Flat Tax vs. Consumption Tax

Republican ElephantWhen I first launched The 7 Train, my first blog entry was on the flat tax. Since then, conservative talk show and advocate Sean Hannity talks about the movement to repeal the Sixteenth Amendment to the Constitution which gives the federal government the right to tax income. The first income tax was enacted in 1913 and was a flat tax. Replacing the federal income tax would be what is called a consumption tax, which would work like a national sales tax but would involved higher percent rates on more expensive items. One would pay a higher consumption tax on a Mercedes Benz than on a Chevy Cruise. While both tax reform options offer similar advantages to the American people, the consumption tax is a little more problematic.
The main advantage to going either direction is that you could shut down the IRS. This is a big victory to those of us who want to see a balanced budget in our lifetime without putting people out on the street, metaphorically speaking. Before one considers making cuts to Social Security and Medicare, which will hurt a lot of Americans too ill or too late in life to start over and build an American Dream, or cutting Big Bird, which will not generate enough revenue savings to make a dent in the debt in a $17T deficit, you eliminate the IRS instead; the one government agency nobody likes; Democrat or Republican, liberal or conservative, rich, poor, or middle class. The complete absence of an income tax would make the IRS completely superfluous and the same is true with a flat tax since everybody’s withholdings could be set the tax flat rate, say 9%.
While the consumption tax and the concept of Americans keeping every hard-earned penny without sharing it with the federal government is an easier sell for a political sales representative, as it were, it operates under the assumption that Americans will always consume at a predictable rate. The main reason I prefer a sales tax engine of revenue over an income tax at the state level is it gives the taxpayer more elasticity in the event of hard times, such as a layoff or a need to give up a job to stay home and take care of an ill or elderly relative, or for a woman to have a baby and be a stay at home mom. Such a taxpayer can buy less, including affordable items that are purely wants and not needs. A Subaru Outback station wagon to cart the kids around in bad weather where all wheel drive is desirable instead of an Audi A4, Lincoln Navigator or BMW X-5—you get the idea. But if the federal [national] government goes that route, America becomes prone to more recessions and deeper ones that take longer to get out from under.
The number one source of consumption in the United States of America is retail sales. The number one retailer in the United States right now is Wal-Mart, and Wal-Mart is currently reporting a decline in sales. As long as Wal-Mart exists and the middle class outnumber the rich, it is fair to postulate an axiom stating as Wal-Mart goes, so goes the nation. The logical conclusion is we are headed toward another recession, not predicted to be as bad as The Great Recession of 2008. Although it will not significantly affect the buying habits of the top one percent or even the top twenty percent following the old 80-20 rule, the global decline in consumption will adversely affect revenue from a national consumption tax. It will also mean more frequent recessions because it will deter consumer spending, even in good economies.
As much as I loathe the concept of taxing earned income and as much as I want to see the return of The American Dream in my lifetime, I think the flat tax is the better alternative. I like the 9% figure because it is one percent less than a tithe so it keeps the federal government and all corrupt politicians who make it up from ever putting themselves ahead of God. Ultimately, the recovery of America as a great nation and the revival of The American Dream are in God’s hands and he cannot allow either one to take place as long as he sees the necessity for American to be punished for its sins, consistent with the Book of Deuteronomy. Simply withhold 9%, no more, no less, from every American’s paycheck and wire it directly to the Treasury Department and you do not need the IRS. It is simple and with the wealthy paying 9% of a bigger number than the middle class, and with a more limited government, I believe it will put America on the road to recovery.

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