A Fair Tax

One of my least favorite (and most effective) conservative talking points is the notion of a "fair" flat tax.  They argue that since America is the land of equality, everyone should pay the same tax rate.  No person, they claim, gains an advantage or a disadvantage from a flat tax rate, because it is the same for all people.  They point to the current tax code, which exempts some low income people from income taxes, as unfair "class warfare."  This argument is so fallacious it would be funny, if so many people did not buy it.

First, a flat tax is not an equal tax, because it does not have an equal financial impact on all taxpayers.  Let's take a simple example to demonstrate the point.  Let's say the federal income tax rate is 25%, just to make the numbers easier.  Joe is a recent college graduate, earning $20,000/ year, saddled with minimal student loan debt (unrealistic, I know), and he lives in a small apartment with a rent of 500 dollars a month.  Let's say his total utilities and food monthly costs come out to another $300-350/ month (again, unreasonably low, but it makes the point).  Assuming Joe does not spend a penny on anything else, this brings his monthly expenses up to about $800.  So, Joe get his yearly salary of $20,000, and the flat "fair" tax rate of 25% is applied, so he ends up with $15,000 of cash for the year.  Take his monthly expenses of $800, multiply by 12 and you get $9600 for the year.  That equates to nearly 2/3 of his entire income for the year, leaving him with only $5,400 to spend on himself.  This means that Joe, although he may earn a $20,000 salary, has only one quarter of that in disposable income each year.  Imagine how much worse the situation is to individuals facing medical bills, student loan debt, credit card or mortgage debt, unemployment or underemployment, disability, etc.  And this simplistic example does not factor in such day to day costs as gasoline, clothing, medical costs, or even state and local taxes.  I deliberately made Joe's situation much easier than the situation many people, young and old alike, face every day.  Even this unreasonably optimistic example shows how a flat tax rate would destroy the finances of a majority of Americans, all in the interest of "fairness."

Take Mike, now.  He's a manager of some firm, earning a nice 6-figure salary, let's say $200,000.  A 25% tax brings him down to a "measly" $150,000.  Perhaps his mortgage and housing costs are $6,000/month, let's tack on another $4,000/month in other expenses.  Even if he spends over 12 times more than Joe, he is still left with $30,000 at the end of the year, almost 6 times as much disposable income as Joe.  Furthermore, these numbers don't take into account the vast difference in quality of life between spending $10,000 a month on "necessities" and Joe budgeting $1000.  Where Joe would be struggling to make ends meet, likely paying rent and accruing no wealth, Mike is able to turn his necessary expenses into an investment in the form of housing.  He also could opt for a less lavish lifestyle, if he feels that $30,000 is too meager of a sum for disposable income.  Once again, Mike is contrived as an unrealistic example; in reality, the fraction of disposable income left over is much higher than what Mike was left with.  It is clear, however, that no matter how contrived the example, the flat tax simply is not fair.  It affects the poor much more than it affects the rich.

The point is simple: wealthy people make a choice to spend more on living expenses, while poor people have no choice but to scrape by.  It is often a good investment decision for wealthier taxpayers to pay more for housing and accommodation  because it accrues wealth, whereas it is rarely feasible or possible for less wealthy individuals to invest in any long-term assets.  The flat tax argument ignores the reality of most American's finances by neglecting any idea of disposable income.  At the end of the year, Mike is left with more money than Joe could hope to earn in a year, and all of that is money that he can spend on himself however he wants.  At the end of the year, Joe is likely in debt due to the numerous expenses that are bound to come up.  Yes, a flat tax does take the same numerical chunk out of everyone's paycheck, but it takes a much greater slice away from one's disposable income.  A flat tax flattens the poor under its heel, while still allowing the wealthy investment opportunities and further income. The only fair and democratic tax system is a heavily progressive and structured system, where the most fortunate pay the most, while a great deal of Americans pay little to no income tax at all.  We cannot bleed those least fortunate and stand by while the wealthy argue about "fairness."  What isn't fair is the disappearance of the middle-class, the widening gap between rich and poor, and the empowerment and representation gap.  The first step toward reducing this inequality lies in tax reform.  The highest marginal tax rate should climb much higher, at least over 50%.  This is not punishing success, or demonizing it; rather, it is the recognition that great gains are only made with the aid of a whole society.  We are simply asking that one's debt to society be repaid.  If you can no longer afford caviar, I'm sorry, but I can barely afford bread.