With the current unemployment rate hovering short of 10 percent and many major cities in America being “occupied” by individuals calling for income equality, taxes and equality of taxation has come to the forefront of news.
The Republican Presidential nominees are jumping on this renewed interest in tax rates and have all put forth very unique tax plans, which they claim would erase inequality among taxpayers and simplify the tax code system. Rick Perry and Herman Cain have even thrown around the term “flat tax.” Flat tax seems to be the phoenix of tax schemes: it gains momentum and is touted as the solution by lawmakers. But then as quickly as it rose to popularity, it disappeared back into obscurity, only to reappear from the ashes a few years later. But are the current Republican candidates truly proposing a “flat tax” and if so, would it actually help America’s current economic woes?
Herman Cain has gained much publicity for his 9-9-9 plan for taxes: a 9 percent income tax, 9 percent national sales tax and 9 percent corporate income tax. Steve Forbes, one of the original politicians to herald the flat tax, is supporting Cain for President. According to The Tax Policy Center, 84 percent of Americans would see a tax increase under Cain’s plan. Meanwhile families earning between $500,000 and $1 million would see a reduction of taxes by almost $60,000. This means low and middle-income earners would have to make up for the high-income earners.
Rick Perry is proposing a 20 percent “flat tax” on income. Perry also would allow taxpayers to choose whether or not they want to be taxed under the current system or his new system, which frankly, is quite illogical. Low-income people will choose to be taxed under the old plan (where the lowest tax bracket is 15 percent), and the wealthy would choose to be taxed under Perry’s plan (where the 20 percent flat tax is lower than the current system’s highest income tax bracket of 35 percent). The result is less revenue for our already in-debt government.
The Tax Policy Center concluded in a recent report that both Cain and Perry’s plans would lead to a decrease in tax revenue and Perry’s plan particularly would slice government revenue by over 27 percent by 2015. However, that doesn’t mean taxes for most Americans would go down — it’s quite the opposite. Cain and Perry’s plans would both simply redistribute the tax burden from the wealthy to the middle and lower class, exactly the opposite of what many Americans want.
Both Cain and Perry’s plans are better described as flat “wage” taxes because they exempt many types of “income” from being considered taxable income.
A study by the National Bureau of Economic Research conducted by Boston University economists Laurence Kotlikoff and David Rapson found that when all taxes, federal and states income tax, sales and taxes for benefit programs, are taken into consideration, most Americans pay a similar tax rate around 40 percent. Wealthier Americans in the 35 percent income tax bracket pay most of their taxes in income tax, while low-income families who don’t qualify for income tax still pay a large amount of tax via sales tax and payroll tax as a proportion of their income. Therefore, increasing income taxes on low-income household hurts them much more than Cain and Perry will have you believe.
If the politicians truly wanted to “simplify” the tax code, they should remove tax breaks and deductions. Unfortunately, these are the bread and butter of lobbyists and politicians who create tax breaks for certain industries to help their own constituency.
These include a tax credit of 10 percent (up to $500) for making your home more energy-efficient (EnergyStar.gov), or the corporate tax credit of $0.39 to $0.60 per gallon to companies manufacturing corn ethanol, which was created by politicians from corn-producing states such as Iowa and Illinois (Business Insider). Even if you agree with the social agenda these tax credits push, you can’t deny how complicated they make tax codes.
Additionally, I don’t feel it would be at all unreasonable to tax capital gains at the same rate as an individual’s income is taxed. Capital gains is currently taxed at just 15 percent, a very low rate considering capital gains requires no labor. Both Cain and Perry’s plans would make capital gains and dividends tax-free. If not, their plans would only win votes from the rich, an unfair advantage to those who cannot afford these overbearing, economic “solutions.”