Conservatives LOVE to talk about the flat tax. There are very few things that will make a conservative get hot and bothered more than the idea of transitioning away from a progressive tax system to a regressive tax system that taxes everyone equally. Governor Bobby Jindal (R-LA) has proposed to eliminate the state income tax and all corporate taxes in exchange for a “revenue neutral” 4 to 7% increase in sales taxes on Louisiana consumers. Most people who can’t count think this is GREAT, and it is – if you’re wealthy. The fact remains that what Governor Jindal is proposing despite all of his rhetoric is simply a tremendous tax increase on the middle class and poor.
Let’s start with some basic math. A person making $25k a year is most likely spending 100% of their income (or more). Very few people in the middle to lower classes are actually saving a dime. A large % of Louisiana cities, counties and special districts charge 9% sales tax or more presently (source); Governor Jindal’s tax plan would make the average sales tax something closer to 15%. So – if you’re making 25k … you actually aren’t paying federal income taxes – just FICA which is going to leave you with around $23,500. Now – most people are going to spend every single penny of income they earn which means a person making $25k a year (after FICA) would pay $3,525 in state taxes under Governor Jindal’s new sales tax plan if the sales tax is only 15%.
Under the existing tax structure – Louisiana residents who make $25k a year pay 4% of all of their income to the state. So – let’s do the math. 4% on 25k is $1k in income taxes. If you take the $23,500 (after FICA) then subtract the $1k in state income taxes that leaves Lousiana residents with $22,500 to spend. Assuming the Louisiana resident spends 100% of their income just like in situation A – sales taxes would be $2,032. Under existing law – a Louisiana resident would pay $3,032 compared to Governor Jindal’s hidden $500 a year tax increase.
What makes this absolutely insulting is that while Governor Jindal’s plan raises taxes on the middle class and poor – it cuts them for the rich. Moving to a consumption tax means the only money that’s taxable is what is spent. If you take a millionaire and you apply the same thought process but assuming they save 25% of their income … the millionaire gets a tax cut. And the more you make – the bigger the tax cut. Period. Now some may think it doesn’t matter to them if they don’t live in Louisiana. But mark my words – if Governor Jindal is able to do this … more Republican Governors will follow. Taxing the poor more and reducing taxes on the rich i.e. “lower the rates, broaden the base” is the conservative wet dream.
If someone makes $10 million a year and they get to save a large amount of it – then they end up with a very small tax bill as a % of their income. It’s a giveaway. As for corporations – I certainly could advocate for lower taxes on corporations provided taxes on the rich increased. But almost certainly – reducing taxes on corporations is just one more method to increase earnings for corporations and produce shareholder value for the rich.
Flat taxes are REGRESSIVE and they will penalize you more. Buyer Beware.
And how does Governor Jindal sell his message … by sounding like a populist who is giving tax cuts to the masses. Louisiana residents are stupid enough to buy it; they elected him after all. This was his message:
“The bottom line is that for too long, Louisiana’s workers and small businesses have suffered from having a state tax structure that is too complex and that holds back economic prosperity. It’s time to change that so people can keep more of their own money and foster an environment where businesses want to invest and create good-paying jobs.”
Because he’s looking out for the little guy. Huey Long is definitely dead. From the Times Picayune HERE:
Jindal said the plan would be revenue-neutral and that the goal would be to keep sales taxes “as low and flat as possible.” The governor’s office has not yet confirmed or denied an article in The Monroe News-Star that reports eliminating the state income tax could require increasing the state sales tax from 4 percent to 7 percent.
Seniors would be dramatically impacted by this because they don’t earn an income but they consume. So presently – they pay 0% in state income taxes but would soon see an increase in their taxes on everything they purchased. A huge defacto tax increase on the most vulnerable among us.
Brookings Institute highlights the impact this type of transition to a straight consumption tax would have on the poor and middle class. They write HERE:
William Gale: In theory you can set up a consumption tax to have any group of households pay it. In the real world, every consumption tax out there is going to hit low and middle income households to a greater extent than the income tax does.
Ray Suarez: Why?
William Gale: For two reasons: One is that, well, the main reason is that low and middle income households consume more of their income than high income households do. Another way of saying that is high income households save more of their income than low income households do.
So if you move the tax from income to consumption, you’re raising the relative burden on low savers, which are low and moderate income households, so almost any revenue neutral shift from the income tax to a consumption tax will be regressive in that manner. There are ways, there are conceptual ways to do it that doesn’t add burdens to low and middle income households, but I don’t think that they would actually happen.
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