Think hard before changing the tax laws
It looks like Bush is going to make a big push for a major change in the tax system.
I will be amazed if it doesn't push the burden significantly more onto the middle class. One idea he said was interesting was a national sales tax. It now looks as though that's not the way he's going. But while the administration sorts out what plan it is going to put forward, let's look at a sales tax because it raises issues that will need to be considered no matter what the plan.
The plan is to replace the income tax with a national sales tax. One version some in Congress support exempts basics such as food and health care, and includes some rebate or other method to reduce the burden on the working poor.
As proponents bombard you with the selling of this or any other tax idea you can test it with one simple measurement. Also, keep one simple guideline in mind.
The guideline is that taxes should not be flat. The historical pattern for taxes in the U.S. and other major industrial nations is that they have to be progressive. To raise enough revenue, people with higher incomes have to pay not just a greater amount, but also a larger proportion of their income. To try to raise enough revenue otherwise would put such a burden on average workers that it simply wouldn't work. A flat tax fails by definition.
Keep a simple measurement in mind. Let me illustrate with a question. What would you consider to be a flat tax? Imagine if politicians had the leadership and guts to make the income tax work the way it's supposed to:
• Close loop holes.
• End tax shelters.
• Just add up all the money you earned or profit you made, call it income, and tax it.
Now if everyone paid the same percentage of that income, would you consider that flat? I would.
Compare that to a sales tax; even one with generous help to the poor. A person at the bottom pays virtually no sales tax. A person with a good blue-collar job spends more on extras and so pays a modest percentage of his or her income in sales tax.
Those at the lower levels of management make a little more and spend it on a higher standard of living, and pay a hefty portion of their income in sales tax. Those making a million dollars a year live a little higher and pay more sales tax, but also keep a good bit of their income and invest it. Government doesn't tax that. So the total portion of income going to sales tax is probably about the same as that of the low-level manager.
People making $100 million a year spend a lot of money, but it's only a small portion of their income. The rest goes into investments, untaxed. So overall they give a very small proportion of their income in sales tax.
The result is the middle taxpayers pay a big portion of their income, and the uppermost pay a very small portion. I'll ask the question again. Would you consider that flat?
The argument goes that eventually people pay the tax on that money, when they finally spend it. Theoretically that's true. But people making a great deal of money are likely to just keep reinvesting it their whole life and pass it on to their kids. If their kids have any sense they'll do the same. They are free all that time to use their money, untaxed, to invest for more return. In all that time someone else has to make up what they don't pay on income.
It's not a matter of wanting to soak the rich, but this idea soaks the middle class. It's a matter of what will work, and what spreads the load evenly.
The simple rule of thumb applies. If everyone isn't paying the same proportion of their income, it's not flat. A flat tax fails the need to be progressive. Worse, a sales tax doesn't even come close to the false goal of being flat.
Tom Cantlon's column appears every other Monday. www.tomcantlon.com.