Preserving Democracy. Elgin L Hushbeck

In the current complex system, with its many different rates and vast number of deductions, it is not at all clear how spending increases affect taxes. But with a flat tax, it would be possible to estimate how much a spending increase would affect the tax rate.

      Again to keep the math simple, let’s say that the 2008 budget of $2.9 trillion was met with a 15 percent tax rate. If everything else remained the same, increasing the federal budget to $3.0 trillion would mean increasing the tax rate to 15.52 percent in order to keep up. On the other hand, cutting federal spending to $2.8 trillion could result in decreasing the tax rate to 14.48 percent.

      While it would not be quite this simple, for as we saw above changes in taxes effect the economy, the key point is that it would at least be possible to talk somewhat intelligently about the relationship between government spending and taxes. With the current system government spending is almost completely disconnected from taxes. Even when there is a discussion of how a new program will be paid for, rarely does this translate down into terms such that the average citizen could understand how much more they are being asked to pay.

      Yet with this system, if spending went from $2.9 trillion to $3.0 trillion, the family of three mentioned above who was paying $750 would see their taxes go up $25.86 to $775.86 The single person making $100,000, on the other hand, would see their taxes go up $466 to $13,966. This would be a vast improvement over the current system, where it is virtually impossible to tell what effect such an increase would have, and as a result, there is seemingly little if any link between our taxes and government’s spending.

      Another Way

      Another proposal is called “The Fair Tax”⁴³ and it scraps the income tax altogether, replacing it with a national “consumption” or sales tax. Under the Fair Tax there is an equivalent of the personal deduction that was seen in the flat tax, but here it takes the form of a ‘rebate’ for a portion of the tax paid in advance each month.

      At the beginning of each month everyone would receive a check from the government reimbursing them for a portion of the sales taxes they could be expected to pay that month. The rebate would be determined based on poverty level so those at or below the poverty level would not pay tax. In fact for those below the poverty level this would be additional money. For those above the poverty level, they would effectively be paying taxes only on money they spent beyond the poverty level.

      Again there would still be a level of progressiveness in that the rich would pay more simply because they consume more. More importantly, like the Flat tax, the rate and the rebate (deduction) would be the same for everyone. As such, this would have the same benefits of simplicity and of linking taxes to spending as did the Flat Tax. There are additional economic benefits to such a tax, but they are outside the scope of this discussion.^o

      The key aspect of both of these approaches is that if taxes needed to go up to pay for additional government programs, they would go up on everyone. The majority of people would not be able to impose higher taxes on a minority to pay for government programs they want, but do not wish to pay for themselves. Thus either of these proposals would restore one of the key checks and balances needed to preserve democracy. With the increasing visibility of taxes and the clearer link between taxes and spending, the steady growth in taxes seen over the last century would quickly be brought under control.