From the Mailbag
Inside Liberty Watch Today - Aug. 3, 2005

Yesterday's Liberty Watch brought a lot of mail, but this piece stood out as another view. 

George Harris, Editor

FLAT TAX

The concept of a flat consumption tax is excellent. Consumption is at least partially discretionary. The worst problem with a consumption tax is that congress will fiddle with what is taxable and lobbyists will seek exemptions for certain products. Introducing a value-add-tax with no exemptions is the least likely to become corrupted.

But don't be swayed by the siren call of Steve Forbes' flat income tax. Taxing individuals and companies at a flat tax of 17% on income sounds good on the surface but the devil is in the details. Forbes' argument for exemption for interest and dividends is founded on the assumption that business pays tax once so those receiving interest and dividends from corporations should not have to pay again. That argument is fallacious. 

Under the Forbes plan, in a competitive environment where everyone is taxed at the same rate, when business pays any tax including tax on net earnings the tax becomes a cost of the product or service which business recovers by passing it on to the consumer in the selling price. 

Consequently the consumer, not the owner of the business, is the effective payor of the tax on business earnings. A wage-earner paying 17% flat tax on personal income pays in addition 17% of business profit included in the price of every service or product he/she might purchase. It is the wage-earner / consumer then who is double-taxed. The owner or stockholder consequently is effectively taxed only once on the hidden income tax in goods and services consumed but no tax on income because dividends from a business evolve from the net earnings of a business which are not reduced by income tax on those earnings. Businesses would thus have incentive to reclassify as much of management wages as possible from salaries to stock options to minimize income tax.

As to the individual recipient of interest on loans to corporations or government, under such a flat tax system his interest income is never effectively taxed. Interest on loans to businesses are passed on to consumers, the weary ultimate taxpayer. Interest on loans to government are again paid by taxpayers, the consumers, the individual taxpayers.

The ultimate effect of Steve Forbes' flat tax is that wage-earners will pay 100% of income tax received by government, and wealthy investors subsisting on interest and dividends will pay nothing on savings and only the 17% business income tax included in consumption prices. That result would not bode well for the American middle class, would not contribute to the ability of middle class wage-earners to eventually become investors. It would drive a permanent class wedge between upper and working classes. I guess Steve Forbes knows that. It is not what he says.

Liberty Watch reader, Jack Van Dien