Donald Sensing mentions that Iraqis will soon have a flat-tax system that's more fair than the American system. He then discusses the idea of a flat tax, and argues that all deductions should be eliminated, particularly deductions for charitable giving and interest paid on mortgages -- but I don't think his arguments take everything into account.
Despite pushes by several prominent politicians and organizations in America to establish a flat-tax system here, the idea has hardly got off the ground. The article cited blames both parties for being to wedded to the home-mortgage deductions and the deductions for charitable contributions.I don't see why having two deductions would threaten the survival of a flat tax; there's a potential slippery slope, but I don't see slippage as inevitable if the flat tax is implemented via Constitutional Amendment.Obviously, I have a vested interest in the latter myself, since contributions to churches are deductible. But dadgummit, "flat-rate" means flat rate. If the system is ever implemented here (fat chance, I know) then its only hope to survive is to have no exceptions.
Furthermore, I see no possibility for enacting a flat tax that doesn't incorporate a deduction for the interest home-owners pay on their mortgage. Donald says:
As for the mortgage-interest deduction, that needs to go too, and I own my home and benefit from it. The main objection to its elimination is that home values would plummet if the deduction is removed.That may very well be the case (and I hope it is), but I think it would be impossible to convince voters; trying to do so would ultimately doom any attempt to pass a flat tax.But what that really says is that the presumed tax savings are really ephemeral because the deduction is inflating home prices. So you have to pay more than the home is worth because of the deduction. That means that the deduction is skewing prices and hiding the true value of homes, and that alone is sufficient reason to eliminate it, IMO.
However, various studies (link, link, link, for example) show that eliminating the interest deduction would have very little effect on home values, and the effect would be temporary. Most taxpayers are not in the highest tax brackets, so their deductions are relatively modest.
As for charitable giving, Donald notes that:
Actually, I have little reason to be very sorry to see the charitable deduction go. After all, the average rate of giving to churches by Americans is very low, about 2-3 percent at best in oldline churches, maybe a little higher (but only a little) in evangelical ones. It frankly begs credulity that an income-tax deductions is driving such giving. (In fact, it begs credulity that anything is driving such a giving rate, but that’s a topic for another rant.)However, while the average rate of charitable giving may be 2-3 percent, in my experience the standard deviation is quite high -- that is, 75% of people give less than 1% of their income, and 25% of people give more than 10% of their income. Eliminating the deduction for charitable giving would obviously not hurt the former group, but gifts from the later group (which gives the majority of the money) would be hurt quite badly. I think these numbers are fairly representative of the situation at my church.
My proposal is to enact a flat tax with these two deductions through a Constitutional Amendment that gives Congress the power to eliminate the deductions in the future, but not to expand them into any other areas. Sure, the courts may eventually stretch whatever language is used, but I think this would be a good starting point for the flat tax concept, and it would be a major step forward in the tax revolution.
No discussion of flat taxes is complete without mentioning the Fair Tax Act of 2003 which actually got quite a large number of co-sponsors in the House, but only couple in the Senate. Go take a look, and follow the instructions to write to your legislators telling them to support the law.
The problem is to exempt charitable giving you have to define it, and it can be defined so broadly as to include most other deductions.
I don't think it would strongly affect charitable giving, even among those giving 10% or more, they might reduce slightly, but the deduction wouldn't save them more than they are giving.
Regardless, I think that a constitutional amendment would be the wrong way to simplify the tax code, at least starting from its current point. It could fix tax code in a range if it was easily definable, but it couldn't really move it anywhere without a lot of problems. I think if we reduced deductions over a period of years, along with simplifying the tax code over that time we might get it to work, and we'd face fewer problems. That way we could also start with deductions which are less sensitive than mortgage or charity and reduce them over a couple years.
That would require long term political will, which is hard to come by, but easier on the system than sudden changes would be.
Charitable giving is actually quite easy to define: it's money given to non-profits. These are already well-regulated, since if they weren't they'd already be a massive tax loop-hole. So I don't see that as an issue.
As far as using a Constitutional amendment, I'm not saying that we should fix the tax rate in the amendment, I'm just saying that we should fix the flat-tax system into the Constitution. Congress could then raise or lower it as needed, but the system would be preserved.
I agree that there would be a shock to the system, but I think that quick fixes are easier to implement than gradual fixes, and I think the negative effects will pass more quickly if we just get it over with.
My problem with charitable deductions is that they are inherently unjust. It amounts to the government deciding which causes are worthy of special treatement, and which do not. There's no way around this.
Sorge: Not really, because organizations with any type of ideology can become non-profit charities. The only restriction is that they have to be non-profit.
Although, if you're saying that corporations should not be taxed on profits, then I agree with you. Corporate tax is a scam on consumers.
I like the idea or concept of a Flat Tax, but with deductions, The Mortage Intrest Deduction and Charitable deductions sound good, but my idea
was a deduction of all health care costs, which I
think the Bush administration was working on in
congress with Representetives and Senators, then
apply a Flat rate after expenses. I think thats
the only way to pass a flat tax, thats good for
indivitual taxpayers. On another subject what
about eliminating all business expense taxes
such as labor costs etc, then taxing only profits, That would be good for all businesses,
job creation etc. It would help Delta and the
Pilots union in their upcoming negotiations.
Carlos A Cruz
CAC: Sounds good to me. Good point about corporate taxation, too.