must pay. Economics tell us that businesses simply pass along taxes to the customer, but I believe the perception of GE, BP, Exxon, Apple and Microsoft writing checks to the IRS like everyone else is a powerful reminder that everyone is in this together.
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One consistent talking point among conservatives is that “51% of Americans pay no taxes.” This isn’t untrue. The majority of Americans do not pay any federal taxes. In 2008, the top 1% of American taxpayers paid 38% of ALL taxes. Under this new system, there would be nearly zero Americans able to prove that 100% of personal income went to necessary expenditures. The number of taxpaying Americans would increase to almost 100%.  In a collective system like we have in America, if everyone pays into the system, we are all incentivized to take care of that system and it’s outputs. Roads, police, parks, legal systems, etc.
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The other massive challenge is getting a federal government on board with an initiative that would absolutely limit the amount of funds it could collect. I am positive this same thought gives many in DC nightmares. I haven’t figured out how to work that out yet unless we get a President that can talk directly to the American people and encourage them to require it of their legislators.
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