We have had a flat tax in America for going on 70 years. How is it working? by Gene DeNardo
(libertarian)
Friday, June 5, 2009
Many consider that flat tax some sort of new and radical idea. This is not the case. Here in America we have had a flat tax for close to seventy years. We refer to it as the Social Security System.
President Roosevelt understood that any attempt to enforce a "pension" or "insurance" program upon the American citizen was foolish. The Federal Government is only authorized by the Constitution to raise taxes. Yet he saw, and there most certainly was, a great need to assist the elderly in our country at the time of the Depression. We were a very poor country and one with a large population of indigent elders. No matters ones views on any social service program and its effectiveness, the reality of the situation does not and never will go away as long as we walk this earth; there will always be people in need.
Roosevelt's ego misguided the intent of the program. Instead of addressing the problem at hand, a large number of indigent retired elderly that needed assistance, the President instead went about instituting a massive program to transfer resources from the workers to all retired workers, regardless of need.
Because of the probable unconstitutionality of the intended program, the administration created the Social Security program under the guise of a tax and distribute framework, which is exactly what it was. The important titles in the legislation, which defined the collection and distribution of funds, were separated as Titles II and VIII. The actual revenue collection procedures were filed under the Internal Revenue Code. It was and remains to this day, despite a greatly increased rate, a flat income tax.
Even so, it barely squeaked by the Supreme Court justices. It is obvious they understood Roosevelt's true intentions, but were hesitant in dismissing the social legislation due to the President's threat of "packing" the Court. Roosevelt was trying to impose a rule that would allow presidents to appoint new justices when an existing justice reached the age of 70 and refused to retire. If this occurred, he would have the power to appoint six justices, greatly tilting the court in his favor. So, many decisions of the time we made by the Court with this threat hanging over their heads.
A very important part of the Social Security legislation is Section 1104. "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress". In other words, the Congress has complete and total control over Social Security.
Since day one, the collection of revenue for the Social Security system has been a flat tax levied on the gross income of all wage earners with a complimentary flat tax of equal rate levied on the worker's employer. Whether the employer's tax is actually paid by the worker is a matter of supply and demand. If there is a big demand for workers in a segment of economy, then it is feasible that the employer truly pays this tax. When the usual oversupply of workers is present, the tax is paid by the worker no matter who signs the check. Regardless, the government gets the money.
Not only is it a flat tax, but it is a regressive type. Collection of the tax has always stopped at a certain income level. Presently, this point is $106,000. Because of this, the lower income worker is taxed at a greater rate than the upper end earners. In fact, one can earn a few hundred dollars a month and still be subject to withdrawal for Social Security. It seems the Federal Government believes no matter how difficult it may be for a poor worker to feed themselves at present, it is more important to tax them now and distribute those taxes to the elderly, who may or may not need assistance. If that poor worker survives and the program is still in existence, then he too may get a check!
The tax is collected like any other income tax, right off the wage earner's check. The government then distributes the amount needed to pay those presently collecting payments. Through the years, Congress has used and abused its power over the system to redefine who collects, how much they collect and at what age they collect. As defined by section 1104, this is completely under the jurisdiction of the Congress. It has also been proven time and again in the highest Court that this collection of tax and redistribution to the taxpayer is not in any way the "property" of the taxpayer. If this were the case, the entire system would be unconstitutional.
To further state the case, there is a "surplus" amount that is collected each year that is above and beyond the funds needed to meet the present payment obligations. And it is a lot of money. It is placed in the Social Security Surplus Fund. In recent years this amount has been in excess of 2 trillion dollars.
The government kindly "invests" this money for the taxpayer. The funds are used to purchase "special" Treasury Securities! So, like any income tax, this money is used to fund the Federal Government in any endeavor that is deemed important at the time! Of course, the taxpayer, by the contract of the Security, promises to pay both the principal and interest back to himself. For this reason, this transfer is not accounted against the Federal Debt! Since it is impossible to pay yourself back without again "earning" and submitting the same amount in taxes, this "expensing" of the Social Security Fund is well....a tax! There is no sleight of hand here, the Social Security Tax is and has always been a flat tax.
If you are a governing agency, then a flat tax definitely works. You are able to collect large sums of money very quickly and by returning a portion of it to keep the populace appeased, you can spend the copious amount remaining any way you please. If citizens begin to grumble, pay a bit more of it out, since you have total control over the system anyway and can raise rates at will. Since you have also done an exceptional job convincing the worker that this tax is not a tax but a "premium payment" that "guarantees" future "deserved" benefits, you have created a sort of a perpetual motion flat tax machine!
What to do? No matter how you glare at the problem, it isn't good. There is no easy solution.
