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By Brian McKay
The idea of a flat tax was first popularized during the Presidential candidacy of Steve Forbes in 1996 and has since been trumpeted as a great way to “make things fair” and eliminate the IRS. Every single plan fails on multiple fronts from funding the government to slowing economic growth. Basically, they are all out of touch with reality.
They are a regressive tax. The wealthy benefit from even lower taxes than they already pay while the poor see their tax rates increase. The absolute worst offender is the Ted Cruz tax plan which is essentially a value added tax on all goods and service. A 16% value added tax. The poor and middle class, who pay a far greater percentage of their income to living expenses, would see the common items they purchase increase in price by 16%.
Every flat tax plan leaves the government horrifically underfunded. Estimates for the Cruz plan vary widely, but most concur with a loss in government revenue of $8.7 trillion over 10 years. With the common theme among Republicans of increasing military spending while their tax plans underfund the rest of the government, one must speculate that any social spending would be the first to go. The badly needed infrastructure rebuild wouldn’t happen, your meat wouldn’t be inspected, poor children wouldn’t receive free school lunches, the elderly would take a hit on Medicare and Social Security benefits, the FDA would take longer to approve new drugs and any government funded grants for research would cease. Commerce would be greatly impacted. Essentially, the country would soon be realizing the Koch brothers dream of government solely existing to defend property rights, while the party of “fiscal conservatism” rapidly tacks on to the country’s debt.
The economy would suffer from such plans as well. Consumer spending comprises 70 percent of Gross Domestic Product in the United States. GDP really is a measure of how fast money moves through the economy (the velocity of money). Slowing that velocity reduces economic growth. A flat tax dramatically impacts that in three ways:
1) The poorest Americans spend all of their income. An increase in their effective tax rate reduces what they have to spend and live on.
2) There is a psychological effect on spending with a flat tax if done through the Cruz plan. Regardless of not having funds deducted from their paychecks, consumers have a tendency to relate prices to past experience. This is why your grandpa always tells you that in his day you could buy gas for $.25 a gallon and that everything is so expensive now. Consumers will slow consumption of items that most reflect this in their memory.
3) As money moves to the top of the income ladder it becomes very economically damaging. A previous article about trickle down on zenruption explained that a recent IMF study showed that for every 1% that moves to the top of the ladder, 5 year GDP growth declines by .88%. The wealthy spend less of their money as a percentage and often move much of it into things that perpetuate wealth and result in little investment in the economy.
There are only two real benefits to a flat tax and one is only reserved for the elite. It’s easy and if your rich you get to keep more of your money.
In a country that drastically needs infrastructure improvements, already has a very large debt balance and has 1 in 5 children experiencing daily food insecurity, such plans are simply small minded and out of touch.
Brian McKay is a co-founder of zenruption and has an MBA from Boise State University. For some odd reason he thinks economics are just rad. Recently, he decided to never watch Casino Royale ever again because his heart breaks when Vesper Lynd dies.