Choose a flat tax?
by
Matt Giwer (c) 1996 <1/23>

      Hell no! The entire discussion is threatened with being diverted into debating which flat tax rather than the desirability of a flat tax. Already some are trying to make it a war between who will benefit most from which proposal. This is the entirely wrong way to look at any flat tax.
      Before I go further there is one and only one purpose of any tax system. That is to raise the money to operate the government. Any other reason is bogus, period.
      Of course the obvious question is why you should not care about which flat tax is chosen. The answer is that you will adapt your finances to minimize your tax liability regardless of which plan is chosen. It may take a few years but there will be specialists by the tens of thousands out there helping you to do it if you can't do it yourself. They will be people who used to be tax consultants and IRS agents who are no longer needed.
      If you own a home you have already adapted to having a home mortgage deduction. If that deduction goes away you will get a lower tax rate and it may not be financially a good idea for you to own your own home any longer. It will depend upon your situation.
      But do not forget this, the more deductions the higher the tax rate and the fewer deductions the lower the tax rate. Zero deductions means the lowest possible tax rate. The more deductions the higher the tax rate.
      Just up front, given the rate of home ownership in this country the "average" difference between the deduction and the tax rates will be at least 50%. Someone with better data sources can come up with a better number. So whatever the deduction might be worth to you, you can not lose more than half of it.
      But there is more. The average income in this country is around $22,000 a year. All of the plans start some place in the $30,000 to $40,000 range for the average family before the dollar of taxes are paid. What about working women? Around half work and 1.5 times 22 is 33 and that is a good place to start for the zero tax level. That means the average family is almost completely exempt from any income tax whatsoever.
      But you are not average and you can't return your four of your six children? No problem. Every plan gives a per person exemption regardless of family size.
      You don't have children and you will have to pay taxes at less than $30,000 income? If so, why in the world do you own a house if it is not for the present tax deduction? You plan to have children and you will want to buy a house? The lower tax rate without the deduction will permit you to save money faster for the down payment and when you have that house and have those children your tax threshold will increase.
      If we really care about our children having a good life and raising our grandchildren for us, that sounds very good to me.
      But there is the scare tactic that home prices will decrease because of the lack of a deduction. They probably will. And therefore your net worth on paper will decrease. Let me point out that your house has only paper worth unless you sell it. That is truly a paper value.
      But what if you planned to sell when the children left and get a smaller place? The price of that will go down also. So your net "living place" asset will not decrease in the least. The asset will only change in value relative to non-living space assets. If you rent it is like all rental prices decreasing by 10%.
      And keep in mind it isn't worth much more than at under the current deduction system. It is only a deduction which is subtracted off of gross taxable income. It is not exemption of income in the first place.
      And to the "rich should pay their fair share" plea. It is not a purpose of taxation to penalize wealth, period. But as to the deduction system, the rich and the poor are equally prohibited from sleeping under bridges. The twenty room mansion and the two room hovel are equally deductable under our present system. I fail to see the difference.
      There is a separate issue that basically rests upon the definition of "earned" income. Is investment income earned income? Or is a paycheck earned income? Our current system says that both are earned income.
      It may appear "unfair" that someone could invest in government securities and pay not income tax. That is because they are "rich." But if you had invested all your money in Piedmont Airlines so as to have to pay not taxes you would now have no income. (Apologies if Piedmont was bought out rather than folded.)
      There are dozens of companies that today appear solid which these people have invested in that are in danger of going under just as thousands of them have done in the past. Don't you wish you had invested in Apple Computers when it was first offered? Apple could go under and become worthless any time now.
      But what about those who invested in very safe things like Treasury Bills? If you have not been following the news, the current political scene has those heading for a default next month. No risk?
      Ask those who are seriously concerned about a US default about concern. That money is at risk at all times. And if it is lost the current tax system does not want to hear about it.
      But lets take the other side of it. With a lower overall tax rate the average person can start investing in these untaxed things. I agree that people may not be able to invest much. I also agree that 10% of income is a lot to almost everyone. But if one invests that over one's working life then at even savings account compound interest a person can retire and live off of only the interest payments quite easily and leave the principle to their children.
      Today it is hard to find any but the very low income paying zero taxes. The magic average person pays at least 10%. There is the free 10% to invest. And it all comes from a flat tax.
      And then the more interesting objection that is a child of our current home deduction, the home is the largest investment the average person has. Why? Solely because of the tax system.
      It may be the largest investment but is it the one with the best return on the investment? Probably not but inflation distorts most perceptions of prices.
      It is hard to get worse than bank interest rates. Those double in real dollars, not inflated dollars about every seven years to ten years. Has your house done that in real terms? By that I mean, your house may have gone up ten times in value but if an equivalent house went up ten times in value you have gained absolutely nothing. If the price of food when up ten times you have gained nothing. All of the difference was inflation.
      And another question, has your house doubled in real value every seven years? If you have only owned for 7 or 14 or 21 years you might be able to say yes. But doubling will overtake you after 21 years unless you are greatly above the national average. If at 28 years you paid $10,000 and it is worth $160,000 then you have beat the average. It has to be worth sixteen times more than you paid.
      And, as above, when you retire what are you going to do with it when every other place you might move to is also sixteen times more expensive than it was when you first bought?
      The reverse of the question is, what else increases that much and obviously my answer is a passbook savings account which is generally agreed to be about the worst you can do as an investment. So under a flat tax you would at least have the equivalent of a mortgage deduction to invest in whatever you wish. But what is so safe as the value of a home? Anyone ever caught in a housing price collapse will be happy to lecture you. But the answer is T-Bills in which any bank will be more than happy to invest your money.
      So what do you have to lose with a flat tax? If you have invested based upon a tax deduction you may have to take a year or three to invest according to the no deduction system and at the same time the lower rate will help you save towards that reinvestment. If you are the type that has more deducted than you are owed and say you can not save without it being forced you deserve to be spit upon by all sides of this discussion. Fix your own personal failings before joining into the discussion.