All dollars are created equal

But they don't stay that way

When I see a penny on the ground, I usually pick it up. Force of habit? I'm not sure. As money, a penny is essentially worthless these days. A penny in your pocket probably creates more wear and tear on your clothes than it could possibly pay for. My young nephew, however, pounces on pennies with utter delight. Pennies in his pocket are a source of great pleasure, at least as playthings if not as legal tender. In that sense, at least, value is quite relative.

What about dollars? Hard-nosed realists would probably explain to us (quite patiently, no doubt, although perhaps with a touch of exasperation), that a dollar is a dollar. Subjective valuations are just a myth. Am I not a mathematician who should appreciate the tautology that a dollar is a dollar?

Actually, no. I agree that every dollar generated by the U.S. Mint is equal to a dollar, but a dollar released into the big, wide world is subject to dramatic variations in valuation—all based on context. A dollar bill in my pocket is worth quite a bit more than a dollar bill in the pocket of Bill Gates (although I doubt that Bill makes a practice of carrying dollar bills around).

To many, I'm sure, this will sound like blatantly relativistic nonsense. To them I would respond by humbly pointing to a book that most of them seem to take quite seriously as a source (or even the source) of wisdom:

As he looked up, Jesus saw the rich putting their gifts into the temple treasury. He also saw a poor widow put in two very small copper coins. “I tell you the truth,” he said, “this poor widow has put in more than all the others. All these people gave their gifts out of their wealth; but she out of her poverty put in all she had to live on.” (Luke 21:1-4)

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Go argue with Jesus, why don't you?

Or perhaps you would rather dispute with Lazarus.

I mean David Lazarus, of course, the San Francisco Chronicle business section columnist who recently turned his attention to the notion of a flat tax. In his April 11, 2007, installment, titled The flat tax: It's simple, alluring, Lazarus skeptically examines the notion that the flat tax is the epitome of fairness. If one taxes every dollar at exactly the same rate, how can that be anything but fair?

Well, tell that to the widow in the temple. As a little thought experiment, suppose that the poor widow's income is exactly at subsistence level. (We can quibble about how one makes this “exact,” but you get the idea.) If you tax her income, if you take anything away from her, she is now grimly doomed to be below subsistence level. Unless Elijah comes strolling along and blesses the widow's cruet of oil and barrel of meal (1 Kings 17), she's now condemned to starve.

Unfair! Not even the most adamant supporter of a flat tax would insist on taxing every dollar. Yes, I admit that this is true. Remember Steve Forbes, who was going to be swept into the White House on his flat-tax platform? His flat-tax proposal would have exempted the first $36,000 of income from his 17% income tax. Ah, yes, even Forbes was willing to treat dollars differently, depending on the taxpayer's level of income. Already a tiny element of progressivism is creeping in. Perhaps things aren't as simple as they seemed.

Lazarus reports that the Hoover Institution's Alvin Rabushka (a senior fellow at that Stanford redoubt of irreconcilable Republicanism) has published an updated edition of The Flat Tax (with co-author Robert Hall) that proposes a 19% tax rate coupled with a $25,500 exemption per family of four. Deep in his heart, however, Rabushka admits to Lazarus that he wants more:

But the figures are flexible, depending on how much money we want the government to raise. When I pressed Rabushka on his ideal formulation, he said he favors a 17 percent tax rate and a $40,000 exemption for a family of four.

“In my view, government is too big,” he said. “I want to cut it down.”

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Yes, that's the customary motive of the right-wing exponents of the flat tax: Set the rate below the revenue-neutral level so that you starve the greedy federal monster. Sounds cool, like something out of a Grover Norquist wet dream (“I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”). Let's put a single knob on the income tax system so that we can dial it down, percentage point by percentage point, till Washington is sufficiently emaciated to qualify for a mercy killing. As C. Montgomery Burns might say, “Excellent!”

Proponents of the flat tax may market it to anti-government groups as a way of reining in the federal colossus, but to the citizenry at large they prefer to emphasize its simplicity. As Forbes was wont to say, “The flat tax would be simple. You could fill it out on a postcard.”

But this conflation of flat and simple is false. Sure, a flat tax is a simple tax, but a simple tax need not be flat. The implication does not go both ways. Lazarus notes that there's a lot of room to reform the federal income tax system:

“Simplification is a different issue from flat or progressive,” said Ed McCaffery, dean of the University of Southern California law school and author of “Fair Not Flat: How to Make the Tax System Better and Simpler.”

“We need a progressive but much simpler alternative,” he said.

In 2005, Oregon Sen. Ron Wyden and Illinois Rep. Rahm Emanuel, both Democrats, teamed up to sponsor what they called the “Fair, Flat Tax Act.” Among other things, it would condense the 1040 form to a single page and offer just three tax brackets—15 percent, 25 percent and 35 percent.

Something along these lines may be the most politically feasible solution to our tax woes.

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The Wyden-Emanuel proposal is flat the way the current system is flat: the rate does not change within each bracket. Yet it is certainly drastically simpler than what we're doing now, even as it retains progressivism.

Why do conservatives hate progressivism so much? Although it's easy to attack progressive tax systems as “unfair” because they treat dollars differently depending on context (which I've already argued is a bogus issue), the real animus against graduated rates lies in their impact on the plutocrats who run the Republican Party. The flat tax would shift the bulk of the tax burden toward lower income taxpayers (despite the fig leaf of the family of four exemption, whatever its level might be). From the Lazarus column:

Under current law, tax brackets range from 10 percent for lower-income households to 35 percent for those bringing in some serious coin.

“A 17 percent or 19 percent flat tax certainly would be a massive tax cut for high-income people,” said Eric Toder, a senior fellow at the nonpartisan Tax Policy Center in Washington.

“Simpler? Yes,” he said. “But a flat tax would be inconsistent with the preferences of the American people. By and large, people—not all people, but many people—prefer a progressive system. We have increasing inequality in society. There's no reason to make it worse.”

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As Toder observes, “not all people” prefer a progressive system—the millionaires and billionaires certainly don't care for it—but the sense of fairness that goes right back to scripture makes it clear that there are circumstances where the dollar in one person's pocket is quite different from the dollar in someone else's.

As a former government bureaucrat, I am less inclined than most people to parrot the line that smaller government is automatically better government. (We've seen during the Bush administration that neglect of government responsibilities results in suffering and tragedy in the nation.) But I have no objection to judicious trimming and pruning. Would Alvin Rabushka like to chop away at the federal government? Oh, yes! Well, Alvin, think about the Wyden-Emanuel proposal. If real tax simplification were enacted, and the 1040 form reduced to a single page, think of how much smaller the Internal Revenue Service could be!

I do, however, worry a little about how the unemployment rolls would swell with former H&R Block tax preparers and civil service CPAs.