I would suggest lowering the total rate to 10%, 5% paid by the worker and 5% paid by the employer. The Security Surplus Fund should be used "only" to pay existing benefits and all funds within it should be kept in cash. Not one dollar in this fund should be diverted into the general fund or be used to purchase Treasury Securities. Benefits should be slowly adjusted down accordingly. Through time, the rate should also be lowered, eventually to zero and the program should be slowly abandoned. We must realize we are abandoning a "flat tax" not an insurance program.
The single most important task that the Federal Government should undertake to insure that its elderly retired citizens are not indigent is to eliminate inflation, which is completely and totally within their means and under their control.
Once this is accomplished, the numbers of poor, older citizens will greatly diminish. For those that remain, those that have spent their lives as citizens of our country and have begun to be "long in the tooth", yet experience the pangs of hunger and possibly homelessness, use our social programs for what they were intended for: feed and provide shelter. There would be no need to raise more taxes, instead build a few less bombs.
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Posted By: Jake, the Champion of the Constitution
Date: 2009-06-05 10:38:09
Gene - nice piece. I believe I am correct when I state that the "flat tax" is 15.3% - doesn't really seem so small when you add it all up. Besides, inflation, indirect taxation by corporate income taxes, would you agree with this figure?
6.2% from employee's (what they see) for Soc Sec, 1.45% for Medicaid
plus the matching 6.2% from employer for Soc Sec, another 1.45% for Medicaid
Social Security taxes are one of the worst taxes ever and unfortunatley a lot of people don't see it as a tax but rather a "contribution to your retirement" YEAH RIGHT!!!!
Social secutirty is the biggest PONZI scheme ever. The government put in jail people like Ponzi and Bernie Madoff among others for the illegal ponzi scheme. Like the old saying goes: "Don't steal, the government hates competition". Bernie Madoff is in jail for doing the smaller version of his social security. At least with Bernie Madoff, if I was one of his victims, it was my responsibility to 'invest' with him or not. Bernie never forced nobody to contribute to his Ponzi scheme. He may have lied, deceived, cheated, but never forced nobody to contribute. The Social Security is even worst becase we don't even have a choice on wheather we contribute or not. If I die before the social secutirty benefits age, I get NOTHING!!! and if my kids are adults, they get NOTHING either.
So yes, Gene, Social Security is not only a tax but one of the worst taxes in history.
BTW: the lower income people if they qualify for earned income credit on their taxes, they will get all of their social security taxes today and still keep the benefits if they ever received them. Somebody who earns $1000 per month with a child will pay $150 in social security each month (between employer and taxpayer) and still get close to $200 per month back from the government in redistribution through the earn income creadit plus other welfare programs. So the result is that the lower income people will NOT pay for social security and still show as if they paid.
One more thing: The employer match of the social secutiry tax (also called the employment taxes) is even more idiotic especially with unemployment so high and the raising of the minimum wage. As a small business owner it pisses me off to pay the government a tax so that I can hire someone to do a job. It really motivates me to not follow the law and pay my people in cash. Then, although illegally, we both save (my worker and me).
What?! How can you call this a "flat tax"? A flat tax is one in which all citizens pay the same amount. "Same amount" is not the same as "same rate." Gene, you even correctly pointed out that the SS tax is regressive. This shows that it is indeed not flat.
You wrote:
"The single most important task that the Federal Government should undertake to insure that its elderly retired citizens are not indigent is to eliminate inflation, which is completely and totally within their means and under their control."
The Federal Government is not sanctioned by our Constitution to insure anything. It is only sanctioned to protect our rights. Any concept of social security or protecting indigent people is beyond the scope of American government.
"A flat tax (short for flat rate tax) is a tax system with a constant tax rate."
Hi Maria, this is right out of Wiki, but you can look anywhere for the same definition. I don't know what you would call a tax where everyone pays the same amount.
The Fed is the cause of monetary inflation which is the reason the dollar is worth about a couple pennies compared to its 1913 value when the Fed was created. I really don't think money creation and the resulting inflation by an independent monopoly banking cartel was "sanctioned" under the Constitution.
Here are some of the things our government presently "insures": banks, corporations, auto companies, sports corporations, nuclear power plants, the highway system, the electrical power system, the largest military in the history of the planet. 10,000 nuclear warheads. It also insures that private corporate resource outfits get our public resources at a fraction of the cost they are worth while we have a 10 trillion dollar debt. It insures that the right dictator is in place in the right third world country so our mega nationals can do their cheap business there. The list goes on and on. If you think making sure poor, old people have enough to eat and a place to sleep is the first thing our government "insures" that should be eliminated, that's your opinion. Personally, my heart says otherwise.
