Kudzu Kongzi: Why Flat Taxers Are Nuts

It's an election year, you've seen the pick-up trucks and minivans with the flat tax stickers; you hear the rhetoric about the middle class being pinched. What does it all mean? What are we supposed to do? I was talking with a friend that I love to death and I usually think is a really smart, right-on kinda fellah. Then he started spewing that vitriol about flat taxes and I had to keep my jaw from falling off my face and onto the table and then rolling over to him and punching him in the penis.
That's when I realized that he was way too smart to be talking like one of those economic hacks; and so I am sharing with you some resources that will try to explain how taxes work and why flat taxes won't.
So, flat taxers tend to congregate around a constellation of beliefs, among the most humorous is that government intervention will only lead to botched efforts and unnecesary influence in the market. This is of course preposterous because if the market were allowed to run its course we may likely still have slaves, Irish wouldn't be allowed to vote and women would likely only have recourse to property rights.

Look to the real estate market right now for an example of how markets don't "correct" themselves naturally - people will hold onto the values they believe in until some other agent (by means of force, whether economic or military) enjoins them to shed that value in exchange for another. Another example of this would be to look at how quickly Americans were willing to shed their civil liberties (a long held value) in exchange for a new value called "security." But I digress....

So Flat Taxers (hereon, Flatheads) believe that consumption itself should be taxed, n'est-ce pas? The belief is that spending is universal and regular and the economy does not have phases, etc. Those Flatheads take the assumption that people will always by stuff and this is nearly a good observation, "Look to the Phillipines, the per capita income their is ridiculously low, yet, per capita cell phone use is through the roof! Even poor people will buy expensive stuff!" This is an example of how those who believe in the Flat Tax will support their argument. But it doesn't have any explanatory power.

The logical question to the above would be, "Well, how much does it cost relative to the income of those poor Filipinos to own a cell phone? Do they even own the phone? How much does it cost to use a cell phone and how does it compare to us?" Instead of explaining why it makes economic sense to have a cell phone in the Phillipines, the Flathead rather uses the above to make an emotional appeal, the flavor of which would be, "hey, taxes are unfair, poor people are poor 'cause they make dumb decisions and the rich can afford to not pay, so why should I?"

The Flat Tax, as sold to me, is usually not about economic justice (it doesn't address the fact that the CEOs of firms make 500-1000 times more than their base employees); it's usually sold with a punitive streak smeared a mile wide across the class line. The rich support the flat tax because they will pay less taxes, the lower-middle class support it 'cause they think poor people are directly benefiting from their own hardships, and no one cares how the poor fit in to all this.

What the flat tax proposes to do is tax people on how much they spend per month; those who make very little money would get a "pre-bate" each money to defray the cost of getting basic goods. What this doesn't address are serious are sad: what would the motivation to work be, then? Most importantly, the actual cost to those with little money would be MUCH GREATER THAN it is today. The rich would do exactly what they've always done - pay the minimal amount of taxes they feel comfortable with; those that are serially poor and unconcerned about "contributing to society" would continue to not work as they would still receive their "prebate" and the working-poor and those just barely able to be middle class would become permanently poor because the relative cost this consumption tax would be more like 50% of their actual income.

What if large groups of people cannot purchase a home, what does that do to tax generation?
http://calculatedrisk.blogspot.com/2007/04/housing-slump-reduces-state-tax-revenue.html
this is one of my favorite blogs, by the by.

Here's some (light) reading on taxes and are great for discussion and analysis of tax proposals and their real effects on the economy and perhaps on individuals

Also, understand what poverty really looks like in Georgia:

"1 in 3 counties in Georgia have been deemed 'Persistently Poor' meaning 20% or more of their population have lived in poverty over the past three decades."www.cviog.uga.edu/services/research/poverty/georgiacounties.pdf

Discussion of How Taxes Work:
http://bigpicture.typepad.com/comments/2007/04/some_thoughts_o.html