MY INFAMOUS FLAT TAX ESSAY - READ IT AND COMMENT AT THE BOTTOM!
THE FLAT TAX - compiled by Michael Fisher
Some of the hottest political debates today revolve around the concept of a flat tax. I realized the other day that my thoughts on the whole flat tax concept were not as complete as I would like them to be. I decided to sit down and research the topic thoroughly, blend my thoughts in with the information as needed, then pass it on to you for comment. Read it and let me know what you think! In presenting this here, my main goal is to offer either facts or concepts that I believe are true without getting too scattered in my thought process.
I guess the best thing to do is start with the whole concept of capitalism. Capitalism has become a dirty word in some circles, and I believe that in itself has a lot to do with many of the problems we are having today. Remember that pure capitalism (laissez faire capitalism, that is) requires total separation of Economics and State, and we certainly donít see that in America today. I think that we would agree that we were much closer to that type of environment earlier in our history, and I believe that had a lot to do with our economic successes. In this setting, we grew from a baby nation to a country with the strongest economy in the world in a relatively short time period. We should not be ridiculing capitalism, but rather ridiculing the way we are doing things in this country and the way we have strayed from doing things.
What role would the government be playing in a truly capitalist society? In my mind, they would only be protecting the citizens from violations of freedom or fraud through use of police (for internal threats), military (for external threats), and the courts. I donít think anything that Iíve said to this point is a revelation to anyone, but where I lose some people is the next step.
The very essence of true capitalism is individual freedom, and I believe in doing whatever it takes to guarantee a personís personal freedom (you do too, right?). Is the fact that a man does not have enough money for food a violation of his freedom? No. Is the fact that a man is forced at the point of a gun to pay taxes a violation of his freedom? Yes! Since capitalism upholds individual rights as absolutes, capitalism upholds freedom as absolute. It just does not line up as nicely with socialism or communism as some would like. Basically, my point is that the United States of America is NOT a capitalist nation.
Let me try to answer a few common questions that I have been asked in the past.
WHAT IS A CAPITALIST?
From a purely economic point of view, a capitalist is a person who buys in order to sell for profit. However, the productive role that capitalists and businessman serve cannot be overstated. Far from being exploiters, the true function of capitalists and businessmen is to raise the productivity, and thus the real wages, of manual labor by means of creating, coordinating, and improving the efficiency of the division of labor." By continuously improving the efficiency of labor, capitalists are responsible for raising (real) wages and creating employment which serve to raise the standard of living of everyone. Therefore, it is the capitalists that are the true humanitarians, it is because of them that so much life-saving and labor-saving technology is available to so many people. A few capitalists and businessmen have done more to help mankind live a more enjoyable life (think about it for a minute - how many people would not be alive today if it weren't for the capitalists) than all of the humanitarians, social workers, and clergy men combined. If one considers human life a value, then they should regard capitalists as one of its greatest promoters. Mother Theresa is a phenomenal woman, but if she really wanted to help people, she should try and accumulate enough capital to start a factory in India and employ thousands of people who would not have jobs without her, right?
HOW IS DEMOCRACY RELATED TO CAPITALISM?
That depends if we are talking true democracy or the Americanized version of democracy. An absolute democracy (which I would define as unlimited majority rule) is incompatible with capitalism and freedom. This is so because capitalism rests on the principle of individual rights. In an absolute democracy, rights would really have no legitimate meaning because they could always be voted away in the next election. Individual rights must be consistently upheld if capitalism is to be achieved, and if the majority may do whatever it wants regardless of the rights of the minority, capitalism cannot exist, not even in principle.
When most people think of "democracy" they usually mean a constitutionally limited democracy like we have in the United States. The function of a limited democracy would be only to decide who held political power and how that power is specifically exercised (such as how many policemen or judges are needed), but what that power is should be strictly defined and limited in the constitution, and this basically was the original American system. In a proper capitalist nation, a constitution based upon individual rights would be necessary to limit the actions of its citizens and the government. Under capitalism, the majority would never be able to vote to violate the rights of the minority, no matter how large the majority or how small the minority. Individual rights would not be subject to vote.
DOESNíT UNREGULATED CAPITALISM LEAD TO WORKER EXPLOITATION?
I really donít believe that it does. The simplest answer to this question is that in a capitalist society all workers are free to choose who they are going to work for. If workers donít like the terms that an employer is offering them for a job, they can simply look for work elsewhere until they find a better job, or not accept any job at all. Does the fact that a worker doesn't like everything about his job mean he is being "exploited"? For someone to be exploited I would think that they would have to be physically forced to work against their own will. It is only a government, not a businessman, that has the type of power necessary to force people to work against their own judgment.
