Wednesday, November 30th | 6 Kislev 5783

January 24, 2012 12:26 pm

The Flatter Tax

avatar by Ed Koch


Internal Revenue Service building in Washington D.C. Photo: wiki commons.

I don’t believe class conflict is harmful to our country, as long as it is limited to elections.  It is also helpful if the charges made by both sides in this conflict are factually correct.

The Republicans are the party of the wealthy.  Its membership, however, is made up primarily of people who do not fit that description and are not in the 1 percent of our population with an income of $380,000 and above.  Those people, not part of the 1 percent, have an expectation of someday becoming part of that small group which pays just over a fourth of all federal taxes, according to the Tax Policy Center.  It also may be that even if they don’t expect to be part of it, they hope their children will be, and they want to protect the prerogatives that come with wealth.  The major political tenet of these people is – success comes to those who strive to make it and do on their own.  I truly believe that is the meaning of Newt Gingrich’s statement that President Obama is “the most effective food stamp president in history,” and “I would like to be the best paycheck president in American history.”  Mitt Romney decries these criticisms of Republican philosophy as “the bitter politics of envy.”

The Democrats, on the other hand are the party of the poor and middle class.  Rich people also play a leading role in the party, but that role is to decry the lack of a level playing field, seeking changes in the law that if executed would be damaging to their own economic condition.  The best example of a wealthy person heading the Democratic fight is F.D.R., whose policies as President were decried by his social peers and were condemned by the Republican elite as betraying his own class.  Today, that role is held by Warren Buffet.  The Times of January 14, 2012 reports, “The top 1 percent of earners in a given year receives just under a fifth of the country’s pretax income, about double their share 30 years ago…In 2007, they accounted for about 30 percent of philanthropic giving, according to Federal Reserve data.  They received 22 percent of their income from capital gains, compared with 2 percent for everybody else.”

The political battle between the Democrats and Republicans has generally taken the form of Democrats seeking to address and upgrade the economic status of the poor and middle class with Republicans defending the rights and privileges of the wealthy.  The I.R.S. code has conferred special privileges for different groups.  Today, most people, even many Republicans, would agree that the most glaring example of special and unfair favorable treatment is given to those whose income comes primarily from Wall Street, with capital gains taxed at 15  percent.  Income described as “unearned,” as opposed to “earned,” the latter consisting primarily of salaries paid to employees or professional fees, e.g., lawyers, doctors, architects, etc., which are taxed at different rates depending on the amounts, with the highest rate on “earned” income currently being 35 percent.  Contrast that with the income of hedge fund operators – their income described by the I.R.S. as “unearned” — which is taxed at 15 percent, no matter the millions they receive in the conduct of their business.

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I am not an economist and don’t pretend to be an expert on the I.R.S. code or the many loopholes carved out allowing the privileged and wealthy in some cases to pay nothing.  The media has told us of oil companies, very successful in their profits, using available deductions and ending up in some cases paying zilch in corporate income taxes.

When you have middle class taxpayers paying up to 35 percent of their earned income subject to taxes, and well known businessman Warren Buffet paying 15 percent on most of his income, why shouldn’t there be anger in the country taking the form of class warfare dominating the pending election?

What should the Democrats be offering as one of their top priorities to deal with the enormous inequities in our tax code?  I believe it should be a form of the flat tax, but not the traditional flat tax.  The traditional flat tax excludes from any tax “unearned income,” taxing only “earned income.”  Now you will understand why Steve Forbes when he ran for president in 1996 and 2000 supported as his top issue the adoption of a flat tax.  If adopted, he would have paid nothing, since he and many others can manipulate their income so it is only “unearned” coming from Wall Street investments.

Instead, I call for the “flatter tax.”  I believe all income from whatever source should be taxable.  As many deductions as possible, now available to us, should be eliminated.  Realists believe that at least two deductions will remain:  the mortgage interest deduction, the impact of which The New York Times of January 20th described as follows:  “The average family in the top 1 percent saves more than $5,000 from the mortgage deduction.”  The Times also points out, “The mortgage interest deduction, widely considered a middle class benefit, actually saves a typical middle-income household only about $200 a year, because so many families claim the standard deduction, rather than itemized ones.”  The charitable deductions allowed have a huge support base.  The deduction in my opinion really should be eliminated and certainly at the very least be far more limited.  Why should the public pay a significant part of someone’s charitable contribution?  Indeed, when the government is involved, it isn’t, in my view, charity anymore.  Nevertheless, probably at least these two deductions will be kept.  Finally, I believe three rates, depending on income, should be retained so as to keep progressive taxation a part of the code, and, voila, we’ve leveled the playing field.

I will be taking a vacation in the Caribbean for about two weeks, so my commentaries and movie reviews will not be coming in that period.

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