One Thing a Flat Income Tax Will Not Solve

Every income tax, progressive or flat, has a problem that shifts the burden unfairly to those subject to paycheck withholding.  Most employees cannot avoid automatic deduction from their paycheck.  Others though enjoy the luxury of voluntarily reporting their income to the government for purposes of taxation.  Millions of self-employed, especially in largely cash businesses as well as those who derive their income from the so-called underground economy or illegal activity, choose to report only a portion of what is owed by law or even none at all and the effect of this is quite significant.

Years ago, maybe 2002 or 2003, when the United States had annual deficits of only around $400 Billion, Barron’s ran a story claiming that if all taxes actually owed by law were paid the entire deficit would vanish overnight and flip us into surplus.  Since it is not possible to track down all this unreported income those subject to paycheck withholding necessarily must pick up the slack.  It can be no other way.

Of course, this is where the advantage of a sales tax comes in.  Everyone becomes a contributor, even those who obtain 100% of their income through illegal means.  Criminals now contribute to the process of their eventual arrest and conviction.  Folks running legitimate cash businesses no longer have to face the temptation to not report all their income.  Everyone pays closer to their fair share and complete avoidance becomes nearly impossible.  Huge compliance costs are eliminated along with far fewer points of enforcement.  In theory the Federal Government could collect all its needed revenue through a sales tax without the complication of competition that faces states or municipalities in this regard, with the threat of losing sales and tax revenue to neighboring jurisdictions.

So while lowering rates, removing deductions, and broadening the base through a flat income tax is preferable to a highly progressive tax with many deductions and armies of lobbyists attempting to create even more loopholes, it can never solve the problem of folks, in a position to do so, under-reporting their income at the considerable expense of those who cannot.  Since the majority of citizens are subject to withholding and this unfair burden placed upon them, it can only be their failure to recognize this that has prevented their demand to end it once and for all.