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Craig Allen: A Flat Tax May Be Our Only Option

Facing a possible double-dip recession with no cards left to play, a bold reshuffling of the tax code may be America's only way out

For a long time, I have been advocating a flat tax. To me, having a single tax rate on every dollar earned, regardless of who earns it — business or individual, rich or poor — makes the most sense and seems to be the most fair. To date, however, there have been many groups that for a wide variety of reasons have opposed the flat tax. Given the current economic environment, it may be time to reconsider a flat tax, which may just be our only viable option.

Before I delve into my reasons for championing the flat-tax cause, I will acknowledge that the chances of success are slim to none. Many will say there should be a progressive system in which those who earn more pay a higher percentage of their earnings in taxes. Others will say they should get benefits for owning property or having children. I’ve heard them all. While I disagree, I realize that these groups are many and contain large numbers, so the chances of seeing a flat tax are not good. However, I will try to make a strong case for at least considering a flat tax as possibly the only option we may have, to get us out of the current economic predicament we find ourselves in.

Our glorious leaders in Congress and the White House, and not just in the current administration, have painted the country (and you and me) into an economic corner. We have exhausted just about every option we have to address the weak economy and our financial problems. We have borrowed about every dollar anyone is willing to lend us — more than $14 trillion — and have dropped interest rates to zero percent.

We have also had two rounds of quantitative easing, or QE, in which the Treasury basically prints currency so it can go out and buy securities, such as U.S. treasuries and mortgage-backed securities, to pump cash into the economy. The theory behind QE is that more cash in the economy will allow banks to lend at lower costs to the borrower, and therefore more people and businesses will borrow, spend and thereby stimulate the economy.

We have also had TARP and a stimulus package for which the government spent hundreds of billions of dollars to try to stimulate the economy. All of this has contributed to our current national debt of more than $14 trillion and has caused the recent calamity in Congress, where we pushed things to the absolute edge before voting to raise the debt ceiling above $14.3 trillion to avoid default. The bitter fighting in Congress that resulted in the last-minute vote was a direct contributor to the recent S&P downgrade of our sovereign debt rating, to AA+ from AAA.

We find ourselves in quite a pickle. Basically, we have used every economic recovery tool in the shed, and the economy is still faltering. In fact, many are beginning to seriously consider the possibility of a double-dip recession — one recession, followed by a brief period of recovery, followed by another recession. We had a double-dip during the 1980-1982 recession, which was one of the worst since the Great Depression, so it has happened before. While many, including myself, have been talking about this possibility for some time, few thought it was a real possibility. Until now.

What is the government to do? We have few options today to avoid another recession. All of the things the government would normally do — stimulus packages in which the government mails everyone a check to spend, lowering interest rates, quantitative easing, printing currency, lowering taxes — all cost money. Because we have already leveraged the country beyond all reason, we are not in a position to borrow any more. As a result, we simply can’t afford to do much of anything, regardless of how bad the economy gets.

A flat tax may be our only option. By setting the percentage tax that is paid on every dollar earned at, let’s say 20 percent, the government would not necessarily receive lower tax revenues. This is because all loopholes and write-offs would be removed from the tax code. By simplifying the tax code, huge costs would be avoided. Additionally, there would be a strong incentive to earn more money — every dollar earned results in 80 cents to the person or entity earning it. No matter how many dollars earned, the earner always gets his or her 80 cents. This would drive economic growth, new business formation, employment and government tax revenues.

While a flat tax may not be the most popular choice, we must all recognize the seriousness of our economic situation and consider the few options that remain. If we don’t do something meaningful soon, we may run out of options altogether, making a double-dip recession — or worse — a reality.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.

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