The Well FED Society

This is the weblog for the University of Baltimore Federalist Society. Come back regularly for updates about our meetings and events, and you might even be treated to some original thought.

Friday, September 17, 2004

Is an Income Tax in Line with a Federalist Philosophy?

Sitting through a socialist rendition of “Name That Tax” in last Wednesday’s Tax Policy class, I started thinking. Would our Forefathers condone such a blatant redistribution of wealth?

Then there are the “alternatives” to the income swap: a true consumption tax, a “National Sales” tax, a VAT tax, and a little ditty called the “Mark to Market” tax.

All of these taxes are designed with one purpose in mind: to create revenue to feed the ever-growing central government. But is this what our Forefathers envisioned?

Folks grow up and get married. Then something happens, and kids arrive. Those folks choosing to send the kids to day care are given a deduction for expense, but those parents looking to raise their children themselves are given no such deduction on their taxes.

That’s right, the first couple makes two incomes and receives a deduction for the expenses incurred in day care, but the parents who want to instill their values in their child, instead that of a nanny, get one income and no deductions. Do you think that our Forefathers envisioned this?

I would love to hear your thoughts…


Blogger Bronson said...

I'm nost crazy about income taxes, however, I don't know that it's, necessarily a bad idea.

My thought is that a flat tax rate with very few exemptions would serve the policy concerns of the nation to encourage personal advancement. Ideally all citizens need to share the burden of the government. That would encourage people to want the government to be more trim.

I have a pretty good structural engineering analogy as to why a flat-tax would work. The basic idea is that if all people are equal under the law then it is not unfair to require each person to share a proportionate amount of the burden.

I'm not a big fan of VAT and national-sales tax ideas because they are, in effect, regressive. (I.e. the greater percentage of your income you "consume" the greater percentate of your income gets taxed.) I'm not a fan of regressive taxes any more (or any less) than I am of progressive taxes. I think both ideas are bad because they focus on some citizens to pay for the government. Let's encourage "buy-in" in the system by a very flat tax rate.

I could be wrong... but don't tell anybody, ok?

September 18, 2004 at 11:15 AM  
Blogger Craig said...

I do agree; some type of tax is necessary to sustain the basic functions of government.

While a flat tax would be more in line with the citizens bearing an equal amount of the burden for the central government, my fear is that it would not be feasible to tax 100% of the population.

As is the practice today, nearly 50% of the population pays 100% of the taxes in the current "progressive" system. A flat tax would indeed level the tax playing field, but it would also do two additional missteps. First, considering a flat tax of 15%, it would either raise the taxes of those currently paying 10% to the higher 15% rate, or it would be necessary to drop them off the tax rolls. Second, the 50% not paying today would still be "unable" to pay under a flat tax. The two concerns together would raise the percentage of those not paying taxes to 60% or higher.

Would this be a "fairer" way of leveling the playing field for all? True, the wealthier tax payers would be paying a lowere overall percentage of their income to the government, but how long will our government allow a low 15% flat tax to stand with the tremendous reduction of revenue?

My fear is that the percentage would be raised to an amount similar to the current higest rate of 35%. This would result in a higher tax paid by the wealthier tax payers with no progressive structure to break up the percentage of tax paid.

Possibly, a National Sales tax, with absolutely no income tax, would pose a more equitable solution. Those poorer tax payers may find a break from the regressive tax through a no tax status given to items such as unprepared food or other staple consumables.

I'm not saying this is the way to go, but the progressive tax model used today needs to be fixed before it becomes our road to socialism.

September 18, 2004 at 10:52 PM  
Blogger Bronson said...

"...the progressive tax model used today needs to be fixed before it becomes our road to socialism."

Here, here!

My solution would be to give a relatively generous personal exemption, say $8,000 for an adult, say, another $8,000 for a spouse, if dependent, and then $4,000 for each dependent child or other close relative living in the household.

I'm not too worried about putting bumping the 10%-ers up to 15% because there would be a generous personal exemption, and there's no disincentive to work harder.

I'm not going to run the numbers on it at the moment, but I suspect that this system would be not all that tough on the lower economic rungs while not punishing the upper ones.

One final thought - So what if this puts some poor people back onto the tax rolls? People tend to care a little bit more for things that they have a personal stake in. The un-taxed citizens have absolutely nothing to lose if they vote for more social spending.

Walter E. Williams wrote about this sort of thing recently. He proposed a somewhat more radical scheme to level the playing field. Here's the address of his article:

As for a national sales-tax... It just doesn't sit well with me. I know, I know, whenever the government sucks money out of the economy, it cools economic activity, HOWEVER, the way in which the government extracts it's income can be almost as important as how much it takes. A tax that targets consumption will tend to reduce consumption. Attacking consumption will have a ripple effect throughout the economy. A tax on the income is based on the theory that the taxpayer is allowed to seek and obtain wealth as a direct result of the structural safeguards maintained by the government. A national sales-tax, on the other-hand would target the middle class. The wealthy would be able to avoid it with most of their pay, and the poor would have much of their consumption tax-free, but the middle class won't be able to save enough to selter a significant portion of their income.

to be sure, this is a good conversation to have, but I suspect that a relatively low flat-tax rate (with only personal exemptions) would be the most equitible and least punitive of all the tax schemes that I've contemplated.

September 19, 2004 at 4:37 PM  
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