Wouln't a tax where everyone pays the same amount and not the same rate be called a 'flat fee'. I wouldn't mind paying something like $10 per year per person for a tax fee regardless of income or age (even for kids). With more than 300 million residents in the US, that would be more than $3B in tax revenue. That should be plenty enough to run a small federal government with its sole purpose of protecting the constitution. Everything else should be left to the states.
yes, I think you are right, it would be simply a fee. like car registration which is $53 a year here, no matter the car. income tax alone is about a trillion a year, which it is obvious isn't enough for the feds!
check out "geo-libertarianism" sometime, you can google it. it's the only place I think "revenue" should come from.
geolibertarianism seems like an interesting concept which is much better than the current system. We already have such a "rent" concept at the municipal level through property taxes. And as a result we also have waste on city governance, schools, pensions, cops, firefighters, libraries, etc... So with Geo-lebertarianism although less unfair than taxing the fruits of your labor thus turning you into a slave there is still room for government waste.
However, at the municipal level, depending on the property tax rates (rents to the city) we are free to chose where we move, so there is still a little bit of freedom to chose the city that taxes the least and gives the most. Then in addition to that you may even want to create another level of micro-government thorugh condo associations with association dues which such community directly manages those dues as they see fit. The president of a condo association draws ZERO salary and thus is a more fair level of government at the micro level than at the federal level. An association may have 1000 houses or even as low as 10 to 15 houses. They may have their own community ammenities like pool, tenis courts, club house or neighborhood parties, common landscaper, even their own home-schooling program alternating between the resident's homes each week.
If we implement this rent at the federal level, there is still going to be government waste, therefore, the geo-libertarianism needs to be acompanied by a strong restraint on government waste and redistribution. Also, we would no longer have a choice of community as no matter where we move, the federal rent payments will have to be made. So the best way is for the federal government intervention to be so little that the community geo-libertarianism determines what the rents or condo associations be in their community and thus affects directly each individual who lives in such community rather than re-distributing it at will. That will allow not only the states but also communities inside the states to have their own form of micro-governments with their own form of rents, tax or dues each affecting the individuals around these communities more directly than those unnecessary idiots at the federal level.
Geo-libertarian micro-governments such as condos, associations or multi-family buildings or non-association places could even include social comunes, religious cult-like polygamist places, amish as well as free-for-all anything goes communities. They will all be legal and free under the Constitution as long as you are not forcing people to join your community or forcing those whe were there before you to abide by your new established by-laws. But if it is a new place or a place with established by-laws, it is up to you to either buy or not buy into the rights of that common property and abide by these by-laws. So as an individual, you still have some form of choice.
Geo-libertarianism at the federal level? I don't see it. I only see it at the micro level. At the federal level, there needs to be a very small minimum fee and they should be able to run the entire Federal government with a shoe-string budget or with voluntary contributions as any charitable organization does.
you are right, at the local level. it is said that the best way for states and the feds to collect is to "levy" the local municipality a percentage of their aggregate land rent. if the county doesn't want the state services, they don't pay and don't receive the services.
what i think is better is land rent at the local level, resource levy at the state level such as Alaska does and equal % aggregate value of resource from the state to fed. small fed, bigger state and most control to localities, but overall much smaller gov.
I thought that Alaska had NO sales tax and NO income tax. The AK government runs operations with the oil revenues and each year, the oil revenue surplus is passed to the residents. So it seems that in Alaska is the other way around: the government actually pays you to live there. So it is like you are taxing the government instead of them taxing you. Then from that money you pay your local property tax. When gas prices last year where at $4/gal, because payments are flat per resident (including children) and regardless of income, there where families of 5 receiving more than $20k for last year. But that only works there because Alaska is the wealthiest state in natural resources (oil) and the state shares the revenues. The down side, of course is: Who would like to live there? You may have more freedom and even free money in Alaska, but 70 degrees below is a very steep price to pay for that freedom.
Actually, it can work everywhere. If land rent [resource rent is land rent] is the tax and the government is small, everyone get the citizens dividend. It applies to that which is not produced, here before us.
"TRD", the tax you are thinking would be a head tax. If I recall correctly, this is explicitly probibited (like the income tax was before early last century) under the heading of "no direct taxes". The Fed was until 1913 funded via excise, import and sales taxes only.
In order to fund the FED to its current wasteful level, you would need 2T or so, which'd be 6000$\head at a population of 365M.
The biggest issue with the $ the Fed (state, or local city) is that they advertise a tax on an item for an express purpose, say on a gallon of gas in order to use the revenue for infrastructure maintenance. This is very logical and all pay - business and individual - according to useage. The problem is the bait-and-switch in that the funds ar ethen added to the general fund, and not set aside for the express purpose advertised. Then, when funds are needed to repair a bridge, or pay for expanded usage of "Social Security", the money isn't there, so "oops! we need to raise taxes!"
There are some things for which We the People need to be able to pass laws directly, without approval by Congress or POTUS, similar to a CA Referendum process. One would be term limits, another requiring a super-majority (60-70%) of both houses in order to pass any tax increase (or requireing a referendum), a third would be on penalty of imprisonment, that physically separate accounts be maintained for taxes established to cover defined expenses, like that stated above. Independent audit with publicly posted results, and independent prosecutors would be necessary for enforcement.
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