The Jeffersonian Perspective

Commentary on Today's Social and Political Issues
Based on the Writings of Thomas Jefferson


The Flat Tax

The more one thinks about the Flat Tax, the less appealing it becomes. One aspect that is attractive is the realization that for many of the rich, a 17% tax rate would be 17% more than they are paying now. In his autobiography, Lee Iacocca revealed that Henry Ford II paid no income tax whatsoever!

But I think there is something mythical about the flat tax idea. This much is certain: taxes will need to be collected from somewhere and paid by somebody. Whether a flat tax or a graduated tax, proper management of government means we collect sufficient revenues to pay government's expenses. We deceive ourselves (or is it our representatives in Congress who are deceiving us?) when we think that we can expand government services and pay for them by adding to the national debt. Paying out expenses as we go along keeps our attention on fiscal responsibility. As Jefferson noted,

Deficit spending is a great evil, because it deceives the people by relieving them of the burden of the true cost of what their representatives are doing. It is immoral, because it puts this burden on posterity. If the people were required to bear that cost of Congressional extravagance as it is happening, they might be more inclined to do something to stop it. In other words, if taxes matched expenses, citizens would be alerted to what their government is doing and would be more inclined to insist of responsible financial management.

Avoiding excessive taxation through deficit spending is deceitful.

The Flat Tax plans that are being touted to the public are all additional forms of deceit. It is fantasy to think we can cut everyone's taxes and still have the same amount of revenues coming in. If Congress wanted to simplify the tax code and eliminate the loopholes for the rich, why not do precisely that? We could have a simplified and progressive tax and still file our tax returns on a post card. When you cut out all the smoke and mirrors, you realize that all the flat tax REALLY does is eliminate the concept of progressivity. All it REALLY means is that the rich will pay taxes at the same rate as everyone else. Now, is that going to help everyone else, or is that going to help the rich? The real purpose is to destroy the present system and to introduce the concept of the flat tax, which must ultimately mean higher taxes for everyone except the wealthy.

Progressive taxation is the fairest way to tax in a nation where incomes are spread over a wide range. Jefferson spoke favorably of progressive taxation in his analysis of France before the revolution:

    "Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise." --Thomas Jefferson to J. Madison, 1785.

There was no income tax in Jefferson's time, of course, and government revenues were derived mainly from tariffs on imports. But that system of taxation had an intrinsic progressivity by its very nature. The more money the rich spent on imported items, the more they paid in taxes.

    "The rich alone use imported articles, and on these alone the whole taxes of the General Government are levied... Our revenues liberated by the discharge of the public debt, and its surplus applied to canals, roads, schools, etc., the farmer will see his government supported, his children educated, and the face of his country made a paradise by the contributions of the rich alone, without his being called on to spend a cent from his earnings." --Thomas Jefferson to Gen. Kosciusko, 1811.

In the final analysis, the flat tax will accomplish one major change: it will eliminate the progressive element in our tax structure, making taxes as a whole more regressive. That means a shifting of a greater portion of the tax burden from the rich to the less than rich. Even a flat tax will need to be adjusted in order to bring in the required amount of revenue, and in the end there is only one group that is going to come out ahead: the rich.

    Is a Progressive Tax Unfair?

If there is only one tax rate, and one taxpayer makes ten times the money that a second taxpayer makes, the first taxpayer pays ten times the tax that the second does. The question naturally arises, Why should the first taxpayer pay twenty times the tax of the second?

Whether something is fair or not is a human calculation, not just a mathematical calculation. When taxpayer one and two sit down to a meal, taxpayer one does not eat ten meals when taxpayer two eats one, neither does he live in ten houses at one time, nor drive ten cars at one time, nor wear ten pairs of shoes. If taxpayer two makes $10,000 per year and taxpayer one makes $100,000, and both pay 15% income tax, taxpayer two having to live on $8,500 is much more of a squeeze than taxpayer one having to live on $85,000.

While it is true that taxpayer one has more capacity to earn money than two has and is by rights fully entitled to the fruits of his effort, nevertheless, one's ability has enabled him to profit from the system in order to produce ten times what two can, so why should he not pay geometrically more for having benefitted so much more? In a certain sense, the rich and successful "own" the economy of this country. They are the chief beneficiaries of it. Why should they not be the chief supporters of it? Leona Helmsley's "only little people pay taxes" revealed a despicable attitude. She used the system to her great benefit, and yet she thought she owed it nothing in return.

