The more Democratic presidential candidate Jerry Brown is criticized by the left wing of his party, the better he looks.
Brown, a former California governor, is under attack for his 13 percent flat rate tax proposal that, together with a value added tax (VAT), would replace our present incomprehensible tax system.Critics say that Brown's proposals would raise taxes on the poor and that the VAT would be inflationary.
In a recently released study, the National Center for Policy Analysis in Dallas concludes to the contrary that under Brown's plan wage earners would pay less in taxes than they currently pay at virtually every income level and that low and middle income families would pay higher taxes only if they had substantial investment income.
Critics who say Brown' plan is inflationary are far off the mark because they overlook that the VAT substitutes for the 15.3 percent payroll tax that raises the price of labor and for the double taxation of dividends that raises the cost of capital. The drop in labor and capital costs from the removal of these taxes offsets the impact of the VAT.
For wage earners, Brown's proposal is the best of all possible worlds. This is because it shifts the tax burden from labor to capital even while lowering the marginal tax rate on investment income.
Under our present tax system, due to double and triple taxation, investment income is taxed at a much higher marginal rate than labor income. This causes our economy to create less capital, thus suppressing labor productivity and the growth of real wages.
Brown's plan eliminates many of the anti-capital features of the present tax code, thus boosting capital formation, productivity and wage growth. He is able to reduce the tax burden on labor while stimulating capital growth because he replaces the Social Security and corporate income taxes with the VAT.
The VAT taxes labor and capital in proportion to their share of gross income, which is two-thirds labor and one-third capital. In contrast, corporate income tax revenue has averaged only 25 percent of Social Security revenue for the past decade, placing the burden three-fourths on labor and one-fourth on capital.
Thus, by removing productivity-killing distortions in the present tax system, Brown's plan benefits everyone. Investment benefits from lower capital costs while employees benefit from greater productivity and a shift from payroll to value added tax.
The best reason for supporting Brown's tax plan, however, is preservation of our personal liberties.
Anyone with a complex tax situation is fair game for selective prosecution, and our large multinational corporations rue their U.S. base. A tax code that creates such intense feelings of hostility toward government is counterproductive.
What we desperately need is a rival candidate who will create voter interest and a political debate by offering a 12 percent flat rate tax and a 12 percent VAT in order to keep pressure on the government to trim its spending. That would resurrect what appears to be a lifeless political season.