Quote:
Originally Posted by Asheth
I totally agree flat tax would be a great idea! I would be all for that but what about inflation and the cost of living rising do you think a flat would still be effective? Would a flat tax be able to offset the rising costs?
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Depends. The question is -- would wages rise in pace with inflation? They're supposed to, right? It's what they call 'indexing'. If wages keep pace with inflation, then it should be a wash. Let's say cost of living goes up 5%. Well, if wages also go up by 5% to match, then the dollar amount the government gets from income tax will also automatically go up by 5% without having to actually increase the tax rate. And voila, you have your offset of rising costs.
Where things get muddy is when cost of living goes up but wages don't keep pace. If everyone's cost of living goes up by 5% but their wages stay the same (wage stagnation), then everyone is effectively taking a 5% pay decrease. At that point, the revenue generated by the flat tax will not be keeping pace with inflation. But that's when one has to wonder -- why should it keep pace with inflation in such a scenario? If everyone else has to take an effective 5% wage cut, why shouldn't the government also take an effective 5% cut in revenue? What's good for the goose is good for the gander, right? If the government raises the flat tax rate by 5% to offset inflation in this scenario, then tax payers will be taking a double-hit. First their cost of living increases by 5% and they have no matching wage increase. Then the government comes and jacks up the tax rate on top of that. Talk about adding insult to injury!
This hypothetical scenario of the double-hit would make me laugh were it not so close to the truth. People are losing their jobs en masse, some people are taking pay cuts, and most people who are lucky enough to keep their jobs don't dare dream of getting actual raises. But what do politicians do? They vote themselves pay increases and raise taxes to pay for the machine known as the modern state, which keeps getting bigger and bigger.