Flat Out Unfair

I set out this morning to investigate Fred Thompson’s new “flat” tax proposal. I could only find Thompson-friendly sources – virtually all are carbon reprints of his talking points. There may be more to learn as it filters down.

The Thompson “flat” tax is fairly simple and not very well thought out – he doesn’t know how much it will cost the treasury. But here’s how it would work:

We would have a choice of paying taxes using the current code, or his flat tax. With the flat tax we would be offered a $25,000 standard deduction, plus a $3,500 personal exemption, so that a family of four would not pay the tax until it earned $39,000. Then the tax would kick in – 10% on incomes up to $100,000, and 25% thereafter.

There’s more to it, of course, but that is the nitty gritty. How they call a two-tiered tax a “flat” tax escapes me. But that’s not the only problem.

Thompson, like every other candidate in either party save perhaps Dennis Kucinich, is blind to the payroll tax. That’s the tax that in a sneaky way takes 14.2% of everyone’s earnings up to $102,000 (2008), and 2.9% thereafter. It’s a regressive tax, and it applies only to wages. Dividends and interest and capital gains – the kind of income wealthy people are more likely to have – are exempt from it.

The payroll tax is a cash cow. The most recent year for which I have numbers, 2004, shows that the government raised more money from the payroll tax than the income tax, even though payroll taxes applied only to the first $87,900 of wages at that time. Thompson kisses the ring on the hand that feeds him, and slyly ignores this tax.

Here’s the Thompson proposal in full disclosure mode:

Family of four depending on wages: Income up to $39,000 taxed at 14.2%, income up to $102,000 taxed at 24.2%, income up to $139,000 taxed at 12.9%, all income thereafter taxed at 27.9%. He creates a donut hole between 102 and 139.

Family of four depending on passive income (interest, dividends, royalties, capital gains): Income up to $39,000, no tax. Income up to $139,000, taxed at 10%. All income thereafter taxed at 25%.

Thompson maintains the basic unfairness of the current tax code – he double-taxes wages while giving passive income a pass. It’s a push in the ‘right’ direction – in the idealized conservative world, all taxes would be paid by wage earners, none by owners of capital. They are pushing us in that direction – in 2008, the initial tax on dividends and capital gains is 0%. Zero.

The idea behind this is, of course, trickle down, aka feeding the sparrows through the cow. I’m not sure they really believe in that, but it’s a nice bouquet of flowers that hides an ugly bride. It’s a way of making the little guy pay the freight. Since it is so inherently unfair and indefensible, there’s no real justification for its implementation. So the best thing to do is what Fred Thompson has done. Ignore it.

When given a free hand to implement their will, conservatives have pushed for “reforms” at the point of a gun. They reimposed private health care on Iraq, and installed a flat tax of 15%. In that country they could have their way. Paul Bremer was a dictator. In this country it’s not so easy. But the essence of the Thompson plan – that wages should be taxed twice while all other income is tax only once, if at all, is an unacknowledged part of our system. No ‘credible’ candidate wants to change that basic structure.

And Thompson is no exception. His candidacy is going nowhere, but his flat tax has legs, I’m sure, in Catoland. Watch out for it. It’s a new version of the current regressive system dolled up to look like something else.