In a free market economy, all employers must compete for the services of their employees. If an employer offers lower salaries or poorer working conditions than other employers in a given field, workers will seek to work elsewhere, and the employer will lose his employees and go out of business. This means that it is in the economic self-interest of employers to provide higher wages and better working conditions than their competitors. Wages are certainly not risen or lowered because an employer is kind or cruel. Wages, like all other commodities, are subject to the law of supply and demand. It is an inevitable consequence of capitalism, through the accumulation of capital and the widening of labor markets, that workers' wages rise and their choices of employment increase over time. It is capitalism, not monopolistic unions or "pro-worker" legislation, that brought the pre-industrial serf out of his misery, right?
WOULDNíT UNREGULATED CAPITALISM LEAD TO UNSAFE PRODUCTS AND SERVICES?
Many opponents of an unregulated economy fear that without government safety regulations unscrupulous businessmen will try and maximize their profits by selling cheap, unhealthy, and unsafe products to an ignorant populous. On the contrary, however, it is the profit-motive that would ensure the safety of products and services in an unregulated economy at a level higher than in an economy with safety regulations.
In a free market there are no government agencies deciding what products, foods, and services qualify as "safe enough" to be sold. This means that under capitalism all companies would have to earn their reputation through a demonstration of consistent quality and safety to their consumers. A good reputation would be essential to success for any company, whether they sell pizza or stocks, in a free market because consumers would realize that it would be their responsibility, not some bureaucratís, to decide for themselves what products to and services are worthy of their money. The importance of reputation would force any potential profit seeker to ensure that his products were safe and his customer's trusted him, or else they would simply purchase from another competing company. Furthermore, the free market would prevent any "fly-by-night" scams from having any real success because before any company could achieve real success, it must establish itself with a good reputation for quality and safety which can take many years. For what investor would take the advice of a brokerage company that just opened its doors with no success rate to speak of as opposed to a firm that has been in existence for decades with an unparalleled reputation for quality investment advice. Therefore, it should be realized that it is in the economic self-interest for companies to provide safe products and quality services in order to meet the public demand for them and beat out their competitors. Finally, it should be observed that in a free market private agencies and publications would exist for the sole sake of recommending quality products and services and could help to set the standard for a reputable business.
If you think about it, you realize that it is safety regulations which actually operate to lower the quality of products and services. When safety regulations force companies to divert their capital into areas of production that they would not have done so on their own, it leaves the company with less capital to invest into areas of production which they otherwise would have, which will end up affecting the overall quality of the product. Also, it is usually much easier for a business to obtain a government safety license than it is to actually earn a quality reputation. This leaves to possibility of scam artists taking advantage of people, because the typical consumer is all too willing to place their faith in a government license which could have easily been earned by bribing an official. Furthermore, safety regulations create a false sense of security and promote consumer irresponsibility because they discourage the need for consumers to be responsible for their own choices.
Most importantly, all forms of government regulation, whether they are personal or economic, are violations of rights -- the right to free contract, and should not exist in a free, i.e., capitalist, society. If a company wants to sell cheap and unsafe products, and people are willing to buy them, then no one has the right to stop them from doing so.
HOW WOULD RACISM BE INFLUENCED BY THE SHIFT TO TRUE CAPITALISM?
Because the force driving all economic activity under capitalism is the profit motive, businessmen obviously want to maximize their profits at all times. The simple fact is that it would not be in the economic self-interest of companies to hire white workers who are less qualified than black workers for the same wage, or to hire white workers who are just as qualified as black workers at a higher wage. If the black worker is able to do the same work for a lower wage, then it would be in the economic self-interest of the employer to hire him. It would also be in the economic self-interest of the employer to hire a black worker who can do the job better than a white worker for the same wage because this would increase his companies overall efficiency. Conversely, if a racist employer was willing to pay higher wages for white workers or if he was willing to hire less skilled white workers because he prefers the color of their skin, he would be at an economic disadvantage in a competitive market place where other companies could afford to offer cheaper services or products than him because they were not practicing racism in their hiring practices. In other words, if a company wants to maximize their profits and be as competitive as possible, they will practice colorblindness -- the profit seeking businessman is a black man's greatest ally against economic injustice. Think of a small company with just 10 people and an owner that is racist enough that he is willing to pay whites just 25 cents more per hour to work for him. In a forty-hour work week, with fifty work-weeks in a year, he will lose $5,000 (since .25 X 40 X 50 X 10 = $5,000). That quarter an hour can cost that employer quite a bit each year, probably more that he is willingto pay.
