In my article last week, I mentioned that it was time to revamp the tax code. I obviously struck a cord with many of you. It is easy to say we need a flat tax (graduated income tax rate, say five to 20 percent) or a fair tax (federal sales or value added tax). But does this really solve the tax problems facing Americans today? After a week of thought, I realized that there are two serious issues that must be addressed. The first and most important is that many families pay no taxes. In 2009, 47 percent of families paid no income taxes. This is up from 38 percent in 2007. (http://www.nytimes.com/2010/04/14/business/economy/14leonhardt.html).
This infuriates me. Most of us pay our taxes on time, while almost half the country pays no income tax! How is this possible?
The answer is simple. To get elected, the politicians who make the tax laws decide not to tax those they consider to be low income. Yet these low-income families have automobiles. They have television. They may receive food stamps and other social assistance. And most importantly, though some are healthy, they may not work. By global standards, our poor are considered wealthy as they have food, water, shelter, electricity, and many of the comforts so lacking in the third world. You and I pay to ensure that our poor have the benefits of life in America rather than just the bare necessities to sustain life.
I actually do want to help those who are less blessed than we are. I believe that we must assist those in our country who are physically or mentally unable to work or have worked hard and are now retired. I agree that we need to provide unemployment insurance and even temporary welfare to assist those who are between positions or fall upon hard times. I also strongly believe that everyone who works or receives retirement benefits, welfare or unemployment payments from our government must pay taxes. Here is how I suggest we do it.
First, let's get rid of the current tax legislation and replace it with a flat tax. I understand that an entirely flat tax would be regressive if it was applied across the board. Therefore I believe it should be graduated. Families with income or social assistance less than $25,000 would pay no flat tax. Families that earn between $25,000 and $35,000 would pay a small flat tax, say five percent. We could set flat income brackets in a graduated manner up to the top rate of 20 percent for families earning more than $200,000. The graduated flat income tax ensures most families pay a tax on their income or their government benefits. The only deductions available to those who pay the flat tax would be state and local taxes and a tax credit of up to five percent for the fair sales tax. The fair sales credit would be phased out for families earning over $200,000.
Now let me ensure that everyone pays some taxes through the implementation of the fair sales tax which would be applied on all non food purchases with an exemption for rent, home purchases and mortgage payments and charitable donations. As you spend, so shall you be taxed. Not only does this ensure that those who pay no flat income tax do pay a tax for the items they buy. Since food and lodging is exempt for the tax, it does not pose an undue hardship. The income tax credit for the flat income tax mentioned above ensures that most of the taxpayers will not be taxed on income then on spending, which in effect would be a double tax. It does ensure that everyone pays some tax and as a side benefit, encourages saving since saving is not taxed.
One of my concerns with any taxation process is the scofflaws who work hard at not paying taxes. In our current taxation system I expect that there are some people and businesses that hide income. A restaurant that does not ring up some of their cash sales, or a contractor who gives you a discount for cash so they do not have to remit tax on it are not only avoiding taxes, they are increasing the taxes you and I have to pay. Once the flat income and fair sales taxes are implemented, it is essential that we deter those who illegally understate their income. Those who cheat should pay the back taxes plus whatever penalties are levied.
Once the flat and fair taxes are implemented, we can eliminate the hidden taxes on gasoline and utilities. The flat and fair taxes will generate more than enough revenue to replace the income tax and all of the hidden taxes, while ensuring that everyone pays their fair share of the tax burden.
As always, I look forward to receiving your comments. You can send them to me at firstname.lastname@example.org.