Tax Plans in America: A Look at the Flat Tax [DRAFT]
There are very few, if anyone, in the United States who will claim that they are undertaxed. To complain about tax burdens is as American as apple pie. There seems to be as many proposed tax solutions as there are complaints about taxes. Like many, we at Prospering in America have a proposal to alleviate the federal income tax burden on a vast majority of Americans.
Our plan is actually a return to an older plan and tax distribution. In fact, it is an adaptation of a plan adopted by the Republican Party. In the 1953 tax year the median household income was $4,233. That means have of all American households made more and half made less. In that year, the personal exemption was $600. At that amount, a family of four deducted $2400 its taxable income, or 57% of a typical family’s income was exempted from taxation as a result of the personal exemption alone. There were of course standardized or itemized deductions as well.
The PIA tax plan thus proposes an increase in the personal exemption from the current $3050 to $6000 and that the exemption be indexed to inflation. In 2003, median household income in the United States was approximately $44,000. A family of four would be able to deduct $24,000, or about 57%, of its income from federal taxation. The family would also have standardized or itemized deductions. A family of four taking a standardized deduction of $9500 and the PIA personal exemption would have a taxable income of $10,500 and would pay a tax of $1,221. Under the current Bush Administration tax policy that same family would pay $2,991. (For the tax forms that are the basis of these calculations, check out http://www.irs.gov/.)
This would, of course, mean a dramatic reduction in federal revenue that would need to be recovered. (The reasons follow in the discussion of the flat tax.) The first action would be to rescind the Bush Tax cuts and initiate tax increases on those with the greatest ability to pay. This is in line with the ideas of Adam Smith, author of The Wealth of Nations, who wrote “the subjects of every state ought to contribute towards the support of government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” (Adam Smith, The Wealth of Nations, edited by Robert Reich, p. 888)
Smith argues, as we do, that progressive taxation is the most just system. In 1953, for every dollar paid by individuals, corporations paid seventy-five cents. In 2003, corporations paid sixteen cents for each dollar paid by individuals. If the ratio of 1953 had been in existence in 2003, the federal government would have collected an additional $470 billion dollars. The deficit, excluding Social Security, would have been $120 billion rather than $591 billion. Including the Social Security surplus, the federal government would have run a budget surplus of between $95 and $100 billion. (Note: For information on the history of tax distribution, see Donald L. Barlett and James B. Steele, America: Who Pays the Taxes, 1994 and for information on current taxes and spending see The World Almanac or The New York Times Almanac.)
In this light, let’s consider the flat tax. Let’s begin by noting that the federal government ran a reported deficit of $374 billion in fiscal year 2003 (FY2003). That deficit is a very misleading number, however. It includes the Social Security surplus of about $218 billion. The purpose of paying the additional funds into a pay as you go system is to generate a surplus that will guarantee continued payment of benefits to the baby boom generation. The great deceit of federal government financing dating back at least twenty years and in which both parties participated is that the surplus in Social Security is being used to buy government bonds and to disguise the extent of the federal deficit. The real deficit is $592 billion.
As you can already see, the PIA tax plan – a return to historic patterns of tax collection would significantly reduce the tax burden on millions of Americans and reduce the size of the deficit. What about a flat tax?
The federal government currently collects, excluding Social Security, a total of $1,056, 407,000,000. That is a little over one trillion dollars to pay for everything outside of Social Security. Individual income tax represents about 75% of that total, or $789,972,000,000. If the flat tax collected the same amount of money as the current income tax, the flat tax rate would have to be 9%. We arrived at that figure by taking the current income tax collected and determined that it was about 9% of the total national income of a little over $8.9 trillion.
Nine percent as a flat tax would have to be applied to all income in order to collect the same amount of money. Therefore, in order to be revenue neutral, our family of four making a median annual income of $44,000 would have no personal exemptions and no deductions. Under a flat tax scheme that was revenue neutral that family would pay a tax of $3960. This is even worse than the Bush plan where this family has to pay $2,991 and much worse than the PIA plan where the family would have to pay $1,221.
