While arguably the regressive income tax is the best way to reward productive citizens, the flat tax does not hurt citizens for being productive. Currently, under the progressive income tax system, welfare recipients who work part time, and who have annual incomes under $10,000, receive a great deal of money back from the government. Compare that with the fact that productive citizens earning $150,000 must pay the federal government 42 percent of their earnings. Total taxation can reach as high as 55 or even 60 percent. A federal flat tax set at 17 percent, as Steve Forbes has proposed, will greatly help the vast majority of Americans who work hard and stop undeserving Americans from benefiting from the system. A flat tax would also make the arduous task of filing a tax return much simpler by streamlining regulation.
Some now advocate a national sales tax instead of a tax on income, proposing either a value added tax (VAT) or simply a federal sales tax of 20 or 30 percent, while abolishing the income tax. This would be disastrous. The negative effects on the poor in our society would be numerous, as poor Americans would see their grocery bills, heating costs, and clothing costs spiral upwards, further impoverishing them. Can you imagine a TA trying to buy his groceries for the month, paying $25 in tax?!
A national sales tax would really hurt people such as TAs, whereas a flat tax would hardly affect them. The rich, who would have more money to spend, would save far more of their money and invest, but they would purchase less. One could argue that the concurrent decrease in the consumption rates of Americans would also lower governmental expenditures. This and other effects caused by the new sales tax, such as a possible decrease of investment in capital goods, would be felt across the country in the shock waves of an economic downturn. Not only that, but a sales tax on top of the corporate income tax (which no one talks about scrapping) would be utterly disastrous for business. The effect of a sales tax would be not only to cause an economic downturn for business, but to increase savings rates among the very rich while leading to economic hardship for middle class and poor Americans.
There is also great concern as to whether the American people can trust the government to not suddenly increase the sales tax even higher or to bring back the income tax along with the national sales tax. With a flat tax, they are at least spared from being taxed twice to death and only have to deal with the possibility that the rate may rise.
A flat tax of 17 percent also will force the government to spend what little money it receives responsibly. No longer can politicians get away with massive deficit spending, and now we can hopefully begin to shrink government back to where it becomes manageable again.
While the flat tax proposal by Forbes makes great economic sense by freeing up tens, if not hundreds, of billions of dollars that the government normally would waste, it is only the first step in regaining economic sanity. The next steps Americans can take will be to eliminate capital gains taxes and the truly disgusting inheritance tax. By eliminating these, the government will begin to stop penalizing citizens for working hard and saving their money.
Overall, when comparing means of taxation, it is far more prudent and worthwhile to impose a flat tax rather than a sales tax. For a flat tax will bring true taxation equality among all citizens, and as a corollary, it will also force government shrink, thus leading to greater economic growth.