But as tempting as that sounds, I'm betting Foolish investors know a ruse when they see one. So I'll stop wringing my hands and cut to the chase: Why exactly are flat-tax proponents wrong? Let me count just three of the ways:
- Under the pretense of treating taxpayers "equally," flat-taxers ignore the fact that the tax code doesn't act on individuals. It acts on their incomes, which are not at all equal;
- By offering a simplistic solution to a complicated problem, flat-taxers actually delay the necessary work of real tax and budget reform; and
- When someone says, "It's not about the money," it's about the money.
Still with me?
Good.
The current progressive tax code acknowledges that, gee, there is a difference between the 50 millionth dollar of annual income and the 50 thousandth and, with a rare show of governmental common sense, sets tax rates accordingly. Under his own proposal, though, multimillionaire Forbes, who scratched and crawled his way from Papa Malcolm's breakfast table to Forbes' corporate headquarters, would cut his current 39% marginal rate to 17%, reducing taxes on his wages by more than half.
But wait, it gets worse. Forbes would actually pay next to nothing in taxes because he derives most of his income from dividends, interest, and capital gains, which his plan completely exempts from taxation. That's right, Fools: The money you earn by working would still be taxed. But if you're wealthy enough not to work, well, fugetaboutit -- Forbes figures your fair share of the nation's tax burden to be zero, zilch, nada. Damn the deficits! Let the poor working saps figure out how to fund the government.
Now how fair does that sound? Perhaps my worthy duelist, Bill Mann, will argue that a flat tax might actually force -- at long last -- fiscal responsibility on our free-spending government by cutting it off at the revenue stream. Don't you believe it. If years and years of red ink couldn't force the "leadership" of an evermore "conservative" political class to make serious budgetary distinctions between Medicare and methane testing, no alteration of the tax code will do the trick. Remember, we had to grow our way to a balanced budget, and even that required a soaring stock market and some creative arithmetic. If you're counting on political courage to inform decisions about government spending, I've got a pork-flavored highway bill I'd like to sell you.
In fact, it's much more likely that a flat tax placebo effect will artificially reduce the incentive to hold elected officials accountable for their decisions in the same way we've learned to hold brokers and money managers accountable for theirs. Hey, with a flat tax, we'll be filing our tax returns on a postcard, brother. How much better can it get?
A lot better, actually. In fact, it has to. Our current system is so larded with loopholes, inconsistencies, and special favors for special interests that when the current economic expansion recedes (as all economic expansions do) and government coffers start coming up short again, the overtaxed middle class will have to choose between assuming even more of the burden, tolerating deficit spending (and additional interest payments on the national debt), or demanding meaningful tax and budget reform.
Here's a suggestion: Let's choose the latter and start demanding it right now. Rather than squandering precious energy and good will on a tax plan that disproportionately benefits the wealthy, let's insist on reform that retains a progressive tax code. Should marginal rates come down? Absolutely. Should capital gains rates also be lowered? Maybe. Should I pay the same rate on my last dollar of annual income as Bill Gates does on his? Absolutely not. And, for heaven's sake, let's insist that corporations -- whose share of the tax burden has been on the steady decline even as that of individuals has risen -- start paying their fair share.
But most of all, let's redirect the flat-taxers' blunt instrument away from the progressive tax code and toward the overstuffed and misguided federal budget. It's due for a good bludgeoning.
This Week's Duel
Related Links