Warm Southern Breeze

"… there is no such thing as nothing."

The Impact of the Flat Tax Reform on Inequality

Posted by Warm Southern Breeze on Wednesday, January 26, 2011

Some assert that everyone should pay the same rate of taxes, claiming that one “flat rate” would solve many problems.

I beg to differ.

The inequality of the so-called “flat tax” is quite simply, self-evident, because given that the cost of living is indexed similarly, the one whom has more income and wealth does not use as much to live, whereas the less fortunate and less wealthy use a greater percentage of their income to make ends meet.

Put another way, if it costs $500 annually to live, and you make $1000, that’s 50% of your income.

If it costs $500 annually to live and you make $10,000 that’s 5% of your income.

Who, then, does a flat tax benefit?

We conclude that the flat tax led to increased income inequality and it stimulated households consumption particularly among the wealthiest households.

The Impact of the Flat Tax Reform on Inequality.

Liviu Voinea: Academy of Economic Studies, Bucharest and Executive Director, Group of Applied Economics
Flaviu Mihaescu: Associate Researcher, Group of Applied Economics
Journal for Economic Forecasting
2009, issue 4, pages 19-41

For years, I have analogized thusly:

Three people must move an 800-lb object. They are: 1.) a Strongman Bodybuilder; 2.) an Average Joe; and 3.) an 80-year-old, 80-pound granny.

Would it be wrong to assert, even demand, that the 80-year-old, 80-pound granny should do as much as the Strongman Bodybuilder?

Naturally, the obvious answer is “yes, it would be wrong to demand, that the 80-year-old, 80-pound granny should do as much as the Strongman Bodybuilder.”

Would it be wrong to presume that the Strongman Bodybuilder could do more work than the Average Joe and the 80-year-old, 80-pound granny?

Again, naturally, the obvious answer is “no, it would not be wrong to presume that the Strongman Bodybuilder could do more work than the Average Joe and the 80-year-old, 80-pound granny.”

Would it be wrong to tell the Strongman Bodybuilder to “sit down, and take a break… let the other two do the lifting”?

Why, of course it would! Why? The Strongman Bodybuilder can do much more, even more than the Average Joe and 80-year-old, 80-pound granny combined!

This being an analogy, who do these three figures represent?

The Strongman Bodybuilder represents the ultra-wealthy and Multi-National Corporations. The Average Joe represents the average American family and citizen, while the 80-year-old, 80-pound granny represents the elderly, sick, frail and poor, and poverty-stricken.

For the past several years, we in this nation, by and through our leaders – whom for the greatest extent have been Republican – have embarked upon an effort to tear down government, to take “laissez faire” to the next logical  level – Social Darwinism, which is the so-called “Law of the Jungle” where only the strong survive… claiming that “it’s a dog-eat-dog world.”

There are adherents to this mindset, most notably among them, the “Mises Institute,” and others, which in reality are “professors” whom live in the four walls of their ivory towers and write of their Utopian vision. They provide no real answers, no real solutions to the problems of everyday life. They are, in essence, theorists, whom have no real-world experience, and whose ideas do not work in the real world.

These governmental deconstructionists, as I prefer to call them, would tear down every structure of government, damning it as evil, inefficient, malevolent and ascribing any and every variety of curses and evil diatribes against it… all in an effort to 1.) appease those to whom they are loyal – their corporate masters, and 2.) get as much as they can for themselves, the rest be damned. They would allow every independent business to establish their own standards, hoping that “the marketplace” would make all things right.

That is not government. That is anarchy. To be absolutely clear, anarchy is defined as “a state of society without government or law.

While the heart of man may be good, the intents can, and often do, go awry. Our hearts are set upon evil, and with selfish motive.

The regulatory role of government is that against which we in recent history seem to strain. We do not like being told that there is a standard, that there is a just way to behave, that standards exist, that air and water should be pure and clean, that financial transactions should be all regulated, and that the demands of justice require acknowledging that inequality exists between the rich and the poor, the haves and the have-nots, the wealthy and the rest of us.

The motivator for much – if not all – of what evil we have seen is greed. Unbridled greed, even avarice has motivated many elected officials, whose soothsaying seductive siren song has captivated the imagination of many, and which has led in large part to our own destruction, in large part by elimination of the 1933 Glass-Stegall Act which occurred by malingering Republican pressure under the Clinton administration in 1999.

In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.
Congressional Research Service

Unfortunately, it seems that many have short-term memory failure, and have forgotten that once, it was illegal for your insurance agent to sell stocks, and for banks and credit unions to sell insurance, and for stock brokerage houses to sell insurance. Now, it’s one giant incestuous fiscal orgy.

I have previously opined about the negative effects of the repeal of the Glass-Steagall Act.

