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Engraved atop the United States Supreme Court building are the words "Equal Justice Under Law." Equality in the eyes of the law has been one of the cornerstones of the American judicial system for more than 200 years. Nothing violates this American tradition of equality more than the current tax code, where every taxpayer is treated differently based on who they are, where they live, and even their marital status.
We should scrap the current code outright in favor of a simple, low, fair, flat tax rate that treats every American as equals. Anything less would be un-American.
H.R.1040, the Armey/Shelby flat tax bill, meets the test of fairness, unless you believe that fairness means treating people differently. Some opponents of the flat tax believe that fairness means redistributing income through the tax code in an effort to make everyone equal. This stems from a curious philosophy, which holds that those who have enjoyed economic achievement have done so only at the expense of others. The result of this philosophy has been marginal tax rates as high as 91 percent.
In practice, this distorted view of justice has produced a Byzantine system of breaks and preferences, which have subjected the tax code to arbitrary political "values" imposed by special interests. With the myriad loopholes, deductions and shelters present in the tax code, some people have been able to essentially hide a percentage of their income from taxes, leaving others to pay a larger percentage of their income to make up the difference. In this case, the law is not neutral; it is deliberately picking winners and losers. Oftentimes, the winners use high-priced lobbyists or lawyers to exploit the tax code; whereas the losers are people who do not have the resources to hire a professional to help them maneuver through the myriad instruction forms and regulations.
Naysayers of the flat tax argue that its implementation will transfer wealth from poor and middle-class Americans to the very rich. This is simply not the case. With a 17-percent flat rate, and large personal allowances, the flat tax would reduce tax bills for millions of lower- and middle-income taxpayers. As the table below indicates, a married couple with two children that earns $50,000 a year would save more than $2,469 a year with the flat tax. And, despite claims to the contrary, the flat tax is progressive. As the table below illustrates, families with higher incomes will pay more in taxes than families with lower incomes.1 With the flat tax, a taxpayer who earns ten times as much as their neighbor will pay ten times as much in taxes.
Comparison of Tax Bills Under the Flat Tax and Current Tax System*
Taxes Paid Under Current System
Taxes Paid Under a Flat Tax
Savings From the Flat Tax
*All figures assume a family consisting of a married couple with two children.
Source: Tax Foundation
The laws of economics teach us one very important point: people are different. By and large, a person’s income correlates with their productivity and overall contribution to the economy. Research indicates that the vast majority of wealthy people in the United States have amassed their wealth through years of hard work and savings, not through inheritances or lavish trust funds. It is wrong to suggest that the wealthy have benefited at the expense of lower-income individuals. Yet, in an attempt to transfer wealth from those who have contributed to the economy to those who have been economically less productive, the current tax code punishes productive behavior.
Contrary to their intent, such "tax the rich" schemes only succeed in punishing those who are hoping to move up the economic ladder. The current tax code hurts those who try to save and invest for the future by taxing investment income two or three times. The capital gains tax is just one example of double taxation. An individual pays taxes every year based on their income. Then, when they try to plan for their future by investing in stocks, bonds or retirement accounts, the government will tax them again on any increase in the value of their investments. Under a flat tax, capital gains would be taxed exclusively at the business level, not at the personal level. Those taxpayers who choose to save and invest for the future would no longer be double taxed.
The estate tax, commonly referred to as the "death tax," represents double taxation at its worst. Under the current system, the federal government confiscates as much as 55 percent of a person’s estate at the time of their death. The flat tax would abolish the estate tax because taxes will have already been collected on the taxable assets of the deceased during their lifetime. While proponents of punitive estate taxes claim that they affect only the rich, many small businesses and family farms have had to be liquidated and sold to pay estate taxes.
In the end, efforts to "tax the rich" have a perverse effect. The rich remain rich, but Americans trying to build a better future for their families through hard work, savings and entrepreneurial investment are punished and held back by the tax code. Ultimately, the current tax code is a tax on the American dream. Replacing the current system with a single, flat tax would go a long way to restoring the principle of equal justice under the law.
1Scott Moody, "The Flat Tax: A Tax Cut for the Middle Class," Capitol Comment, Citizens for a Sound Economy Foundation, February 6, 1996.