The What Tax?

originally published April 2, 2008

Despite U.S. Representative Paul Broun’s claims to the contrary, the flat tax scheme based on a national sales tax pushed by the Republicans is not workable, and hopefully, will never be more than an election-year issue. If it ever becomes law it would prove disastrous for the working poor and those on a fixed income. Here’s why.

The proposal’s main appeal is to fairness, the idea being that everyone regardless of income would pay the same percentage of sales taxes on each purchase. That sounds okay, but nowhere in the national discussion has anyone considered that as soon as the law is passed, individual legislators would be pressured to start writing exceptions for specific items to protect manufacturers and sellers of high-end goods like luxury yachts, designer clothes and furs, custom-built luxury cars and limos, high-end electronics like full-size home theater systems, luxury fixtures and furniture for high-end homes, jewelry, RVs, and many other things that only the wealthy can afford. These industries will collapse and cost American jobs, the lobbyists will argue, if we don’t exempt these items - the economy will collapse if we don’t. So much for fairness.

Next there’s the problem of cumulative taxation percentage. Even if the federal flat tax figure would remain constant at about 23 percent (the figure being used, give or take a few points, to argue the issue while being as nonspecific as possible), that still fails to take into account state and local taxes. With the seven-cent state and local sales tax we already have, that means a 30 percent sales tax on every purchase of every item somebody buys without counting property taxes, license fees on driver’s and sporting licenses and the like, and user fees at state parks and other public recreational sites, to name just a few. It’s anyone’s guess how current federal gasoline, tobacco and alcoholic beverage taxes would be treated under the new system. For people at the bottom that means a real tax rate of close to 40 percent, and probably more depending on lifestyle choices.

Every time you go to buy a TV set, concert tickets, an iPod, clothes, tools, food, gas, insurance, or anything else, you’ll have to figure in an extra 30 percent fixed tax cost. Rents and mortgages may even be taxed. When you buy a car you’ll have to finance the tax as part of your car loan. For example, say the car you want is $20,000 and your trade-in is worth $4,000. Your resulting note would reflect $16,000 principal plus $4,800 tax (presuming a real 30 percent sales tax rate), so the total financed amount would be $20,800 - more than the actual price of the car even without counting the interest on the note. This makes you wonder why the auto industry hasn’t come out against it - do they know it doesn’t have a chance, or have they been assured that their products will be exempted? The fairness issue comes down to what will and won’t be exempted.

That brings us to this point: It’s truly scary how quickly people can be so whipped up by anti-IRS rhetoric that they’ll accept a proposal in principle with no specific details having been stated and yet to be determined; they’re willing to “buy a pig in a poke.” Most flat tax supporters have an anti-government philosophy based on distrust of government and the political process, but are perfectly willing to let the details of the most sweeping proposed change in tax law in human history be written by legislators who are themselves the products of that same process. The IRS is obviously imperfect, and the Alternative Minimum Tax is a real problem for a lot of people, but the truth is that it’s a system that has been evolving for decades as a result of negotiations between the political parties based on trying to solve real-world problems. If we scrapped the system completely, it would probably be decades until a new system could reach anything close to an equilibrium point of fairness again.

One last point on the idea of a “prebate": flat tax proponents, in order to make the idea more palatable to low-income voters, have offered to send low-income taxpayers a check, or “prebate,” that would cover the amount of their projected federal-only yearly tax liability based on income. State and local taxes, however, aren’t covered, meaning that the poor would have to cover that extra 7 percent sales tax out of their own pockets, not to mention the other license and user fees mentioned above.  There is only one possible reason why  self-styled  “fiscally conservative” politicians, who normally don’t trust the poor to handle their own money and consequently squeal like pigs every time an antipoverty measure that would put more money into the hands of the poor is proposed, would make such a  proposal.  They know that they themselves, and their wealthy supporters, will benefit greatly and disproportionately from it.

Don’t be a sucker.  Instead of taxing incomes and wealth for the haves, this would shift the tax burden  down the economic ladder and would make it even harder for struggling families.

Bob Booth