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Both a Congressman & Wealth Redistribution in Camouflage

Sat ,24/07/2010

Dan Boren (D-OK) has made a number of ads critical of his Democratic primary opponent, Jim Wilson.  It bothers many Oklahomans that Boren appears to be just camouflaging himself as a Democrat because his father was a highly respected Democratic Governor and Senator. It’s not clear whether the acorn fell really far from the tree or if Boren’s ads represent what a Democrat has to do to be elected in Oklahoma. One ad showed Boren in new camouflage gear, tags still attached, cocking a gun at his opponent. However, the ads have not gone over well as State Senator Wilson, who Boren chastises as Oklahoma’s “most liberal” senator, was a combat marine in Vietnam.

An article recently appeared in the Daily KOS containing a video making fun of Boren’s ads and criticizing him for supporting a “Flat Tax” scheme. (1) True to form, in the tree scene in the video, Boren is wearing the unofficial state color – camouflage. He is the  only Democrat among 61 Republicans in Congress supporting the “Flat Tax”(or “Fair Tax”) scheme.

Boren apparently hasn’t thought that Flat Tax scheme through. My Congressman, Frank Lucas (R-OK), also favors a “Fair Tax” scheme that would replace income taxes with a national sales tax ( a consumption tax) (2). Boren says it would be a sales tax of 30%. It  may need to be higher for it to be “revenue neutral” as we have to raise a certain amount of revenue to support our government and that would not change. What the “Fair Tax” would change is that more of the tax burden would shift to the middle and lower income groups, those  already benefiting the least from state and federal tax cuts. (3)

While many like the idea of the Fair Tax’s simplicity, that may turn out not to be the case. The Tax Reform Act of 1986 was supposed to bring us “simplification” of  our income taxes but there is little evidence that it has worked. Adopting a national sales tax will have a ripple effect across our economy with unknown consequences. For instance, we would have to tax internet purchases and raise import duties to keep the wealthy from shopping overseas for major purchases.

Economist Mike Moffatt has worked out who would be the likely winners and losers under the Fair Tax proposal: (4)

Winners:

  • People who are inclined to save: People who do not consume as much will benefit from the plan.
  • People who can shop in other countries: People who take a lot of overseas vacations or living near the Canadian or Mexican borders.
  • People who can avoid sales taxes: Those who can exchange or barter services and goods, or the unscrupulous who can buy for personal use and claim as a business use.
  • The wealthiest one percent: They will see an average tax cut of about $75,000 per person.

Losers:

  • The Poor: The working poor pay little income tax but they must spend a larger proportion of their income to survive. They’d pay a larger percentage of their income in taxes than wealthier individuals.
  • Families: Tax breaks such as dependent deductions, earned income credits and child care credits would disappear. It would hurt families with incomes less than $200,000 but help families with income above $200,000, due to the dramatic reduction in the top tax rate.
  • Tax Accountants, IRS Employees and Income Tax Lawyers: Yes, but they’d survive somehow.
  • Seniors: They’ve already paid a lifetime of income taxes and this would now tax them again on consumption as well. They would end up paying a disproportionate share of taxes.

Overall, the Fair Tax is fairer to some than to others, and it looks to be most fair to the wealthy. Our present graduated income tax code is based on the ideas that those who profit most from our country’s wealth, resources, and opportunities should pay a greater share of their bounty in taxes. The rich may not think that’s fair, but that’s fairer and more pragmatic than shifting more taxes to those who have little.

Note added on 3/29/2012: Congressman Dan Boren has decided not to run again for Congress in 2012. This post about his 2010 campaign has been left as it explains the disadvantages of flat tax schemes – and also what a Democrat might try to do in Oklahoma to be elected.

(1) http://www.dailykos.com/story/2010/7/3/881389/-Dan-BorenCongress-Worst-Democrat-Has-A-Primary

(2) For an in depth analysis of the consumption tax see:  http://mises.org/daily/1768

(3) For historical top tax rates see:

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213

(4) http://economics.about.com/cs/taxpolicy/a/fairtax_5.htm