Flat Tax Shifts Burden to the Middle Class
Flat tax shifts burden to low- and middle-income taxpayers
November 1, 2011
The latest political rhetoric centers on the various proposals for a "flat tax," which can be used to describe any type of system that provides only one tax rate. But the U.S. system is a progressive tax system, where we ask those who can afford to support the government to pay a higher rate. We have deductions to encourage certain behavior, such as the mortgage interest deduction to encourage home ownership or the charitable deduction to encourage giving.
Texas Gov. Rick Perry is now supporting a 20 percent "flat tax," a single rate to replace the existing progressive income tax, corporate income tax, and estate tax. This was first proposed in l983 by Robert Hall and Alvin Rabushka, so there is really nothing new about it. In fact, the authors admitted that "it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people." The Institute on Taxation and Economic Policy estimates that under this plan, the richest 1 percent would have received a tax cut of over $200,000, while the bottom 95 percent would pay an average of $2,900 more in federal taxes in 2010. This means people with an income of $25,000 would end up paying $2,300 more in taxes, which is exactly what the authors of the proposal knew.
Then there is Herman Cain's 9-9-9 plan. It would replace all existing federal taxes with three new taxes: a flat 9 percent individual income tax, a flat 9 percent business tax, and a 9 percent national sales tax. Cain's plan would exempt charitable deduction and capital gains, which would benefit the wealthy as they would essentially pay nothing on their capital gains. Already, millionaires like Warren Buffet (whose income is mostly from dividends) are currently taxed at only 15 percent on their dividends, and as a result pay a lower rate than their secretaries—thanks to the Bush tax cuts. Under Cain's plan those dividends would be taxed at only a 9 percent rate.
Plus, Cain's proposal appears to tax Social Security payments at 9 percent. Under the current system, most people on Social Security do not pay any income tax on what they receive. The money contributed to Social Security was taxed at the time they made the contribution. Thus, for the elderly, this would be a major tax increase.
Furthermore, the 9-9-9 plan would introduce, for the first time, a broad-based national sales tax of 9 percent. Sales taxes or value-added taxes are very regressive, meaning that they take a larger percentage of the poor and middle-class family's income than they take of a rich family's income. Poor and middle-income families are more likely to put all of their income toward consumption. Further, Cain's plan doesn't tell you what would be subject to the sales tax. Would a home or car now cost 9 percent more?
The devil is in the details: It is easy to say, "I will be lowering your tax rate," but in order to reduce the tax rate, the revenue loss has to be made up, and someone else has to pay more taxes. The question in all of these proposals is who will pay: Are the rich paying their fair share, or are we continuing to shift the tax burden to the poor and middle class? The "flat tax" proposals would materially raise the tax burden on many low- and middle-income taxpayers, who today face little or no tax under the income tax. I don't think that is what the American public wants.
- Check out a roundup of editorial cartoons on the economy.
- Read 10 Things You Didn't Know About the Bush Tax Cuts.
- Read how Rick Perry is using the flat tax the boost his campaign.