President Bush's flat tax proposal is really a tax on what people consume. It taxes money that people spend on food, clothing, household items, etc. The flat tax would apply to wages and not to income from capital or savings. It would probably have a large lower income exemption but it would slash taxes for upper income earners. Since upper income earners accumulate their wealth through dividends, capital gains, and interest, much of their income would not be taxed, lessening income to the federal government and burdening the budget. The flat tax rewards savers, making people more likely to put off the purchase of large consumer good items which would mean less consumption. It would be good for the environment but bad for someone whose job depends on consumption. Economic theory shows that when the supply of capital grows, the demand for it will be less, making it less profitable to invest.
As of now, we already have something close a flat tax. With the 2003 tax cuts, the top 400 income earners in America pay 18 cents on the dollar in federal income tax. The national average is 15 cents on the dollar of Federal income tax. Add in all other taxes, including payroll taxes, the gap closes and the rich end up paying less tax per dollar than the middle class. A wealthy person who earns all their income as capital gains and dividend would pay 15 cents on the dollar. A middle-class citizen, who paid tax through earned income, including Medicare and social security, would pay about 30 cents on the dollar. In effect, when comparing marginal utility of money, we have a flat tax in disguise.
The President wants to eliminate capital gains taxes and the estate tax, which would lessen the tax burden on the wealthy. The supply side economic theory has not worked and will not work when it applies our current economy. In America, capital is not in short supply. With half of Americans living on less than $28,000 per year, income is in short supply. President Bush's tax policy is aimed at more capital in the hands of the wealthy and not at higher incomes for those in need. Money is a stream of income to most Americans, not a pool of wealth building assets. Streaming money is taxed, while the pool of assets, which is held by a few, is not taxed. Therefore, the gap widens. The tax on the estate tax is sometimes the first and only tax for a significant portion of capital that is passed on from generation to generation, making the abolishment of the estate tax a gift to the children of the extremely wealthy.
John Kerry proposed the plan to repeal the upper income tax cuts. This is a start but much more is needed to repair our tax system. Income deferrals for executives, salaries hidden as capital gains, the alternative minimum tax creeping into middle-class tax brackets, tax loopholes for multinational companies, and special favors for special interests all need to be addressed and fixed in order to collect the proper amount of tax that would make our current system work.
I do not believe in a national sales tax because the tax rate would have to be around 25% in order for the government to obtain the amount of tax it needs to function. It would again favor the rich because they make money off compounding interest and have already reached their maximum level of consumption. It would burden the middle class with the majority of the taxes needed to sustain our current commitments. It would open up a new black market and initiate problems like fraudulent receipts that showed tax was paid when it actually was not. The seniors who saved from after tax income would be double taxed because they would now spend their money and again be taxed on what they consumed. While is sounds like a great idea, there are too many unintended consequences.
Since our federal tax system has favored the rich, the amount of income flowing into the government has decreased and would decrease even further if an all out flat tax was enacted. Government spending has increased, making matters worse. I do believe in balanced budgets. Nevertheless, I believe there are times were tax cuts aimed at the middle class are needed to jump start the economy.
You must ask yourself: What is a one percent increase in tax for the top one percent worth to you? Although some would say it would slow growth in the economy, the funds it would raise could pay for increased education, Veteran's benefits, job creation, etc. It costs this country more to borrow, cut taxes for the wealthy, and spend, than it does to tax responsibly, and spend. The forgotten factor is interest expense. Do you want to pay for it today or have your children pay for it with interest in the future?
I believe our current system would work if real reforms were put into place and fully enforced. As of now, the tax law is not being enforced because the rich can afford to fight the IRS in court and still save on tax. Also, it doesn't help that 99% of legislators don't know anything about taxes or economics. It would really help if someone would read tax law that was passed and understand what they are doing.
If you are truly interested in tax law and economics of this nation, read "perfectly legal" by david kay johnston. That breaks down our code and shows how both republicans and democrats have rigged our tax system to benefit the wealthy.