Searching for a fair tax

Welcome to our fourth week of looking at tax systems. Today, I want to examine how your economic philosophy affects which system appeals to you. But first, a review of the three systems.

Flat – everyone pays the same percentage in tax.

Sliding Scale – the more you earn the higher percentage you pay.

Top-down – if you earn more than a certain amount of money, anything above that number is taxed 100%.

All the systems are fair, depending on your definition of fair. For instance, you might determine fairness based on how people earn money. If you think that money comes from hard-work, preparation, risk-taking, good choices, and so-on, then you’d probably like a flat tax. If you think the rich got that way because of luck, greed, connections, and cheating, then you wouldn’t want to reward that behavior. For you, the top-down method sounds fair because those people deserve punishment (via tax).

Maybe fairness is an after-tax level playing field. The sliding scale may get close to that goal; but the top-down method would get even closer, as it would tend to redistribute wealth from the haves to the have-nots.

The problem is that, in their purest form, all three of the systems have problems. The flatter the system, the more of the tax burden is taken from lower-income folk’s basic standard of living, while not affecting the standard of living of the rich. The more you head toward a top-down system, the less connected lower income folk have to the tax side of tax and spend, while the incentive to earn higher wages is drastically reduced. The sliding scale ends up in the middle as one that has both sets of problems, but to a lesser extent.

So which fair do you like better?

The purpose for this four-week exercise was to recognize that every tax system is flawed.  Every fix you might make introduces both pros and cons and thus trades one flaw you don’t like for another you can put up with.

Remember this when (or perhaps, if) Congress starts working on tax reform. Each side, each lobbying group, each radio show will point to the obvious flaws of whatever the “other” side proposes. What gets lost in the discussion is exactly what we’ve discussed here. All tax systems are flawed. What is being decided isn’t how to make the system fair, but in how to combine the flaws in a way that we all can tolerate. Not an easy task. 

This article was published under the title "Every tax plan has its flaws" in the Wichita Falls Times Record News on March 1, 2015.