Botnst - 4/6/2006 8:34 AM
The flat tax, if applied to everybody, would disproportionately impact the lower end of income.
Just make a graph and take a peek at what it looks like.
Take Bill Gates' $40 Bn and he pays 10% and take some young adult working at $10/hr = about $20K/year and also pays 10%. No deductions.
How much does it take to maintain life, health and property at a minimum in the young guy's town? Let's say $1,000/mo. So that's $12K.
$20K - $2K (taxes) = $18K. $18K - $12K = $6K "profit" from which he can pay a car note, insurance, fuel for the car, and other 'luxury' items.
Now we have Mr Gates. $40 Bn - 10% leaves $36 bn. (Man that must hurt to have only $36 Bn after takes). Now let's take the same minimum from Mr Gates as we did from the young adult. $36 Bn - $12 K is still $36 Bn, rounded to the nearest Billion freaking dollars.
The point is that a flat tax differentially impacts the poor to a greater degree than it impacts the wealthy.
A Plan to Replace the Welfare State
The government should give every American $10,000--and nothing more.
BY CHARLES MURRAY
Sunday, March 26, 2006 12:01 a.m. EST
This much is certain: The welfare state as we know it cannot survive. No serious student of entitlements thinks that we can let federal spending on Social Security, Medicare and Medicaid rise from its current 9% of gross domestic product to the 28% of GDP that it will consume in 2050 if past growth rates continue. The problems facing transfer programs for the poor are less dramatic but, in the long term, no less daunting; the falling value of a strong back and the rising value of brains will eventually create a class society making a mockery of America's ideals unless we come up with something more creative than anything that the current welfare system has to offer.
So major change is inevitable--and Congress seems utterly unwilling to face up to it. Witness the Social Security debate of last year, a case study in political timidity. Like it or not, we have several years to think before Congress can no longer postpone action. Let's use it to start thinking outside the narrow proposals for benefit cuts and tax increases that will be Congress's path of least resistance.
The place to start is a blindingly obvious economic reality that no one seems to notice: This country is awash in money. America is so wealthy that enabling everyone to have a decent standard of living is easy. We cannot do it by fiddling with the entitlement and welfare systems--they constitute a Gordian Knot that cannot be untied. But we can cut the knot. We can scrap the structure of the welfare state.
Instead of sending taxes to Washington, straining them through bureaucracies and converting what remains into a muddle of services, subsidies, in-kind support and cash hedged with restrictions and exceptions, just collect the taxes, divide them up, and send the money back in cash grants to all American adults. Make the grant large enough so that the poor won't be poor, everyone will have enough for a comfortable retirement, and everyone will be able to afford health care. We're rich enough to do it.
Consider retirement. Let's say that we have a 21-year-old man before us who, for whatever reasons, will be unable to accumulate his own retirement fund. We accumulate it for him through a yearly contribution for 45 years until he retires at age 66. We can afford to contribute $2,000 a year and invest it in an index-based stock fund. What is the least he can expect to have when he retires? We are ridiculously conservative, so we first identify the worst compound average growth rate, using constant dollars, for any 45-year period in the history of the stock market (4.3% from 1887-1932). We then assume our 21-year-old will be the unluckiest investor in American history and get just a 4.0% average return. At the end of the 45-year period, he will have about $253,000, with which he could purchase an annuity worth about $20,500 a year.
That's with just a $2,000 annual contribution, equivalent to the Social Security taxes the government gets for a person making only $16,129 a year. The government gets more than twice that amount from someone earning the median income, and more than five times that amount from the millions of people who pay the maximum FICA tax. Giving everyone access to a comfortable retirement income is easy for a country as rich as the U.S.--if we don't insist on doing it through the structure of the welfare state.
Health care is more complicated in its details, but not in its logic. We do not wait until our 21-year-old is 65 and then start paying for his health care. Instead, we go to a health insurance company and tell it that we're prepared to start paying a constant premium now for the rest of the 21-year-old's life. Given that kind of offer, the health insurance company can sell us a health care policy that covers the essentials for somewhere around $3,000. It can be so inexpensive for the same reason that life insurance companies can sell generous life insurance cheaply if people buy it when they're young--the insurance company makes a lot of money from the annual payments before eventually having to write the big benefit checks. Providing access to basic medical care for everyone is easy for a country as rich as the U.S.--if we don't insist on doing it through the structure of the welfare state.
There are many ways of turning these economic potentials into a working system. The one I have devised--I call it simply "the Plan" for want of a catchier label--makes a $10,000 annual grant to all American citizens who are not incarcerated, beginning at age 21, of which $3,000 a year must be used for health care. Everyone gets a monthly check, deposited electronically to a bank account. If we implemented the Plan tomorrow, it would cost about $355 billion more than the current system. The projected costs of the Plan cross the projected costs of the current system in 2011. By 2020, the Plan would cost about half a trillion dollars less per year than conservative projections of the cost of the current system. By 2028, that difference would be a trillion dollars per year.
Many questions must be asked of a system that substitutes a direct cash grant for the current welfare state. Work disincentives, the comparative risks of market-based solutions versus government guarantees, transition costs, tradeoffs in health coverage, implications for the tax system, and effects on people too young to qualify for the grant all require attention in deciding whether the Plan is feasible and desirable. I think all of the questions have answers, but they are not one-liners; I lay them out in my book.
For now, let me turn to a larger question: Assuming that the technical questions have answers, do we want a system in which the government divests itself of responsibility for the human needs that gave rise to the welfare state in the first place? I think the reasons for answering "yes" go far beyond the Plan's effects on poverty, retirement and health care. Those issues affect comparatively small minorities of the population. The more profound problem facing the world's most advanced societies is how their peoples are to live meaningful lives in an age of plenty and security.
