Tax Proposals

The Bush administration has declared that Tax Code revision is a high priority of the second administration. Many Tax Proposals are being advanced, and they will be examined here. The two main Proposals are a National Sales tax, and a Flat Income tax. A third Proposal is for a 'Value-added' tax. Each possesses benefits and losses, most Advocates though, do not see the potential losses which can be huge. Statement of the benefits and gains must be made, and results clarified, before relevant discussion can be conducted.

The National Sales tax would adversely impact Consumption, if it was to be sufficiently high to produce enough revenue to replace the current progressive Income Tax system. The rates of Sales Tax would have to exceed Eight percent, on top of already high State Sales taxes, in order to raise sufficient revenues. The reason it would need to be this high stands that wealthy households do not spend an equivalent percentage of their incomes, as do Poor houselholds. The constriction of Consumer Dollars in Poor households would vastly exceed all the increase in Consumer Dollars gained by all previous Bush Tax Cuts. Actual reduction of Consumption could exceed 20% of the current total Consumption, destroying Business Profits and costing ten million Jobs.

The 'Value-added' Tax adds additional cost to Business operations at every stage of Production. Actual Consumer prices could rise in excess of 20%, with a 3% 'Value-added' tax rate. The application of the Tax is even worse than the National Sales tax, and would probably cost 15 million Jobs.

The Flat Income Tax actually becomes a regressive tax system, if any Tax credits or exemptions are allowed (this means I.R.A.s, 401ks, Personal Savings accounts, Personal health accounts, mortgages credits, etc.). The reason for this is the Poor do not have the ability to save the same percentage of their Income as do wealthy households, and Poor households pay a higher percentage of their Income as tax. The mortgage credits are equally bad, as Poor households cannot afford the largesse of mortgage payments left deductible. Middle-Class and wealthy individuals would reject the Flat Tax, if they lose these tax credits and exemptions, but they should not be so hasty.

A second failure of the Flat Income Tax lies in the differentiation of types of Income. Effective tax rates insist all Income be considered taxable income; i.e., Capital Gains, Interest, Rents, Business Profits, Corporate Income, and Royalties must all be considered entity income, and taxed at the same rate. This is the only method to maintain effective revenues while overall reducing the impact of tax placement. The Middle-Class and Wealthy would reject such taxation, because they held hope of savings over half their real tax payments, by alteration of the Tax Code. This is an unrealizable goal. They might reduce their real tax burden by around 20%, by proper introduction of tax rates.

The primary element is to make All subject to the tax. This means Poor households also pay their share of the tax. This is considered excess burden, unless you intergrate SS taxes into the Flat Tax. Provision will simply state individuals will be taxed at the determined flat rate, all funds entering the SS Fund until a maximum level is reached. Remaining tax revenues revert to the General Budget. Every Taxpayer gets the same maximum payment, so the SS Fund gets added income from Corporations and Business concerns. Business and Corporations will not get Investment credits, but will benefit from reduced tax rates. The necessary tax revenues will flow into Government coffers, but more equitable tax placement will reduce tax impact and enhance economic performance. The Flat Income Tax is the way to go, and the Consumption and 'Value-added' taxes will destroy economic performance and restrict Standards of Living. The Flat Tax, though, must not be regressive. lgl