By Peter Bearse
When might our yearning for simplicity lead us astray? When dealing with the economy. We see this happening now with schemes for tax reform. We recognize that the income tax has become mind-numbingly complex and rather unfair. So we seek a simple tax. Enter Steve Forbes with a Flat Tax. Never mind that it fails to address the root of our economys failings. Never mind that its just another income tax with which Congress can play its social engineering via tax incentives games. Its flat; and since, according to Tom Friedman, the economic world is also flat, flat must be good.
And so we have the all three NH Republican candidates for Congress competing on flatness -- on how quickly and strongly they recommended the Flat Tax. Unfortunately, theyre informed by ideology, not economic understanding. Why would a Flat Tax be good for the economy? What basic economic problem would it help to solve? What good would it do besides providing less business for accountants, lawyers and H.R. Block?
The major source of our economic problems is that we have
been living far beyond our means as a nation. Savings have been very low and
sometimes negative (dis-saving). Consumption has been unsustainably high. We
have financed higher spending by drawing down equity in our major asset, our
homes. Our trade deficit has been consistently negative, with imports far
higher than exports. Our federal deficit has ballooned. Private debt has risen
like the flames of a house afire.
What would help us get a grip on our economic future? a Consumption Tax [CT], otherwise (though somewhat misleadingly) called a national sales tax. As you can tell from the name, it taxes spending on consumption, not income, savings or investment. Thus, by its very nature, it provides disincentives to excess consumption and positive incentives for higher savings, investment and earnings.It is not nearly as simple as a Flat Tax. Members of Congress can still try to play games with it to favor some interests over others. Yet, its better than the current income tax and the proposed Flat Tax in its ability to help us strengthen and rebuild our economy.
Another advantage is that the CT would force our government
to live within its means. This is because calculations show that a reasonable
CT rate (say, 7-12%) would not generate enough revenue to finance the
PETER BEARSE, Ph.D., International Consulting Economist, 3/16/08