Flat Tax Essay Research Paper An Analysis

Flat Tax Essay, Research Paper

An Analysis of the Flat Tax Rate System

Vince Viloria

Political Science 1, 7:40 P.M.

Ms. Entity

July 16, 1997

Should the flat tax rate system be implemented. No, the flat tax rate system should not be implemented. In this paper, the pro arguments will be presented, which will affirm the thesis. Then the con arguments will be presented. A rebuttal will then follow, and finally, the author’s conclusion will be offered.

The loudest clamor against the flat tax would come from homeowners, Realtors, and builders, who would be hammered as the flat tax does away with deductions for mortgage interest payments and local property taxes. If not negotiated with skill, this issue could be the flat tax movement’s Achilles’ heel. An analysis by the economic consulting firm DRI/McGraw-Hill estimates that the market value of all homes could drop by 15 percent if the tax were introduced without a phase-in period. The brunt of the blow would be borne by those in middle and upper income groups. The flat tax could cause mortgage interest rates to drop by a full percentage point, which would chore up prices. But even so, the DRI economists calculate that were the flat tax enacted with no phase-in period, the price of a $150,000 home could fall to $113,571, a decline of 24 percent. (Dishman 39)

Middle class votes who have most of their money tied up in home and hearth will scream blue murder. Nor will they be soothed by economists’ armchair arguments that the government’s roughly $80-billion-a-year tax subsidy to owner-occupied housing has led to a vast overbuilding of the nation’s housing stock. Roger E. Brinner, DRI’s chief economist, figures the plunge in housing value would wipe out more than $1.5 trillion of householder’s net worth. The collapse of the housing market and new home construction, Brinner predicts, would slice 1.2 percent off GDP the year after the flat tax passed, and 1.6 percent in the second year. (Dishman 39)

A potentially troublesome law lurks in the flat tax plan of House Majority Leader Richard Armey. The Armey flat tax plans to eliminate business exemption for most fringe benefits, especially employer paid health care. Flat tax enthusiasts like Harvard University economist Dale Jorgenson argue that employers, who look at the total cost of compensation, would simply increase their employees’ cash compensation, leaving them free to purchase their own health insurance. In theory, the workers then become more price-conscious consumers of medical services than they are under today’s employer paid system. (Dishman 40)

What if workers, particularly those modestly paid folks who would face no tax under the Armey plan, choose to pocket the cash instead of paying health insurance premiums. Dallas Salisbury, president of the Employee benefits Research institute in Washington, worries that they might expect the government to pay for their care when they need it. Presumably, a system to avoid the problem could be created, but it is clearly going to b a thorny issue. (Dishman 40) The flat tax eliminates deductions for home mortgages. In addition to getting hit on their stock holdings, homeowners will likely suffer a 10 to 15 percent drop in the value of their homes. (Darell)

Another negative effect of the flat tax is that of the decreased market value of tax-free bonds. Under the most popular flat tax proposals, market value of tax-free bonds could easily drop by 20 percent. High on the list is the blow that investors take when they trade the securities. Because there are so many thousands of small issuers, the market for municipals would have wide spreads between the bid and asking prices. That increases transaction costs. Also, getting good and timely financial information on many issuers is difficult. When Orange County filed for bankruptcy in December of 1995, for example, the most recent financial statements available to the public were for the fiscal year ending June 30, 1993. In other words, they were nearly 18 moths out of date (Tarik 50)

So in a flat tax world, why bother with municipal bonds, with all their attendant difficulties, even if they are AAA-rated. It would be much easier to buy a Treasury bond with a similar yield. Like in-state municipals, most tax reform treasuries would still pay interest exempt from state and local taxation. Inevitably, municipals would have to offer richer yields than Uncle Sam. That means that issuers of new municipal bonds would have to pay higher interest rates too. Up would go the cost of public works. Local officials would have to abandon municipal projects. (Tarik 51)

The proponents of the flat tax have a perspective unlike its opponents. The Flat Tax was crafted by two Stanford University taxation experts, Robert E. Hall and Alvin Rabushka. First published in 1985 and updated in 1995, their model would tax the wages, salaries, and pensions of individuals that exceed such basic exemptions of $9,500 for a single taxpayer. Basic exemptions would vary with the size and composition of the household. There would be no further deductions. Investment income from capital gains, interest, and dividends would be exempt. Businesses would deduct necessary goods and services, wages and benefits, and investment purchases from gross revenue. There would be no deductions for dividend or interest payments. The flat r