In my Economist reading group today, we talked about taxation. The article we discussed had to do with the republican primary. It appears that all of the candidates are campaigning under the same banner of tax cuts and the shrinking of government. The latest development that appears to be trending is this idea of a flat tax rate. This is essentially a new tax system that will level the amount of federal income tax payed by the rich and the poor. No matter how much one earns, the same percentage will apply. There are of course different applications of this flat rate idea- Herman Cain’s 9-9-9 proposal for instance (9% corporate and personal income tax and sales tax) and Ron Paul’s particularly libertarian suggestion to completely do away with federal income tax. Of course the argument against this sort of system is that it involves increasing the burden on lower income earners while providing- to borrow Mitt Romney’s words- ‘a tax cut for fat cats’.
Interestingly however, a point was brought up that I think highlights the essential difference between an American idea of government and a more ‘European’ one. What this person argued was that it isn’t fair to expect the rich to pay for the woes of the poor- that the government was limiting the freedom of each individual to rise above the rest without having his money ‘robin hooded’ away. This is a very libertarian approach to government that is in line with America’s obsession with individualism. The burden of taxation then, although necessary, should be shared equally by every corner of society, regardless of their ability to pay.
This is of course understandable especially if you consider America’s founding. It was a breaking away from the nepotism and despotism of a medieval system that arbitrarily decided on a society’s winners and losers.
What is interesting about this persons suggestion is that it is reflective of a collective American ethos (not my words but my professor’s). If you worked hard to earn your money you should be allowed to keep it. If you haven’t, well sorry, you still need to carry your own weight and pay taxes like everybody else. This of course seems entirely reasonable but a little bit impractical.
For a poor person – and in America they are very liberal with their idea of poor – the burden of a flat income tax would of course be decidedly higher. 9% of 20,000 dollars is much more onerous than 9% of 300,000 dollars a year. Should someone who is barely scraping by be expected to pay into society when he can’t even provide for himself? What is the role of government in supporting him? According to the libertarian argument, private charity should replace the role of government. A tad idealistic no?
Nonetheless, it is plain to see that there is a very distinct difference in the European countries- particularly in the Scandinavian countries. There are of course much higher tax rates in Europe than there are in America- the marginal tax rates on income can go as high as 54%. The tax revenue generated is then redistributed amongst the copious amounts of social welfare programs. There is this almost socialist idea then, the rich have a responsibility toward the poor and that it is the government’s job to regulate that. Egalitarian is the word. This of course spills over to the formers European colonies in Asia. Their idea of government is one that is more patriarchal and authoritative (At least in comparison to other democratic capitalist states).
The debate in America then is a very ideological one. Some argue that the rich don’t get merely on their own merit, that they ride on the backs of government infrastructure and on society. A tax system with a ton of loopholes as well has allowed many of the rich to avoid paying taxes either by means of deductions or because most of their income is acquired through un-taxable capital gains and dividends.
Coming from a more ‘European’ idea of government, it is interesting to note that there is such a stark difference even amongst the developed world. It raises very important questions that I’m sure will be occasion for more interesting debates in the future.
Regardless of ideological differences however, I am of the opinion that it is very impractical to impose a flat tax rate system especially at a crisis time such as this. For very practical reasons, the American economy cannot handle more tax cuts if it is going to solve its sovereign debt problem. Furthermore, if you take from the poor, there will be severe retaliation that could result in rising crime rates, further unemployment and a more degenerative society. Uncle Sam risks biting into consumer power that could stall economic recovery. From a realist perspective then, it is reasonable to do just the opposite. Sacrifices have to be made, and the rich incur a smaller opportunity cost… from a strict efficiency stand point, American ethos for now needs to be set aside.