This should not be taken as a denigration of the rich. Quite the contrary. It is the American "system" that allowed the rich to use their abilities and their hard work to achieve whatever they did achieve. This is what makes our country so great, and what attracts millions of people from all over the world to our shores. There are other places on this earth where no matter how hard you work or how much ability you have, you still can't get anywhere. Ours is the land of opportunity, and people in this great land are able to profit from the system in a way that is either much more difficult or even impossible elsewhere.

We have a great system here, and it works marvelously for many. For many others, and for untold numbers of reasons, the system doesn't work. Maybe they are too lazy, or too stupid, or too mentally messed up, or just not interested in advancement, or who knows what. But it seems reasonable to say that those who truly benefit from the system should bear the chief cost of supporting the system. And the more they benefit, why not have them pay their support at a higher rate? This is not to penalize them or to give them a slap in the face for working so hard; it is to maintain the very thing that has nurtured them so generously and to gauge that maintenance according to how well the system has worked in their particular case. It is not as if the rich should apologize or be penalized for doing something wrong by becoming rich. It is just that they are the winners; it is "their" system, they have "worked it," and it has worked for them. If everybody should pay taxes equally for the whole system, then one could argue that everybody should reap the earnings of the system equally, i.e., profits should be spread equally to everyone. But that would deny the right to acquire property based on one's own ability, which is fundamental to real liberty.

We should notice also that all proposals for a flat tax have a lower cut-off that allows people below a specified yearly income to pay no tax whatsoever. That in itself means it still incorporates the basic principle of the graduated tax and suggests that the real purpose of the flat tax is not a true non-graduated tax (which would be egregiously unfair), but rather just adjusting the graduated tax we have now so that the rich pay less. No doubt, after such a tax is installed, the proponents will say, "Aw Shucks! We miscalculated! We're so sorry. We'll have to raise the flat tax from 15% (or whatever) to 25% (or whatever it takes) in order to meet revenue needs." Then the rich will still pay less than now, and the middle class will have a REAL increase in their tax burden. That appears to be the strategy behind the flat tax. The inadequacy of the amount of the tax appears to be a part of the scheme: once the concept is introduced, then the actual rate can be adjusted as required. The flat tax will need to bring in at least the same revenue as the present system; and if the rich are to pay less (which is the absolute bottom-line meaning of the flat tax), who will make up to difference?

People making moderately high incomes, say $200K per year, object to their present tax rates which are the same as people making millions, saying it is these people who are the true "rich," not them. It could be argued, however, that subjecting those with moderately high incomes to the highest tax rate -- the same rate paid by the super-rich -- only illustrates the basic unfairness of a flat tax. Under a flat tax, EVERYBODY (except the very lowest incomes) would pay at the same rate as the super-rich. If it is not considered fair now for those with $200K income, why would it be fair for everyone?

If our problem is that all taxes are too high, that we should not be overtaxing anyone and not trying "to soak the rich," then let us apply the ax where it will do the most good and reduce government spending, not mess with the tax system in a way that has nothing to do with spending, that can only mean less taxes for the rich and more for the lower incomes. Also, it is difficult to believe that the rich are being "soaked." When they can throw away millions on the trinkets that once belonged to Jackie Onassis, the conclusion is inescapable that the rich are not really suffering. Even with "high" taxes -- which actually are historically low -- they obviously have money to burn.

    The Danger of Changing a System That is Working

We should have great reverence for the mysteries of economics. We are not 100% sure what makes it all tick, but we can be sure that no one else knows absolutely what makes it tick either. Nevertheless, it IS ticking. Ours is the richest country in the history of the world and we should look with a jaundiced eye on any schemes that might disrupt its workings. If a properly functioning system means that a well-off person must pay 50% of their income in order to enjoy the other 50%, then we should at least consider that maybe 50% of something is better than 100% of nothing. Maybe that isn't a fair assessment. Maybe there are adjustments that need to be made. But fairness in achieving the exact balance needed is a separate issue from making radical changes in the whole system of taxation. It may be short-sighted to say that our system is great except for this one part; but it appears certain that the system does not work in parts, rather it works essentially as a whole. Mess with one part and you MIGHT --just might-- pull down the whole thing.

None of us want to destroy those who have worked hard and produced wealth for themselves. They represent the fulfilled opportunities that are the essence of America. The wealth they have produced benefits not only themselves, but everyone else also. Jefferson himself was a wealthy man. But as he said,

    "My observations do not enable me to say I think integrity the characteristic of wealth." --Thomas Jefferson to E. Pendleton, 1776.