Throughout history until a few decades ago, the meaning of life for almost everyone was linked to the challenge of simple survival. Staying alive required being a contributing part of a community. Staying alive required forming a family and having children to care for you in your old age. The knowledge that sudden death could happen at any moment required attention to spiritual issues. Doing all those things provided deep satisfactions that went beyond survival.
Life in an age of plenty and security requires none of those things. For the great majority of people living in advanced societies, it is easily possible to go through life accompanied by social companions and serial sex partners, having a good time, and dying in old age with no reason to think that one has done anything significant.
If you believe that's all there is--that the purpose of life is to while away the time as pleasantly as possible--then it is reasonable to think that the purpose of government should be to enable people to do so with as little effort as possible. But if you agree with me that to live a human life can have transcendental meaning, then we need to think about how human existence acquires weight and consequence.
For many readers of The Wall Street Journal, the focus of that search for meaning is bound up with vocation--for some, the quest to be rich and famous; for others, the quest to excel in a vocation one loves. But it is an option open to only to a lucky minority. For most people--including many older people who in their youths focused on vocation--life acquires meaning through the stuff of life: the elemental events associated with birth, death, growing up, raising children, paying the rent, dealing with adversity, comforting the bereaved, celebrating success, applauding the good and condemning the bad; coping with life as it exists around us in all its richness. The chief defect of the welfare state from this perspective is not that it is ineffectual in making good on its promises (though it is), nor even that it often exacerbates the very problems it is supposed to solve (though it does). The welfare state is pernicious ultimately because it drains too much of the life from life.
The Plan returns the stuff of life to all of us in many ways, but chiefly through its effects on the core institutions of family and community. One key to thinking about how the Plan does so is the universality of the grant. What matters is not just that a lone individual has $10,000 a year, but that everyone has $10,000 a year and everyone knows that everyone else has that resource. Strategies that are not open to an individual are open to a couple; strategies that are not open to a couple are open to an extended family or, for that matter, to half a dozen friends who pool resources; strategies not open to a small group are open to a neighborhood. The aggregate shift in resources from government to people under the Plan is massive, and possibilities for dealing with human needs through family and community are multiplied exponentially.
The Plan confers personal accountability whether the recipient wants it or not, producing cascading secondary and tertiary effects. A person who asks for help because he has frittered away his monthly check will find people and organizations who will help (America has a history of producing such people and organizations in abundance), but that help can come with expectations and demands that are hard to make of a person who has no income stream. Or contemplate the effects of a known income stream on the young man who impregnates his girlfriend. The first-order effect is that he cannot evade child support--the judge knows where his bank account is. The second-order effect is to create expectations that formerly didn't exist. I call it the Doolittle Effect, after Alfred Doolittle in "My Fair Lady." Recall why he had to get to the church on time.
The Plan confers responsibility for dealing with human needs on all of us, whether we want it or not. Some will see this as a step backward, thinking that it is better to pay one's taxes, give responsibility to the government and be done with it. I think an alternative outlook is wiser: The Plan does not require us all to become part-time social workers. The nation can afford lots of free riders. But Aristotle was right. Virtue is a habit. Virtue does not flourish in the next generation because we tell our children to be honest, compassionate and generous in the abstract. It flourishes because our children practice honesty, compassion and generosity in the same way that they practice a musical instrument or a sport. That happens best when children grow up in a society in which human needs are not consigned to bureaucracies downtown but are part of life around us, met by people around us.
Simply put, the Plan gives us back the action. Institutions and individuals alike thrive to the extent that they have important jobs to do and know that the responsibility to do them is on their heads. For decades, the welfare state has said to us, "We'll take care of that." As a result, we have watched some of our sources of life's most important satisfactions lose vitality. At the same time, we have learned how incompetent--how helpless--government is when "taking care of that" means dealing with complex human needs. The solution is not to tinker with the welfare state. The solution is to put responsibility for our lives back in our hands--ours as individuals, ours as families, and ours as communities.
Mr. Murray, W.H. Brady Scholar at the American Enterprise Institute, is the author of "In Our Hands: A Plan to Replace the Welfare State," published this week by AEI Press.
40 billion is Gate's asset value, not his income. Individual assets are lightly taxed if you are very rich, and heavily taxed if you are not. For example, Mr. Gates, even if he lived in a $100 million dollar home, would be paying a miniscule percentage wise of his total wealth in property taxes on that asset. Take a typical middle class person - your house represents your greatest asset, and as a percentage of income it is a heavy, heavy tax. Same with sales taxes - as you purchase assets, 8-9% of your income is collected. Mr. Gates, on the other hand, is not buying groceries with his 40 billion, he is buying stocks and bonds, and there is no tax on the purchase of these items, they are only taxed when sold, and if they sell at less than he paid for them, he gets to deduct the loss. Now let's look at income. The vast majority of Mr. Gate's income is from dividends and interest on bonds. On that, he pays a 10% income. You work for a living. On your income, you pay a 30% tax - this is the biggest fucking crime perpertrated by the rich, and the work of two Bush administrations. Why should income, which is money one earns, be charged at a higher rate for those who earn it from the sweat of their brow, while those who sit by the swimming pool and collect the same amount as stock dividends pay a third less? In other words, if you derive income by being filthy rich, you get a massive tax break over the working slobs. WHAT A FUCKING SCREW JOB! And then they piss and moan over their taxes.