Consider the benefits of regulation. In sports, we hear the term “regulation play.” In football and baseball, we have rules. All sports – including individual competitions – have rules. We all have rules, rules of life, rules of decorum, rules of grammar, rules of operation, rules of law and more. Rules are the comprising hallmarks of genuinely civilized society.

A “Free Market” is not a free-for-all melee. A genuinely “Free Market” is regulated.

When we consider the future path of our nation, we would do well to take a lesson from history. To wit, were we to examine the greatest period of growth in our nation’s history – which is in the immediately post WWII era – we would be well advised to re-enact tax structures that replicated those in place during that time. During that time, the “Middle Class” grew, which was a defining hallmark of our nation, and which set us apart among nations in the world.

We know what we did.

We simply need to repeat the process.

5 Responses to “The Impact of the Flat Tax Reform on Inequality”

  1. I beg to differ. We live in a democracy. We should ALL pay taxes. The flat tax is truly democratic. If everyone paid say 15% with no deductioons we would get far more revenue. The tax is an incentive to move up and improve your life.

    John Wilder


    • Warm Southern Breeze said

      Thanks for sharing your thoughts, John! WOW! That’s the FIRST TIME I’ve EVER heard of a tax being called “an incentive”! Seriously, it is! Were we to apply such logic… er, reasoning, to our current state of family fiscal affairs we should apply taxes to those, whose station in life is modest, or even meager (translate: poverty stricken), because “it’s their fault they’re poor, and we should motivate the lazy bastards.” It certainly does seem by your remarks that you favor imposing tax upon even the most poverty-stricken.

      To that, I say “no, No, and NO!” (Time and chance happen to us all.)

      If anything, taxes could be called “disincentives.” Or if you prefer, part of the “cost of doing business.”

      You may recall that previously in our nation’s history, we had a so-called “flat tax.” In 1894, a flat rate Federal income tax was enacted. However, it was challenged, and the following year, the Supreme Court of the United States (SCOTUS) ruled it unconstitutional, because it violated the Constitution, which at the time, allowed Congress to impose direct taxes only if they were in direct proportion to each states’ population. Specifically, because it was a direct tax not apportioned the population of each state, it was struck down, and ruled unconstitutional.

      And, as the research authors illustrate, the so-called “flat tax” actually has the opposite effect.


  2. Tommy M said

    A flat tax is a beautiful incentive to get business moving, especially when compared to what we currently have, which is loopholes for the wealthy, and exemptions for the lobbyist/corporations. Also, a truly free market is self-regulated by buyers/sellers who freely choose to interact or do not, so the definition you have is not entirely correct.

    Your analogy of a strong man lifting weights is in all actuality a straw man argument. You are using the tax percentage as the weight, when you should be using the percentage of the weight. For example, a flat tax setup correctly applied to your analogy would make it so that a strong man who is capable of lifting 500 pounds should lift 87 pounds (15% of 500), the medium build man who can lift 250 pounds should lift 37.5, and the old man who can only lift 100 should pay 15. When you look at it in this light, it is incredibly fair.

    What if we applied a flat 17% tax after, say, everything after $50,000 a family makes? If they make $51,000, they are $170.. would you be alright with this?

    Lastly, I am confused by the general tone of your argument as well. A rich person will be paying drastically more to the government because he created more wealth. This is not a bad thing there is income inequality. Bill Gates being rich does not make me poor. There is not a fixed pie of wealth; this fallacy predates Mercantilist France.


    • Warm Southern Breeze said

      Tommy, you make some excellent points – for example, the elimination of loopholes & the reining in of exemptions for corporations & the wealthy.

      Regarding the notion of “self-regulation” of, by, or in “a truly free market,” that is a Utopian fantasy, simply because inequality exists. And when sellers can call the shots (as they increasingly are), they can gobble up every business they want. That is called monopoly, and it is illegal. But then… perhaps we should eliminate that law?

      Laws exist to make things right, just and equitable, which means that the powerful must be made weak, and the weak powerful. It’s not that some have more rights than others, but rather that the little 80-year old, 80-pound granny has a much power as the denizen hordes of corporate attorneys of a multinational corporation.

      Concerning the linguistic machinations of “percentage as the weight” and “percentage of the weight,” that is purely circular logic.

      And the assertion that my analogy is a “straw man argument,” is similarly flawed, because I have not misrepresented the idea that taxation is a burden.

      Thanks for sharing your thoughts!


  3. […] But the argument of equality is one used for the so-called “flat tax” – about which I have previously written. Conclusion: It is a bad idea. Why? As I have analogized quite simply, “if it costs $500 annually to live, and you make $1000, that’s 50% of your income. If it costs $500 annually to live and you make $10,000 that’s 5% of your income.” The research may be found with my corresponding blog entry, which is entitled The Impact of the Flat Tax Reform on Inequality. […]


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