Against The Flat Tax

by Vladimir Pasti
Ziarul BURSA #English Section / 21 mai 2004

The media have been paying close attention to the recent debate on fiscal reform, a debate involving representatives of the business community, the civil society, the foreign investors and, last but not least, the very energetic US ambassador. This enumeration of the participants is enough to enable us to guess, without too great a risk of mistaking, the dominant standpoint throughout the debate: smaller and... flat taxes. Indeed, the most significant speeches advocated the flat tax first and foremost. The next prominent idea upheld within the debate was that income taxation should be smaller. Thirdly, participants favored the idea of having a single tax for both earned income and capital gains. Fourthly, it was generally agreed that taxes must be collected in a fair, uniform manner, inclusively by "digging up' the underground economy, that is, the part of the economy where no records are kept and no taxes are paid.

These four ideas put together are synthesized in the proposal that all taxes - on income, profit and possibly on consumption - should be cut and unified, preferably around 15 percent. Those who embrace this idea believe that the results would be generally beneficial. Business owners would invest more money and hire more people, wages would be larger, prices would be smaller, The State's revenue would be larger because taxes would be collected from more taxpayers and, on top of everything, The State would no longer have to do "social engineering,' that is, social policies intended to stimulate various forms of collective behavior. In other words, social security would be the only job left for The State, which would treat all citizens the same. Contrary to the aforementioned beliefs, I believe that those who uphold this theory have proven a complete lack of knowledge about and touch with realities in Romania and elsewhere and that such an aggressive promotion of the interests of a minority to the loss of the majority is simply irresponsible. The application of such philosophy on the relations between The State and the citizens corroborated with the application of such fiscal system would cause social disaster, but, truly enough, it would also make the life of the richest Romanians even much more prosperous. The idea that The State should treat all citizens equally is the fundamental idea of 19th Century Liberalism. With one important note: at that time, "equally' referred to the political equality of the citizens. This conception was the exact opposite of the medieval mentality that citizens were politically unequal and therefore only some of them - the nobles, or the landlords, or the high-income citizens - had the right to participate in running the country. Modern democracy is based on this revolutionary idea of political equality among citizens. The disaster began when the scope of "equality' was expanded from just politics to economy and social life as well... The application by The State of the same economic and social treatment on all citizens led, also in the 19th Century, to the greatest social inequalities imaginable in a human society. The philosophy behind such inequality says that, if someone is poor, uneducated and sick, that person is so because he/she is incapable of being rich, educated and healthy. Inaptitude or bad luck... And it is not The State's job to compensate for such inaptitude or bad luck. However, two centuries of social and economic research have proven this theory false beyond doubt. It has also been proven that the system and not the individuals are responsible for such situations. In late 19th Century, one of the greatest European "reactionaries,' Bismark, living in one of the least democratic countries in Europe, Prussia, put together a system of State intervention in the economic and social condition of the citizens, the framework objective being "taketh from the rich, giveth to the poor.' Obviously this was not a completely new idea. Bismark, too, used previously invented systems, but he laid the foundation of the essential concept that The State is responsible for the welfare of its citizens - a concept that has taken root in the economic and social practice of all modern states to this day. It is this very concept that joint armies of intellectuals and business owners in Romania are contesting and, since one can always be "more Catholic than The Pope,' they put so much extremism in their contestation that their attitude, seen from a political perspective, begins to resemble communism extremism with the only difference being that it is headed in the exactly opposite direction... As I said before, besides the fact that they are keenly interested in a fiscal system and statal attitude advantageous to them (for the simple but convincing reason that their tax threshold would drop from 40 percent to less than half that), the intellectuals advocating the flat tax are simply ignoring reality. They are ignoring the fact that, to the majority of the population, the redistribution of State revenue accounts for an important percentage of their household income and that the termination of that percentage would condemn several million people to poverty. They are ignoring the fact that over 1.5 million people are "unremunerated familial workers" meaning that they work without a wage, without social security, without health insurance and everything else. They are ignoring the fact that, in order to put a child through school, a rural family has to spend a much bigger percentage of its income than an urban family, just as a poor family needs to allocate a bigger percentage of its income than a well-to-do family. They are ignoring the fact that a state that renounces "social engineering' is a state that grants a "social engineering' monopoly to the corporate world, as the corporate world never treats its own employees equally and therefore does not offer equal wages and equal working conditions for equal taxes. They are ignoring the fact that corporate profit always come with social costs. They are also ignoring the fact that a part of that profit comes from past expenses incurred by the respective state - education, health care, public transportation, communications etc - for the benefit of the people that generate the respective corporate profit. None of those who have vehemently demanded the uniform taxation of all citizens ever thought about suggesting that, upon hiring a person, the corporate employer should compensate the respective state for all the expenses that the respective state has incurred for the education, health and subsidies granted to that person in the process of rendering that person capable of generating a profit for the employer. Most of all, they are ignoring the very true empirical fact that equal treatment of all citizens by the state means, in the end, that the state sponsors those who have at the expense of those who have not.

This is why the extreme simplification of the fiscal policy - although it is comfortable to tax collectors - is unacceptable to the people.

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