The Issues: Taxation

It occurred to me recently to try and articulate what I think the major issues are in the current Presidential election., Over the next few weeks I hope to write short pieces on what the issues are (for me) and how I feel about those issues. At the moment I can think of four. They are (in no particular order): taxation, the war, education, and health care.

American stand, I think, at a crossroads in terms of the nature and philosophy of taxation. It's not a very sexy issue. It is an issue primarily because a group on the far right of the political spectrum wants to do away with income tax and replace it with a "fair tax" that would charge everyone a flat rate in the form of a sales tax at the cash register.

The "Fair Tax." Genius. That's a better name than No Child Left Behind. Someplace along the way, Conservatives have learned that if you give an idea a really good name you're more likely to be able to make it a law. But I digress...

There are a bunch of things wrong with the "fair tax," as I see it. The most important is that it is a ploy, a disguised effort to control government spending by reducing revenue. I say that because the analysts that I've looked at all seem to agree that the proposal in Congress now would drastically reduce federal revenue. The result of that would be either a) a world in which Congress cut existing programs willy-nilly because it simply could no longer pay for them or b) the Reagan deficit, multiplied several fold. I would bet on "b," but neither is a pretty choice.

I'm not going to dignify this proposal by calling it a "fair tax" again; for several reasons, it's not fair. So we'll refer to it from here on as the sales tax proposal.

The reason the sales tax people have gotten as much traction as they have is simple: the tax system in America is complicated, convoluted, and seems to facilitate tax avoidance for the rich. Ron Paul is in favor of this proposal; Ron Paul is a fruitcake from outer space. But Mike Huckabee is also in favor of it; he uses it ironically to promote his image as a populist.

I found this definition of populism at Answers.com: "A political philosophy supporting the rights and power of the people in their struggle against the privileged elite." Call it part of being an enigma for candidate Huckabee: a Baptist preacher in a rock & roll band, the Republican populist...

The sales tax proposal is a bad idea because it makes taxation voluntary to the extent and degree that you can live on less than you make. Those in then upper class who make obscene amounts of money and squirrel much of it away for a rainy day (or a trip to the Italian Riviera) don't pay taxes on much of it - they get away with not paying their fair share. It also means that middle class Americans who live beyond their means by making purchase on credit cards can conceivably make pay more than their fair share in a give year; if they make $70,000 and spend $85,000 they pay taxes on the $85,000 they spent.

In addition to reducing the flow of revenue into the federal government (the real agenda for the sales tax, in my view), the result of the above situation will be that the burden for paying for government will be shift more onto the middle class. That makes the use of this tax to promote an image of populism truly ironic.

Of course, rejecting the sales tax proposal doesn't solve the problem. The truth is that taxation in America is broken and does need to be fixed. And spending in America really is a problem. The question is one of who can come up with proposals to fix the current system. John Edwards (a populist and a Democrat) and a few others have suggested closing loopholes and addressing some specific aspects of the tax code. Why should someone who makes their money in the stock market pay a lower rate in capital gains tax on their 1040 than a teacher, nurse or secretary pays on their salary? Why should the average Joe pay the payroll tax on almost every penny he makes while the CEO of some company pays it only on the first $62,700 and is off the hook for the rest of his $400,000 annual salary?

Fix the loopholes and the system produces more revenue and seems more fair. If the system produced more revenue, the actual rates might could be reasonably reduced.

The purpose for taxation and the manner in which Americans are taxed - these are among the most important issues on the table this election. And I don't think most Americans realize that...

Rudy Giuliani Gets Booed on Taxes

On Saturday, GOP Presidential hopefully Rudy Giuliani was in Florida where we served as Grand Marshall for NASCAR's Pepsi 400 in Daytona. Before the race he attended a town hall meeting in Jacksonville, Florida, where about 500 people listened to him answer questions for half and hour or so. One of his answers brought jeers and boos from some people in the crowd. Giuliani was asked if he would support a flat tax proposal (proponents are using the euphemism "fair tax").

Giuliani said "no." People in the crowd (a couple of dozen or so of them, at least) made those same nasty noises in response to Giuliani's answer that many race fans make during driver introductions when Jeff Gordon gets introduced.

I found it interesting that, in a crowd of 500 people, only 25 to 50 of them vocalized negative feelings about his answer. That means that only five or ten percent of the people there felt strongly about the "flat tax" question. I also found it interesting that the Associated Press headlined a story based on the incident; but they did. Go figure...

