Weird Tax Plans

I actually don't have a major problem with a flat income tax. I like the simplicity of it. Yes, I know progressive tax schemes are "fairer" - $2,000 in taxes for someone making $20,000 a year is a bigger burden than $20,000 in taxes on someone making $200,000. Yes, they are both 10%. But one person only has $18,000 left, while the other one still has $180,000. At $18,000, every little bit counts. At $180,000, not so much.

That said, I would only go for a flat income tax if 1) it covered all realized income from all sources, and 2) there are NO tax deductions or tax credits (except maybe a deduction for charitable contributions). This would go a long way to even out the fairness, as wealthy folks could no longer benefit disproportionately from tax avoidance schemes (that only the wealthy can afford). Even the old mortgage interest deduction mostly helps the wealthy (and creates perverse land use incentives).

Rick Perry's flat tax plan (described here: http://www.bbc.co.uk/news/world-us-canada-15451162) does not meet that criteria. It is full of loopholes that would make it meaningless except as a tool for avoiding taxes.

First, his flat rate of 20% is voluntary - you could pay the current rate if you wanted. Great, two different possible tax rates - way to (not) make things simpler. Okay, the poor might be able to choose a lower rate, but the rich get to have their accountants comparison shop between different tax plans.

Second, his plan would still allow for mortgage interest deductions, and would completely eliminate taxes on capital gains and dividends. Who gets capital gains and dividends? No, it is not the poor, or even most of the middle class. Under Perry's plan, the rich get a huge break - a lower tax rate, NO taxes on capital gains and dividends, and they get to keep the mortgage interest deduction. And tax avoidance schemes would still abound, with a focus on shifting as much income as possible to capital gains and dividends.

Perry's plan is grossly unfair, needlessly complicated, and would only encourage new forms of legalized tax evasion for the most wealthy at the expense of everyone else, especially those Americans that work for a living. A true flat tax on all income, regardless of source, would be simpler and fairer.

Herman Cain's "9-9-9" plan, clearly named by someone with mass marketing experience, is even goofier. It starts with 9% taxes each on personal income, business income, and sales, but after a few years, the income taxes go away, and the sales tax goes way up - to somewhere over 20%. (And that is according to Fox News: http://www.foxnews.com/politics/2011/10/20/cain-adds-to-plan-angering-unions/)

Like it or not, we have a largely consumer-based economy. We depend on people buying things. So putting a high tax on purchases seems really counterproductive. Adding this new federal tax on top of state taxes could result in sales taxes approaching 30%. That makes it much harder to buy a car, or a computer, or pretty much anything. Why would we want to do that? (It perhaps could be better for the environment if people bought less stuff, but that does not seem to be Cain's intent.)

In addition, a sales tax of that level would likely lead to significant black market activity, as buyers would seek to avoid paying huge taxes, and sellers would want to help them in order to make more sales. Large black markets can lead to corruption, as (underpaid) officials can get paid to look the other way. A large black market would also mean that fewer taxes would be collected, and those would be collected in an arbitrary and unfair way, depending on whether a particular jurisdiction suppresses or allows a black market.

Destroying the basis for our economy, creating a black market and disrespect for law, and providing incentives for corruption, does not seem like a good idea, even if it does have a catchy name.

Neither Perry's nor Cain's tax plans make sense.