Or in other words three tenths of 1% of the Federal budget. Of course it would need to be replaced by another agency that would have to make sure the consumption tax is being paid.
Why is it that flat tax advocates can’t understand that “loopholes” and exemptions are a completely separate issue from the debate of whether to have a flat tax rate or graduated tax rates. You could have a 150 graduated tax brackets and no exemptions or a flat tax rate and thousands of exemptions.
Oh, and just to make this quicker we can do the “Good Will Hunting” bit. You are going to say that with a flat tax you wouldn’t have any deductions and you could do your taxes on a post card and then I’m going to point out that you have to have deductions or a company will be paying taxes on its revenue without the ability to subtract its costs like raw materials, capital equipment, and labor. And then you are going to say that of course they can deduct those, but we will get rid of loopholes. And then I am going to ask how we will treat a company that invests in $100M of capital equipment that will last 20 years. Do they just get to deduct the cost the year that they buy it, even though they may have well less than $100M of income to offset it, or can they use a “loophole” like depreciation that will allow them to spread out that deduction over several years. And then you are going to put your fingers in yours ears and say “nyah, nyah, nyah”.
A flat tax is hardly the impractical concept that people are trying to make it seem. There are many countries in the world which have already been using a flat tax system, among them :
Hong Kong
Russia
Iceland
Hungary
Albania
Bulgaria
Estonia
Jamaica
Kazakhstan
Latvia
Lithuania
Romania
Serbia
Slovakia
Trinidad and Tobago
Ukraine
and Flat tax systems are being explored as a possibility even in Australia and Poland.
I lived for several years in Hong Kong, and the taxation system there was very fair. A flat tax on income and not really any capital gains or estate tax to speak of. The social services were not lacking either. Schools are better than in the US, and the Health care was good and universal for everyone for all intents and purposes. Businesses flocked to Hong Kong and the unemployment rate was minimal. And the govt was so flush with cash that they didn’t know what to do with it all. When the British had to give HK back to China in 1997, they had so much left over surplus cash that they burned tons of it building the airport and subway system using British contractors just so China wouldn’t get it. So while it may end up being impractical to have a flat tax system in the US due to all the politics, special interest groups and so on, it is hardly a truth to say that a flat tax can never work anywhere.
I was interested to see what the flat tax rate is in Iceland, which unlike most other countries in that list has a relatively high GDP per-capita. It’s 35.72%: higher than the highest bracket in the US. There are also payroll taxes that are somewhere between 5 and 12% and a value added tax of 24.5%. All of this is mitigated by a personal tax credit (not deduction, tax credit) of $3,200 a year
So it seems that Iceland’s flat tax is actually somewhat progressive due to the tax credit, and also has a higher top rate than the United States. On top of that there are payroll taxes and consumption taxes. Somehow I don’t think this is what you have in mind.
I think it’s impractical to talk about a flat tax in detail, and to try to implement it, with just vague ideas and hopes for how to deal with the massive decrease in revenue that would come with it.
It’s also impractical to say that the savings to the government by decreasing the size of the IRS would be significant, especially without considering the concurrent costs of implementing and enforcing the consumption tax that you propose.
It’s rather deceptive to talk about only one form of taxation, and to ignore others, as an appeal to fairness. Look at the total tax burden that falls on people at different income levels, and then maybe you can start to make a case.
And it’s incorrect to talk about a flat tax as if it would necessarily be simpler than the graduated system we have now. Figuring out your Adjusted Gross Income, the amount on which you are taxed, is the complicated part of the current tax code. Figuring out the tax on that amount is easy. A simplified tax and a flat tax really have nothing to do with one another; you can have one, or the other, or both, or neither.
One of the problems with poverty, John, is that you do NOT make enough money to support yourself. That extra 25% of your minimum wage will not get you the medical care you need to keep you alive in some cases. It often will not pay for housing. There are homeless people with jobs. So I’m not sure efficiency needs to be our only concern here.
I don’t disagree with anything you said, and I never meant to imply that efficiency should be our only concern. My argument was directed specifically at the point made by the poster I was responding to.
See, and I would say for every dollar the government doesn’t spend is a dollar someone doesn’t have to pay.
Inertia!
That’s demonstrably not true, though. Certainly some dollars the government doesn’t spend are dollars nobody has to pay, but most government dollars would have to be replaced by private ones.
Indeed, that’s one of the arguments conservatives raise in favor of smaller government: private charity will cover people’s cancer surgery, and so on.
This is the part that kills me. Flat tax advocates raise the simplicity issue over and over despite complexity having nothing to do with whether we have graduated rates. I can’t decide if it is ignorance or deliberate misinformation.
