Readers Sound Off on Flat-Tax Proposal

Your examples of “winners and losers” (“A Flat-Out Change,” Jan. 28) make the popular case against the flat tax by showing a gain for the low-income group, a “windfall” for high incomes and a loss for the middle class. One could jigger the examples and come up with different results. The problem with analyses such as yours is twofold:

First, you start by picturing deviations from the current system as “problems.” Most taxpayers consider the current system an abomination, and more and more analysts say it’s broken beyond repair and want to start over. Granted, there are significant transition problems to work through, but they are manageable.

Second, you accept the premise that wealth and high income are somehow bad and must be controlled, confiscated and “redistributed.” There is nothing inherently evil about having money or making money. It is what you do with it that matters, and taking it away from the affluent won’t create in the less affluent any greater ability to make or keep money.

Instead of this conventional thinking, why not examine what the taxpayer gets for the taxes paid? On that basis, the wealthy are getting screwed and the middle class are the robber barons. Highways, airports, national parks and bridges are worth about the same to all who use them. Ditto safeguards like national defense, regulation of airwaves and food inspections. Entitlements, particularly Medicare and Social Security, benefit the middle class disproportionately to taxes paid. Medicaid and welfare benefit the poor exclusively. The rich pay a lot more for value received, and would under a flat tax.

This “value” approach explains why Europeans put up with seemingly much higher total taxation. They get total medical care, modern public transportation systems, clean public restrooms and many other visible services Americans don’t have. Why not drop the “redistribution” mind-set and approach taxation as revenue-raising, then apply a “value-added” test in determining what’s fair?

WILLIAM BRADSHAW

San Diego

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Your article is clearly skewed to the view that it would be harmful to the middle-class taxpayer. The article’s format and presentation is one strongly implying, while not clearly stating, that the examples indicated are normative. While you have a deck on the headline saying “Just Whom Would the Tax Plan Help?,” you fail to follow up, except for the $30,000 single individual, to show the many lower-income families that the Forbes plan would, in fact, benefit.

The report concentrates on examples involving $60,000 couples with little investment income and large itemized deductions of $20,000 to $25,000, indicative of young homeowners in residences too extensive for them. These couples would be “hurt” by the flat tax. Then there is an example of a young family of four with a nice $150,000 salary but high personal expenses (implied by the $51,000 in itemized deductions and by the higher tax brackets these income levels denote) that have accumulated over $600,000 in nonretirement savings and investment that would he needed to generate the $80,000 in taxable investment income the sample reflects. This “rich” couple would enjoy an eye-catching “tax savings” of $25,000!

The itemized deduction assumptions used reflect $60,000 couples living in homes with values of about $250,000 and mortgage balances of $176,000, requiring them to spend about 36% of their gross income just to pay the mortgage, taxes and insurance.

In your example of the couple going from no kids to two kids, you have conveniently assumed their itemized deductions would go up by $5,000 even though they already own that expensive home; this increase is convenient because it is important to the inflation of their “tax cost” in your example. While there may be young couples in this stretched financial position, particularly in Southern California, this is hardly normative of $60,000 couples in all age groups and spread across the country who have mortgages and itemized deductions substantially below these levels.

The inclusion of $80,000 investment income for the rich family conveniently adds $23,100 to their tax bill under current law so that the example can claim they save that under the flat tax. No mention, of course, that if Andy and Adele happened to have invested in a stock that went down comparably, they could have lost $50,000 with minimal current tax benefits softening the blow. Nor do we understand why they were silly enough not to take advantage of tax-exempt munis rather than paying a 31% tax on interest income.

Nowhere in the article or in samples do I read that a family of four with gross income of $32,000, who don’t itemize because they are renters, will have their taxes reduced from $2,300 to zero under the Forbes plan, or that if their income grows to $45,000 they would have paid $4,200 under existing law but only $2,210 under the flat tax. Nowhere do you indicate that if the $60,000 couple with kids had itemized deductions of only $19,000 or less, they would realize tax savings under the 17% flat tax. Somehow, it seems to me there are a lot more of these kinds of taxpayers across the land, but your report doesn’t want to talk about them because those kinds of figures are not a fit for your agenda.

MELVIN A. WOLF Jr.

Burbank

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Your article contains one small inaccuracy, I believe, in connection with income being taxed only once under flat-tax systems, or being taxed not at all or three or four times under current law.

No tax system in any modern economy taxes income only once. As income is recycled among successive taxpayers, it is taxed over and over again. For example, if an individual wage earner makes payment (from his after-tax income) to a roofing contractor, the payment becomes subject to tax again as income to the roofing contractor.

Proponents of the flat tax, who exempt investment income from taxation, make the case that the income has been previously taxed to a corporation and should not be taxed again. This view seems to be based on the false premise that taxes are levied on particular sources of income rather than on individuals. It shares the false premise that corporations are not artificial persons established for legal purposes and thus should bear taxes like any other individual entity. To thus espouse having a corporation’s payment of income tax exempt its payments to other taxpayers from subsequent taxation is inconsistent with the separate, individual entity concept under which it was created. There is an inherent contradiction in claiming for tax purposes that a corporation is the same as its stockholders while embracing the idea that it is a person separate from its stockholders for legal liability purposes.

If flat taxers’ slant on taxing income only once were accepted, we would all have reached the blissful state where no one would pay any taxes since the taxable income of any entity would have been previously taxed to earlier taxpayers. The tax-income-only-once myth is one of many distortions and exaggerations emanating from the Hall and Rabushka flat-tax portfolio.

WILLIAM N. McNAIRN

Palos Verdes

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Your report stated that the goal of the tax revolt is to allow U.S. taxpayers to file their annual returns on a postcard.

Wrong! That’s not a tax revolt, nor is it my goal. I want a tax system that stops redistributing my money to the lazy and so-called victims of this terrible society and stops subsidizing businesses both big and small.

Hopefully, this system will leave me with more money to subsidize myself!

JAY A. TILL Jr.

Montebello