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If you're looking for something to think about that will make your head hurt, try taxes. The issue is complicated beyond words. There's no sense discussing it much with someone unless you have at least a vague level of agreement with them about what governments should do -- by which I mean the sorts of things a governments should dabble in more than exactly which course of action governments should take on something. After all, taxation is how government pays for what it does.

Most people don't have a firm grip on the number of different governments and taxes there are that have some effect on their daily lives. If you live in a town in Virginia you almost definitely pay taxes to the town (even if you don't own property), taxes to the county the town is in, taxes to the Commonwealth of Virginia, and taxes to the Federal government. Among my favorites is the prepared food tax that most Virginia local governments charge when you buy cooked food; that tax adds an additional five or six percent to the price of your hamburger at a Wendy's or Shoney's and that money stays with the locality where the restaurant is located.

If you live in some other state, there's a good chance your county taxes you twice - once through your county commission and once through your school board. In Virginia school boards don't have that power.

I looked up the term "flat tax" online and found that not everyone agrees what a flat tax even is. On the one hand, a flat tax is technically a tax where everyone pays the same amount - like the $10 tax I pay to put a county sticker on the windshield of my car. Poor or rich, whether it's for your 30 year old Pinto or your Dodge Viper, ten bucks is what it costs. But most people mean a flat rate or percentage when they talk about a flat tax - everyone would pay something different because they earned (or spent) a different amount.

Of course, we haven't talked about what to tax yet. Some flat taxers want to tax income, some want to tax only earned income, and some what to tax spending (instead of income). That last proposal is what people mean most of the time what they talk about the so-called "fair tax." They want a national sales tax of some sort to replace income tax in America.

I've always struggled with the definition of the word "fair." I can't give you a definition of that term that satisfies me. Most people think of everyone being treated the same.

We don't treat all kids the same at the school where I work:

• Some of them we make pay for their lunch; others we give lunch to for free.
  
• Most have to take their math tests in silence and have half an hour; a few, though, get 45 minutes and some help reading the test.
  
• Some students at my school we make read their books without any sort of devices to help them; others we let wear glasses.

What's "fair" mean?

The "fair tax" proposal is attributed in large part to radio personality Neal Boortz, promoted by the organization Americans for Fair Taxation, and embodied in a bill in committee in the U.S. House of Representatives called H.R. 25.

Common question number one is how a flat tax is fair to the poor (since they have less of an ability to pay)? Not to worry; the poor will go into the grocery store and pay the new 23% sales tax on milk and bread (just like everyone else), but then they'll get a check from the government called a "prebate" to compensate them for money they spend on basic necessities (just like everyone else).

Like the old (current) tax system, there's no effort to allow for the fact that the cost of basic necessities is different in Los Angeles than it is in, say, Newberry, South Carolina. Still, proponents say the "fair tax" is "progressive." I don't know how that's "fair," but I'm not sure what they mean by the word.

One minor detail that bothers me some about the proposal that Americans for Fair Taxation has online is simple. Right now poor people don't have to do any paperwork to escape income tax. If their income is less than the amount of their deduction and exemptions, they don't have to file. Under the proposal I looked at online, poor people would have to file paperwork to get their tax rebate - they'd have to fill out a new form to get back money the government shouldn't have taken. The amount of paperwork rich people have to do would decline sharply and the amount of paperwork poor people (who generally have less education) have to do would go up. That strikes me as being less than progressive; my experience with poor people leads me to suspect that many would miss out because they wouldn’t do the paperwork.

I do know this: poor people (and many in the lower half of the middle class) generally spend every penny they get just to make it from month to month. Rich people don't have that problem. So under the new "fair tax," a couple in their thirties raising two point four children in the burbs will pay taxes on almost every penny they make just because they spend it while the doctors and lawyers in more affluent neighborhoods, even if they pay more in actually taxes, could get by with paying tax on half or less of their income. Then when you look at the government's money and you talk about what portion of it came from the wealthy and what part of it came from the average American who's just try to make ends meet while they raise their kids, you'd find that the "fair tax" reduced the percentage of the Federal budget that was paid for by the more well to do. Rich people will be happy about that.

I'll ask rhetorically, "how is that fair?" And I expect that someone will explain it to me whether the question is intended to be rhetorical or not...