Too often, wealthy people, just like many of the rest of us, want to take without giving, want something for nothing. Many, in fact, would reverse the assessment of responsibility described herein, and pay no taxes whatsoever, laying all the burden of supporting the system on the poor wretches who were not able (for whatever reason) to be as successful as themselves. This has always been the endeavor of the rich. Along with wealth comes power, including political power. And they have often used that power to exempt themselves from a fair and reasonable support of the very system that enabled them to acquire their wealth.

    "Experience declares that man is the only animal which devours his own kind, for I can apply no milder term to... the general prey of the rich on the poor." --Thomas Jefferson to E. Carrington, 1787.

Before the French Revolution, the rich nobles paid no taxes at all! The tax burden was all on the lower classes. And we know where that led.

If we concede that there is a level below which a person should not be taxed, then we have admitted the principle of taxation adjusted to an individual's personal situation. The only question remaining is, what shall be the nature of the adjustment? Taxing the rich more than the poor is not of itself taxation for the purpose of redistributing wealth. If the revenues are taken from one group and turned over to another, then that is indeed "wealth redistribution." But the ordinary purpose of different rates is to put the burden on those best able to bear it, not to take from one to give to another. Wealth redistribution was unquestionably unjust in Jefferson's estimation, as when he wrote:

    "To take from one because it is thought that his own industry and that of his father's has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association--the guarantee to every one of a free exercise of his industry and the fruits acquired by it." --Thomas Jefferson: Note in Tracy's Political Economy, 1816.

Our modern economy is of a different order of being compared to that in Jefferson's day. There are several aspects of our system that some might consider a "redistribution of wealth," but that may in fact sustain the system at its historically incredible level of affluence. Things like unemployment insurance, and perhaps certain other government programs fit this category. Without unemployment insurance, for example, the economy runs the risk of entering a downward spiral of loss of income, fewer purchases, and employment cut-backs, and so on, that would feed on itself and bring the whole economic machinery to ruin. The purpose of such programs is not just to give money to people who don't want to work. Such programs serve multiple purposes, but one of them is to maintain a steady economy and an even level of demand.

    Double Taxation of Dividends

A major part of most Flat Tax plans is the elimination of taxes on interest and dividends--another measure blatantly favoring the rich. This is justified by its proponents because, it is said, "taxes have already been paid on the money paid out in interest and dividends by the payor."

But the idea behind the income tax is that income is to be taxed every time it is earned. If someone earns income and invests some of that income to earn more income, then it is only right that the additional income be taxed also, if all citizens are to be taxed uniformly. It is still income to the person earning it regardless of how it is earned. Why should a certain form of income be sacrosanct?

The whole idea of "double taxation" is a myth. If we are going to say that a person who gets income from interest and dividends should not pay taxes because the corporation paying the dividend or interest has already paid tax on its income, then we should say that persons who earn income as a maid or a butler should not pay tax because their employer has already paid tax on the income with which he pays their salary. The same false logic would dictate that a corporation making retail sales should not pay any income tax at all on its profits because every purchaser of its products has already paid tax on the income they used to pay for the products.

Income is taxed every time it makes a cycle from payer to earner. To suggest that the person who makes interest and dividend income from investments should not pay any income tax at all is to make those who work by the sweat of their brow somehow inferior to those who earn income from sitting on their duff. If anything, that is just the opposite of the way things should be. Jefferson's view was that it is the ordinary people who need their earnings protected:

    "I may err in my measures, but never shall deflect from the intention to fortify the public liberty by every possible means, and to put it out of the power of the few to riot on the labors of the many." --Thomas Jefferson to Judge Tyler, 1804.

There are those who decry majority rule and claim that the masses have taken over the government to line their own pockets, but who actually has their way in Congress? Who writes the legislation? Who is responsible for a tax code riddled with loop-holes and exceptions? The poor?

If Congress wants to provide tax incentives to encourage investment, they could make income from interest, dividends and capital gains free from taxation as long as it is kept invested and doing its work. Let all such income be taxed as ordinary income only when it is withdrawn from investment and actually used as ordinary income. That way, investment would REALLY be encouraged and rich investors would pay taxes on money they treat as income just like anyone else. The "double taxation" argument is just another scam to favor the rich. It is the same process that has always dominated government. As Jefferson observed almost two centuries ago:

    "Enough wealthy men will find their way into every branch of the legislature to protect themselves." --Thomas Jefferson to J. Adams, 1813.

Indeed they do, and by every trick imaginable.

Cross References

To other essays in The Jeffersonian Perspective

To Thomas Jefferson on Politics & Government


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Thomas Jefferson on Politics & Government: Table of Contents

© 1996 by Eyler Robert Coates, Sr.