Flat Tax: Another transfer of wealth to the rich?

At first, a Federal Sales Tax to replace the Federal Income Tax sounds like an excellent idea. The idea being that the Federal Government can make the tax lower for the poor by not taxing necessities such as food; and, directing consumers to products that are better for the nation using industry targeted taxes such as green energy (e.g. 1% tax on high mpg cars vs. 20% tax on the lowest mpg cars). This would tax consumption and reward earned income and savings. The wealthy consume more, so they pay more in taxes. Sounds like a simple and tidy plan. The IRS can even concentrate on businesses only, to collect the Federal Sales Taxes and audit as necessary, rather than target the larger number of consumers.

When one starts crunching the numbers, a problem with this plan becomes apparent. In 2006, the Federal Government brought in tax revenue of 2 Trillion, 407 billion dollars. Of this, 1 Trillion and 44 billion was from the Federal Income Tax, 354 Billion from Corporate Taxes, and 1.009 Trillion from Other Taxes (e.g. FICA).

The Federal Sales Tax would need to, at minimum, replace the 1.044 Billion in Federal Income Taxes. Considering the population of the United States is 301 Million strong, and that each household has 2.1 people, this means an average household needs to fork over $7,284. Since were now using averages, we must consider that the median household income is $43,000. Considering that certain expenses like rent and food wouldn’t be taxed because that would target the poor, and that those things likely make up 40% of the median household income (e.g. 33% isn’t uncommon for housing alone), then the remaining 60% ($25,800) is to be presumed to be spent on taxable consumption. And if this is so, then the tax rate would need to be 29%. In this way, when the average consumer spent $18,516, they’ve been charged an extra $7,284 in taxes.

You’re thinking wait one minute. The rich would spend more, so the taxes could be lower to compensate for how much more they are spending. This sounds like a reasonable argument. There is only one major problem. It’s called the L-Curve (http://www.lcurve.org/). For 99% of the population, the income is under $300,000 which is still low enough that they use most of that income for consumption. This would then support the Flat Tax. However, it’s that last 1%, where the average salary is $1 million per year that the Flat Tax fails and which causes the other 99% of the population to pay for their ability to avoid the tax.

So then, you must ask, why would the one percent making $1 million a year avoid the Flat Tax. There is only so much one household can consume after which the profits go into savings and/or investments that create more wealth. And, although the stimulation of wealth is a good thing, this means the money isn’t going to pay for Government Services used by 100% of the population. This tax paying deficiency by the wealthy causes the other 99% of the population to have to pay a higher tax rate to make up for the lack of consumption by the one percent.

The Corporations pay a very low tax rate in comparison to the Households. However, if taxes are raised on the corporations, then they would then pass those costs on to the consumers. So then an argument might be made that the corporation tax should just be eliminated. Especially since it only contributes 15% of the funds. But, that would be a mistake. The current system promotes corporations to spend down the profits to avoid the higher taxes. The spending down of profits means higher wages for employees (a business expense), or investment in equipment (spurring supplier business success).

So, I find the Flat Tax idea to be appealing but in the end see it as gimmick saving one percent of the population a fortune while distributing the bill to the other 99% of the population. The Federal Tax system does need an overhaul, but this method is not the answer.