Editor’s note: This commentary is by Norm Etkind, who was the founding president of InventVermont. He lives in Woodbury.
[W]hat should a fair federal taxation system look like?
The fairest way to assess taxes is to have everyone pay the same percentage of their income in taxes. We’ve seen proposals like that before, commonly called a “flat tax.” However, those proposals were generally thinly veiled attempts to lower taxes on the wealthy.
I’m not proposing a flat tax as was commonly understood. I’m proposing a fair tax.
The basic elements of this tax would be all income in, and all necessary expenses covered.
Included in “all necessary expenses paid for” through the fair tax would be the typical costs of running the government, but also Social Security, disability, unemployment insurance, Medicare, health and dental care, and long-term care.
It is important to have the broadest tax base possible to keep the tax rate down. Also, having all income in the mix prevents distortions in a fair tax plan. “All income” includes, but is not limited to, wages, investment income, insurance proceeds, and inheritances. There would be no deductions or exemptions, because they create winners and losers. If the government thought there was something worthy of monetary support, they would appropriate funds for it and not alter the taxation landscape.
There would be one taxation percentage applied that would start at an income level equal to a low amount to cover basic necessities (below that level, people would still be paying state and local taxes and fees). I’m not an economist so I can’t tell you what that percentage would be. With all income in, the rate should be at a manageable level.
The reason that this plan creates a better fairness distribution of tax burden requires getting into some specifics about how our current system works. Contrary to popular thought, when all taxes are considered (including sales taxes, payroll tax, property tax, etc.), there is not much disparity in the percentage of income paid in total taxes. The poorest 20% pay a combined tax of 20.2%.
The middle-income quintile, which includes the U.S. median household income level of $57,652, pays a combined federal, state and local tax rate of 25.2% of their income, the top 1% pay 33.7%. (Sources: Institute on Taxation and Economic Policy, April 2019, for combined federal and state rates, U.S. Census for other data)
The major difference in the overall burden occurs when the cost of medical care is figured in. As we know, medical costs for wage earners are generally paid by some combination of employer or employee, but the cost must be paid either way, in funds that could be in the employees’ paychecks.
Based on data from the Kaiser Family Foundation, the annual per person cost of medical care in the U.S. is now $10,224. For the typical family (now at 2.58 people) this is a cost of $25,580. This represents 44% of the median household income but for the million-dollar earner, this is less than 3% of their income. The fact that wealthy people pay a small percentage of their income for their medical costs skews the fairness equation and is an important factor in the medical cost crisis we have today.
What are the advantages of the fair tax, single-percentage system? In addition to providing needed coverage for essential services, a significant benefit is that it relieves the burden on our businesses to process and pay for a large set of social programs and health benefits. Entrepreneurship and capitalism can flourish when these costs are divorced from the workplace, giving people the freedom to change jobs and start businesses and facilitating international competitiveness.
With everyone paying an equal percentage of their income toward health care, there will be a greater incentive to structure medical and drug costs more efficiently and finally address the fact that we pay nearly twice as much as other countries for similar outcomes.
The long sought-after simple tax form would come into play and the numerous tax code exceptions that benefit segments of the population would come to an end. Of course, changes would need to be phased in over a period of years to avoid disruptions in markets and long-established norms. Other proposals that purport to address health care costs and fix the taxation system just seem to work around the edges of an inherently counterproductive and unfair system.
