“Flat Taxes and Angry Voters,” The New York Times, Editorial, 10/30/11

There is a strong connection between our economic quagmire and the Republican presidential primary political playbooks for sweeping tax reform.   The public is angry about corporate greed and corporate corruption of Congress.   Washington’s global political perspective has favored capital investment at the expense of American workers.  It is manifested in “free” trade agreements, which have made it possible for corporations to outsource their U.S. manufacturing facilities to lower wage countries.  Corporate lobbyists pressure Congress to approve these deals, and campaign contributions flow to those who support them.

Mr. Cain and Gov. Perry are riding this wave of discontent by focusing voter frustration upon our insanely complicated and corrupt tax code, which has piled loopholes on top of tax advantages on behalf of influential corporations seeking to avoid their tax burden.  This gaming of the tax code has produced the backdrop for the backlash promotion of the 999 Plan and the Flat Tax.  The problem with these proposals is not in their fundamentals, but in their proportions.  Both approaches would eliminate virtually all corporate and personal deductions and loopholes.  This sounds good to voters, who are revolted by corporations that pay zero income tax, by multi-million dollar severance packages for failed corporate executives, and by mammoth Wall Street bonuses for executives in the banking system bailed out by taxpayers.

Ultimately, the 999 and Flat Tax plans, as presented, are destined for failure, since The Times reveals: “More Americans are questioning the Republicans’ plans to keep rewarding the rich.”  In their current form, these implementations would reduce taxes for the highest income groups at the expense of the middle class.  Furthermore, these plans would reduce overall tax revenues in the discredited belief that reducing taxes would spur economic growth.  Republican supporters make this claim, while protesting that Keynesian deficit spending on infrastructure would not work.  However, the major difference is that government stimulus for infrastructure projects would create domestic jobs, but corporate tax reductions might lead to more investment in jobs abroad.

Of course, sweeping tax reform need not be unbalanced.  The public seems ready to accept radical change if it promises to accomplish equitable distribution of the tax burden.  The Times refers to recent polls revealing that the majority believes wealth is distributed unfairly, that most support increased taxes on millionaires, and that most favor tax increases (plus spending cuts) to close the deficit.

Both 999 and the Flat Tax could easily be altered to change the distribution of burden by altering the percentages of the consumption tax vs. the income tax, by increasing the threshold for the income tax while raising the tax percentage, and by protecting the lower quintiles through the Earned Income Tax Credit.

President Obama would seem positioned for success, already calling for elimination of some corporate loopholes, ending the Bush era tax cuts for taxpayers with $250,000 income, and using new revenue for infrastructure investment and deficit reduction.  What Obama needs to do is package his plan in a simplified system that will incorporate his stated goals…which the public seems ready to support.

This site promotes replacing the Corporate Income Tax with a Value Added Tax because it would eliminate a competitive disadvantage in world trade.  The VAT, unlike any component in 999 or the Flat Tax, is border-adjustable under GATT rules; the tax is subtracted from exports and added to imports.  This would have a positive effect on the price/value comparison for American-made goods. The U.S. would eliminate the double-taxation of dividends.  Without a Corporate Income Tax, the U.S. would become a magnet for foreign investment.  American multi-nationals would bring capital home from lower-taxed countries where it is now parked.  And, the VAT would be unavoidable by corporations such as General Electric, which paid zero Corporate Income Taxes in 2010.

The VAT is already endorsed, among others, by President Clinton, Gov. Mitch Daniels, Warren Buffett, Wilbur Ross, Bruce Bartlett, David Stockman, Jeffrey Sachs, Richard Trumka, Andy Stern, Sen. Fritz Hollings, Sen. Pete Domenici, Alice Rivlin, Christina Romer, Ezekiel Emanuel, Fareed Zakaria.  Many more would climb aboard publicly with Presidential leadership.

Balancing the VAT would be a progressive Personal Income Tax with no deductions, a threshold at about median income, and protection for the lower quintiles via the EITC.

Republicans – even if they liked such a plan – coming from Obama would probably call it the “dead-on-arrival tax plan,” but the President might find a catchy name and successfully promote it as a key to restructuring our economy for renewal.