Finally, it should be known how the mixed economy in which all blacks in the United States live serves to stifle their economic equality. For example, all antiprofit legislation, which either limits the amount of profit a business can make or taxes profits so heavily as to make it a burden to try and attain them, impedes black advancement because employers are free to practice irrational discrimination without fear of economic punishment. Secondly, minimum-wage laws artificially raise wage rates (agreed?) and therefore cause employers to hire less workers, the impact of which is always felt on the poorer and least educated, of which blacks comprise a disproportionate amount. Also, the welfare system allows blacks who could otherwise get jobs to live off of welfare payments. These payments serve to stagnate the ability of the recipient because even if the welfare income is higher paying than a job would be, in the long run the recipient does not acquire the abilities that could promote him to better jobs in the future. Furthermore, the self-perpetuating cycle of the welfare system leads many blacks to a life of dependence and self-abasement. Finally, it should be noted that anti-discrimination laws which force employers to hire minorities serve only to increase tension between races and do not achieve any permanent form of stability.
WHAT WOULD HAPPEN TO THE POOR WITHOUT THE WELFARE STATE?
This is one of the most common questions offered up to combat capitalism. To answer the question very basically, I believe that the welfare state represents a gross injustice and massive violation of individual rights. Is this not simply a system in which the government steals money from most of citizens to give it to others? There is nothing that can justify the violation of rights, especially not the "need" of the recipients of grand scale theft.
SHOULDNíT THE GOVERNMENT AT LEAST PROVIDE PUBLIC EDUCATION?
No way! It is a clear violation of rights for the state to force children to go to school with or without their parents' consent to learn ideas that their parents may or may not approve of (today's private schools are a false pretense because they must "live up to" educational standards set by the state). Government schooling is bad in theory because it assumes that a proper function of the state is to provide education for some of its citizens at the expense of others, and it is not. The state must never enter the realm of teaching ideas because then it becomes nothing more than a tool for social engineering. Teaching is necessarily selective, therefore it should be up to the parents to send their children to schools who teach in the manner they deem best. It should not be up to pressure-group influenced politicians to decide the content of a child's education, and therefore his mind.
The sorry state of American education, which has become nothing but a vast bureaucracy, pays tribute to the fact that the government cannot provide quality education to its citizens. The solution is to give the market free reign on education and end the state sponsored monopoly on education. If the government can't even deliver mail on time, then how are they supposed to be expected to properly educate people? (Sorry, I just had to say itÖ)
In an industrial society there is a very real economic need for education. If educational institutions had to compete for the value that is attached to the diplomas the offer, educational standards would necessarily rise. Like all goods and services provided in the free market, quality education would become a service that would available to nearly all of the population because of its high demand. Just look at what a (basically) free market has done to the computer industry, with cheaper and more powerful computers being made every few months, just imagine what it could for education. Schools would be competing with each other to provide the best education at the lowest price to all consumers.
There is a concluding principle that should be realized: The free market can do anything cheaper and with higher quality than the government can, except provide protection from force. The state necessitates bureaucracy and waste because inherent in all government operation is a grave split between service and payment which means there is little or no incentive for government to ever improve the quality of its services.
SHOULDNíT THE GOVERNMENT ENFORCE A MINIMUM WAGE?
Not in a capitalist society! Minimum wage laws violate the freedom of two people to enter into a voluntary association with each other and actually end up hurting those who they are intended to protect, the worker. Minimum wage laws are supposed to stop employers from offering wages that are considered to be "too low." In an attempt to protect workers, minimum wage laws actually turn out to cause unemployment. For example, if the minimum wage is $4.25/hr, then it means that anyone who's labor is worth less than $4.25/hr cannot get a job. This can be easier understood if looked at from the point of a worker who has labor to sell. If an unskilled worker (who usually needs a job more than a higher skilled worker) only has labor to sell that is worth $3.00/hr, then a minimum wage of $4.25/hr will stop him from selling his labor and he will not be able to get a job. If an employer is forced to hire workers at a rate above what their labor is actually worth (that is, as determined by the law of supply and demand in a free market) he will necessarily hire less workers -- causing unemployment, or raise prices -- shifting the burden onto the consumer. Furthermore, minimum wage laws stifle economic advancement because it is usually the poor who would be willing to work for less than the minimum wage, and if they cannot find jobs, they cannot better themselves.
I think that makes it clear about how I feel about the role of government in this society. Bigger is not better! How does the flat tax fit into all this?
WHATíS WRONG WITH OUR CURRENT TAX SYSTEM?
High tax rates penalize productive economic behavior, reducing incentives to work, create wealth, and take risks. Any professional economist will tell you that as marginal tax rates rise, people tend to work less. Today, the marginal rate for federal, state, and local taxes, for the average American, is 48 percent. As a result, the average family pays more in taxes than it spends on food, clothing, and shelter combined. Naturally, many Americans ask themselves why they should work longer hours when government is going to take away half of their earnings. In an economic setting such as the one we are in, workers and entrepreneurs spend less time trying to build the proverbial "better mousetrap" because the government is going to take most of the rewards for doing so anyway. The net result is a poorer nation.