Let’s assume that the deductions and exemptions remain. Of course, in order to remain revenue neutral, any deductions and exemptions would have to be made up in an increased rate of taxation in order not to increase the deficit. Assuming that the deductions and exemptions remain at their current level of approximately 50% of income for a family of four making the median income of $44,000, the flat rate would have to go up by that amount to be revenue neutral, or from 9% to 13.5%.
Under the flat tax with deductions and exemptions, our family would pay $3010.50 under the flat tax. That is an increase of a little over $100 from the current Bush plan and an increase of almost $1,790 from the PIA plan. And remember, the PIA plan reduces the federal deficit by $470 billion while the flat tax only keeps the deficit at $592 billion.
In order for the flat tax to close the deficit as the PIA plan does, the flat tax would have to increase dramatically. To balance the budget, the flat tax without exemptions and deductions would have to increase by from 9% to 16%. Under a flat tax without exemptions and deductions, the tax burden for our family of four would be $7260. The flat tax rate with deductions and exemptions would go up from 16% to 24% and the tax burden for our family of four would be $5352. It couldn’t be clearer that a flat tax will flatten your wallet.
At this point, many are probably asking why does he insist that the plan be revenue neutral? Let’s just cut federal spending to match revenue. Recall, that the federal government collects about $790 billion in income tax. But where does the government spend its money?
The federal government spends $324,634,000,000 (that $324 plus billion) on interest on the public debt. It spends an additional $449 billion on the military (including civilian expenses) and an additional $58.3 billion was spent by the Veteran’s Administration. The Department of Homeland Security spent $36 billion. Throw in the $10.3 it costs to run the judiciary, Congress and the Executive Office and the federal government has spent $878 billion, or what was collected from income tax ($790 billion), from excise taxes ($67.1 billion) and tariffs and customs ($20 billion).
We don’t have much of a government at this point and we haven’t taken care of our nuclear weapons. So we need the Energy Department at $19.5 billion and we should have the basic Departments that our first constitutional government had under George Washington. In FY2003, the Treasury Department spent $50 billion, the Justice Department spent $21.5 billion, and the State Department spent $11 billion. (The Postal Service was the other federal department in 1789 but is now not part of the federal budget process.) Our running total of federal expenditures is now $980 billion.
We are well on our way to spending the $1.056 trillion collected in taxes (again excluding Social Security) and we have built no roads; maintained no ports; built no airports or in any way provided for the safety and security of air travel once the planes are in the air; paid no unemployment insurance; not regulated nuclear power plants; paid no food stamps; provided no housing; provided no agricultural subsidies; hired not one bookkeeper; accountants or auditors to keep and monitor the government’s books; no federal support for local education; not paid for the National Institutes of Health or the Centers for Disease Control; no EPA; no NASA.
Here are all the remaining federal expenditures in billions (I used The World Almanac 2004 for its ease of use. If you need painstaking details check out the reports of the Office of Management and Budget at http://www.whitehouse.gov/omb/budget/fy2003/):
Even if all these agencies and services were eliminated on the federal level, the budget deficit would still remain. The PIA tax plan pays to provide these services while cutting taxes for millions of American families. The flat tax would eliminate many of these services and raise taxes on those same families by thousands of dollars a year. Americans would pay more and get less under a flat tax plan.
Even if these agencies were eliminated on the federal level, many of the services and funds would have to be supplied by local and state government. That would only mean a shifting of tax burdens from income to property and sales taxes. Millions of Americans would end up paying more, much, much more.
The flat tax is an adolescent fantasy that we can pay less and get more. It is fiscally bankrupt. It is such a bad plan that it make the Bush plan look marginally responsible even though it taxes average families too heavily and will run a deficit of trillions of dollars into the foreseeable future.
Progressive taxation, such as the PIA tax plan can pay for the services we demand and deserve and balance the budget. It will stop the shift of the tax burden onto millions of hardworking Americans and it will stop the shift of burden of the huge and permanent budget deficit onto our children and grandchildren. It is the only prudent and responsible course of action. And it will save you thousands of dollars every year!
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This site last updated on Friday, December 10, 2004