On Twitter, @Downtownjeff asked for my thoughts on a flat tax.
I like the question. Here’s the start of my answer.
I prefer a simple income tax system. I don’t have a preference for it being a specific ‘flat tax’ or a ‘fair tax’ plan that has been proposed by some folks in the past. I just think simpler is better.
I have several reasons for believing this.
- No matter the complexity of the income tax system, government collects about the same percent of the overall economy’s income (GDP) in taxes.
- We don’t get the social engineering benefits that we think we do from the cleverly designed tax code that we have. We may only get bad outcomes.
- The belief that the tax code can and should serve as a social engineering mechanism is a root cause of the government corruption that very many people complain about.
- The only purpose of the tax code should be to raise money to support government expenses.
- A fair tax system is one where everyone pays something to support government.
I plan to expand on each of these reasons in future posts. In this post, I’ll say a little more about the last reason.
Folks become wealthy by producing stuff that we trade our own produce for willingly because we find value in it. We call that a mutually beneficial trade.
A side note on the value creation process:
I trade away what I earned in a few minutes of work for a cup of coffee, for example.
My employer valued whatever he got from me in those few minutes greater than what he paid me.
I valued what I got paid more than having those few minutes to do something else.
The coffee shop valued what I earned in my few minutes of work more than the coffee they sold me.
I valued the coffee even more than what I got paid in those few minutes of work.
That’s how value creation works. In two relatively simple and common transactions, value creation compounded in the economy. I got a cup of coffee. My employer got an edited communication (and, no that’s not what I do for a living, but it is a part of what I do). The coffee shop got resources to invest in more coffee and crew.
Many of these folks are lucky. But they are also persistent, hard-working and they take risks that you and I couldn’t stomach. They failed several times before discovering something that you are willing to trade some of your own produce for and have been flat broke.
These folks pay for the vast majority of this country’s government. We should thank them.
But, rather than thank them, we want them to pay even more. How ungrateful!
While demonizing these folks — again, the folks who produce many of the things that we couldn’t live without — we give a pass to the folks who spend all of the taxes plus another TRILLION a year. And, we re-elect these fools.
We are demonizing exactly the wrong folks.
We believe it’s okay to demand large government without having to pay our fair share.
The Federal government alone spent about $30k per household last year. If your household paid more than $30k in Federal taxes, congratulations, you’ve paid your fair share.
If you didn’t, then you need to start sending thank you notes immediately. You’re being very rude. How many years have you relied on the good fortune of others to support the government that you have?
At least we try to justify our rudeness. Well, wealthy people benefit more from government than we do. Or simply, they can afford it. So what. Neither of these mean that everyone can’t pay something.
We all benefit from government (at least the parts we stand to benefit from). We should all pay. If you want to pay less, then everybody pays less. If you want more government, then you pay more also. It’s that simple.
It’s not fair to want more government without picking up some of the tab.
Maybe our tax bill should first show us how much our fair share would be if we divided government spending evenly among everyone (e.g. $30,000/yr).
Then it would show us the amount we actually pay in taxes (household with median income of $50,000 would pay approximately $10,000 including Social Security).
Finally, it shows us the difference and recommends that if your even share of government is greater than what you actually paid that you ought to be thank your fellow taxpayers for helping to pick up your share of the tab. (-$20,000)
Maybe, it could even accumulate over the years so you know where you stand since you entered the country. (Probably a big negative number)
Then we could single out the tax superstars — the folks who have far exceeded their fair shares in their lives. That way we know that not only have they produced great value in our lives through the private sector, but they’ve also helped us afford a larger government than we could have ever afforded on our own.