The chief economic problem before our nation today is slow growth in worker productivity and stagnant wages. The problem is summed up in this year's Economic Report of the President: Growth in average real compensation declined from 3.0 percent a year between 1948 and 1973 to 0.7 percent a year between 1973 and 1993. This decline parallels a similar drop in worker productivity growth, from 2.5 percent per year to only 0.9 percent. If real compensation had continued to grow at the same rate after 1973 as it had in the previous 25 years, the average compensation of a full-time worker in the United States in 1993 would have been $62,400 instead of $40,000.
Multiple taxation of capital income reduces incentives to save and invest, thereby undermining the economy's long-term performance and slowing wage growth. The largest problem with todayís code is its discriminatory treatment of savings. When an individual buys a consumer good, his income is taxed once, at the time it is earned. If the same individual buys stock in a company, his income is taxed twice, once at the time it is earned and again when the stock generates a return. If he should later go on to sell the stock for a profit, incurring a capital gain, the same income is taxed yet a third time. Obviously, this system makes saving and investing much less attractive relative to consumption (Americans currently save just 4% of their income). The nation is even poorer as a result.
Saving and investment are directly linked to higher living standards in this way: when saving increases, the pool of capital available for investment increases, thus more is invested in machines and equipment, which raises the productivity of workers. Only by increasing their productivity can workers realize higher wages. Because the flat tax would tax all business earnings at source -- the business -- but not double tax them, it would promote greater levels of saving and investment and higher living standards.
The flat tax also lowers the cost of capital by allowing business to expense (or fully deduct) the cost of equipment, structures and land at the time of purchase. In contrast to today's dizzyingly complex maze of depreciation schedules, expensing is simple, economically neutral, and pro-growth. It is neutral because expensing prevents double taxation, and pro-growth because more investment means higher productivity and higher take home pay.
But higher saving and investment aren't enough. We also need greater rewards for work and risk-taking, the true engines of wealth-creation. Instead of punishing entrepreneurship with steeply progressive tax rates, as we do today, the flat tax slashes the top rate from 40 percent to 17 percent, unleashing America's latent talent. By the way, Joint Economic Committee research indicates that at least $1.5 trillion of capital is locked-up because individuals do not want to absorb high capital gains taxes.
We have a needlessly complex tax code that imposes high compliance costs on taxpayers. Even the Internal Revenue Service can no longer give accurate advice on it. The IRS sends out eight billion pages of forms and instructions each year (it has 480 tax forms and another 280 forms that tell you how to fill them out). Laid end to end, these would stretch 28 times the circumference of the earth, and it requires the chopping down of 293,760 trees to produce the necessary paper. On the other side of the coin, Americans spend 5.4 billion man-hours each year calculating their taxes -- more man-hours than it takes to build every car, truck and van produced in the United States! That is a sin in itself. The tax code also puts another drag on our economy worth an estimated $232 billion a year in compliance costs, an amount equal to $900 for every man, woman, and child in the country.
A scary fact is that we have more Americans working for the government than we do in manufacturing. All of this government regulation does little to protect true individual freedom. Three horror stories that I found on the Net while researching:
In Sacramento, California, residents are reeling over a U.S. Fish and Wildlife Service ruling last fall which added three varieties of the fairy shrimp to the endangered species list. The agency relied upon a one-paragraph petition submitted by a Davis, Calif., botanist in 1990, even though millions of the hardy shrimp can be found in California, Europe, Asia, Australia and Africa. The decision has shut down a pony ranch that housed a Sacramento program for needy and disabled children and could cost the Sacramento-area housing industry $550 million.
Bob Floyd of Muncie, Ind., had a "wetland" mysteriously appear on his property when a local business accidentally cut a drainage pipe. Federal regulators swooped in to protect this "wetland" and forced the 80-year-old farmer to stop farming. The so-called wetland has since dried up, but Mr. Floyd may have to sell the land his family has farmed for a half century.
John Thorpe's plans to build on his own property were thwarted by the Fish and Wildlife Service, which demanded to know what steps he had taken to preserve the salt marsh harvest mouse. Though Mr. Thorpe only wanted to develop mostly on the dry, upland portion of his property, an agency of the U.S. government theorized that when global warming melts the polar ice-caps, the Pacific will rise and inundate the habitat of the salt marsh harvest mouse on his lowlands, forcing it to seek refuge on Thorpe's highlands. For this science fiction story, Thorpe was denied permission to develop his land.
Again, I think that the government is too large for our own good.