Ari Goldfarb is communications director with Buffalo-based Goldfarb Financial, and published novelist whose works include Just Under the Sky. His series with Buffalo Rising comments on the intersection between finance, economics and pop culture.
Congratulations New York! We made it through the first voting cycle of 2016. As primaries move forward on their journeys to their respected parties’ conventions let’s take a look at one inevitable consequence of our next president, taxes:
A country needs taxes. Without taxes there can be no government and without government there is no country. That is why the question among politicians is not whether to tax the population, but how much. While one party advocates for the bare minimum, the other argues it is the role of the government to provide certain standards for all citizens (paid for by taxes). A flat tax is seen as the ultimate achievement for the former.
Economist Robert Reich pulled no punches during the presidential election four years ago when he said “the flat tax is a fraud.” Four years later the flat tax has returned to the presidential debate stage; the Republican Candidate Ted Cruz unveiled earlier this year his plan for a 10% flat tax on all Americans, describing it as fair, simple, and using it as a tool to guarantee the termination of our debt.
The original Flat Tax concept was made popular by Steve Forbes in 1996.
The original Flat Tax concept was made popular by Steve Forbes in 1996. The idea developed in the 1980s when two economists, Robert Hall and Alvin Rabushka of the Hoover Institution, developed a consumption tax system: “a consumption tax taxes savings once: either when the funds are withdrawn and used for consumption or when the funds are first earned.” In their original plan all wages and pension benefits were taxed at 19% (exemption $25,500 for a family of four).
One of the main arguments for a flat tax is the fairness. By taxing everyone the same percentage, everyone is treated equally and paying their fair share to the government. However, basing a tax system around income brackets does create a fair system; people in higher brackets are only taxed at higher rates for the portion of their income that reaches that bracket. So working 40 hours per week for 52 weeks at the federal minimum wage ($7.25) a single filer would earn $15,080. Of that, a person would be taxed 10% for the first $9,225 and 15% for the remaining $5,855, totaling $1,800.75 taxed (not 15% on the total as some believe). Ted Cruz’ tax plan however creates one tax bracket, which taxes total income at 10%.
Answers to the flat tax? Our current tax system is already progressive. One of the main concerns is more effective collection.
What would this flat tax do? On February 15, the Tax Policy center said Cruz’ plan would decline federal tax revenues by $8.6 trillion over the next decade and an additional $12.2 trillion the following ten years. By collapsing our seven tax brackets to one he would cause a single payer earning between $10,300-$14,000 pay the same percent as a single payer earning over $485,450; under Cruz’ policies the lowest earners in our current tax system would receive a $47 tax cut while the top 1 percent would receive on average a $400,000 cut. Morals aside, by offering a tax cut this substantial to individuals in the highest tax bracket we would have to gut our government’s spending. This would not just harm the usual suspects of government aid (health care, Medicaid, SNAP, Social Security) but also infrastructure, education and possibly military; we just would not have the means. Our economy has made great strides since recovering from The Great Recession. While our debt grows 3% annually, we have been able to sustain that with an economic growth of 3.4%. Of course we can be more efficient, but fixing individual problems would be more beneficial than demolishing our current tax code and starting from scratch; by forcing austerity our economic growth would stagnate.
Answers to the flat tax? Our current tax system is already progressive. One of the main concerns is more effective collection. The IRS budget has been cut 17% since 2010 and has cut 14% of its staff: “Since 2010, the number of IRS staff devoted to enforcing tax laws has dropped from over 50,000 to below 39,000, a decline of 23 percent.” I personally am interested in the possibility of raising taxes on capital gains and decreasing salary income taxes to the levels they were under Clinton (when the economy actually enjoyed a surplus). According to Joseph Stiglitz, families earning $100 thousand annually only receive 1.4% of that from capital gains while the wealthiest 400 Americans earn 57% of their income from capital gains. But this discussion is for a future article.
This article is courtesy of Goldfarb Financial www.goldfarbfinancial.com, a Buffalo boutique independent financial firm.
Ari Goldfarb is not affiliated with Raymond James. Views expressed are the opinions of Ari Goldfarb and the Financial Advisors at Goldfarb Financial and not necessarily those of Raymond James. Goldfarb Financial is an independent firm. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Goldfarb Financial, 295 Main St Suite 914, Buffalo, NY 14203 716-842-0145
 Joseph Stiglitz The Price of Inequality p. 72