Flat Tax - A Cure for a Non-Problem?

Candidates Perry and Cain have proposed competing flat tax proposals that are appealing for their apparent simplicity. A better test of their value might would be whether these proposals treat Americans equitably and whether they address the problems our economy faces.

The argument that a flat tax would help the economy is based on the premise that it would lead to increased investment in US businesses, plant and equipment resulting in job creation. This approach presumes that our economic woes are rooted in insufficient capital investment and productive capacity.

Reality intrudes at this point. The problems we face stem not from a lack of productive capacity or the capital needed to invest in new plant and equipment. China and the US already have too much productive capacity. The banks have too much cash. Our public companies have low debt equity ratios. The problem lies in the market place where stagnating wages, low home values, and exported jobs have sapped the ability of the consumer to buy new goods and services.

The Flat Tax approach will exacerbate this problem by increasing taxes on most consumers thereby limiting their ability to purchase new goods and services. Without growing markets, new investments will fail to generate the kinds of returns needed to justify them.

It's no wonder that it's the wealthiest voices that are fervently backing the Flat Tax approach; they will be its biggest beneficiaries, at least in the short term. In the long run, continuing to increase taxes on the middle class and poor will only shrink our markets and further damage our economy.