In the wake of his recent re-election, President George W. Bush has ratcheted up his attention to domestic policy, one of them being taxation.
While the discussion is in its infancy, the overarching rhetoric centers on simplifying the complicated tax code. Various special interest groups exploit the myriad deductions and credits that turn the tax code into the public policy version of Swiss cheese – full of holes.
While simplification is more than welcome, the public must be careful. The “simple” the administration is talking about is some form of regressive income tax.
This administration has never seen a tax cut for the wealthy it didn’t drool over. Among the proposals are a national sales tax and a flat tax. No matter what Bush et al. tell you, remember this: Both these proposals will reduce taxes on the rich and either increase them for middle and lower classes or run up the debt.
A national sales tax, likely fixed at multiples of current state sales taxes, has the benefit of deriving from consumption, instead of income. The problem is that it taxes lower earners proportionally more and eats up their savings, as they need a larger percentage of their income to cover consumption.
A flat tax wields the simplistic sword of equity. Everyone gets taxed the same. Must be just, right? If justice were that simple, 8-year-olds would make the best judges. The flat tax rate would likely be close to 25 percent, meaning the upper-middle class and rich would get a tax cut, and the lower-middle and poor classes would see a tax hike.
One cannot discuss taxes without going down class- warfare lane. The reason we have a progressive taxation policy, where the well-off shoulder more of the burden, is because it is inherently more humane. While it might seem harsh to Vice President Dick Cheney, we as a society refuse to tell someone he or she has to go without food or clothing so another can purchase a ranch, automobile or even invest in a new biotech concern.
While said investment does facilitate economic growth, a lack of spending on staple items such as food, clothing, household goods and an occasional bit of leisure will grind an economy to a halt.
Simplification is a good idea. Some long-standing ideas, like the alternative minimum tax, at least need an update for inflation, if not full elimination. But more than likely, the best tax reform is modest changes that include closing of loopholes.