There is a nice article in the Wall street journal about the effect that implementing a flat tax has had in Russia (the rate of which is only 13%, BTW), which is the ninth largest economy in the world :
http://online.wsj.com/article/SB122513898494573247.html
And additionally, given the success in Russia, other European countries are considering adopting some version of a flat tax. I think that there will be more countries experimenting with a flat tax in the future and it will not be a tax system marginalized to only small undeveloped nations as people may imply.
According to wikipedia, Russia’s government has expenses of less than $400 billion a year, to be split among 150 million residents.
America has twice the population, and NINE TIMES the federal expenditures. 13% wouldn’t exactly cover it here.
I don’t know if you didn’t read my OP, or the rest of the thread, but I haven’t argued that a flat tax could never work. It can’t work in America, right now, given our federal budget. The rate would be too high. So suggesting it now is a non-starter. It’s not worth thinking about until we slash our federal budget, which, by the way, we can’t do by simply eliminating the IRS.
eta: Also, your WSJ article is from 2005. If we could go back in time to 2005, would you really tell America to cut taxes even more, knowing what was about to happen?
One thing to keep in mind is that countries who adopt flat taxes generally do so in response to large scale evasion and non-compliance. Russia and Jamaica are prime examples. Thus, while their theoretical tax receipts declined, their actual tax receipts stayed the same or even increased.
In the US, most people pay their taxes, and we have much stronger enforcement, so you won’t see the same effect.
As I said earlier, I don’t think that a flat tax can work in America at present. As you say the overbloated budget is likely much too large for a flat tax by itself to raise enough revenue to cover it without additional taxation. If the budget could ever be slashed to a reasonable level, which I doubt, then a lot of things would work better. I didn’t check the date on the article, but there are plenty of other more recent articles on the web about Russia and Hong Kong’s success with flat tax systems. My main point is that I feel that a flat tax is the most equitable form of taxation as most everyone will have to pay a reasonable share of tax, and it is a system which can work, if the budget is not excessive. I have no illusions that it will be adopted or implemented in the US anytime soon, given the sway special interest groups have in our govt.
The US may not have as many tax evaders, but as I pointed out in an earlier post and article, only about 50% of people in the US pay any income tax at all. Not all of these people are poor people below the poverty line, many are extremely wealthy individuals who are not paying their fair share through use of various deductions and quirks in the tax code. I would consider them “legal” tax evaders in my book.
Except they’re not. Other than retirees and those on financial assistance, they pay about the same percentage in total taxes as everyone else, especially if a flat tax would have any deduction built in. Not all taxes are federal income taxes. Not all government work is done on the federal level.
Stop whining about how the flat tax is not possible and explain why it is preferable to a progressive tax. It’s not simpler, it raises taxes on people at the low end and lowers them on people at the high end. If it has a credit/exemption for the first x dollars of income then it doesn’t even solve your mythical freeloader issue.
Was this supposed to be a parody? Do you really not know what a flat tax is?
In the interest of fighting ignorance, a flat tax is a progressive tax structure with just two brackets: 0% and X%. You can set X to be anything you want, noting that if you put it to 20% it would raise taxes on super rich people like Romney, Buffett, and Obama; while lowering it on professionals including Buffett’s secretary.
You also get to set the non-taxable income level at what ever you want. There is no reason we couldn’t have 0% tax on the first $250k and 35% after that. Or set it to $1million and 90%, or $1billion and 99%. You can even decide if you want to balance the budget, run a deficit, or have a surplus. Aren’t taxes fun?
What you don’t get to do is make shit up and argue against strawmen.
Why is a flat tax preferable? 1. It can mean a much lower tax rate on lower incomes. Right now the progressive system we have kicks in really early and hits people extremely hard making less than $80k. I don’t personally see the point of taxing someone under $34k at 15%, but then again I’m a bit of a liberal when it comes to things like this. Would the budget really change much if we set the first few brackets to 0%? In 2009 70% of the federal budget came from people making more than $112,124. Why not up their rate slightly and set everyone else’s to zero?
The reality of our current progressive system is that it hits people has they go from low incomes to moderate. That is to say the brackets are totally and completely fucked. Why take progressively more from someone that goes from $30k to $60k to $90k? But then ignores people going from $400k to $400million who will most likely see their effective rate drop.
Both you and the OP are wrong, flat-tax isn’t a nonstarter, it’s tax reform that will never ever happen in any meaningful way.
That is the first coherent argument for a flat tax that I’ve seen in this thread. Usually the arguments are that it simplifies taxes (which it really doesn’t), that it is more “fair”, and that it stops the low-income freeloader issue. The latter does not exist because of social security and other payroll taxes, and of course as I noted, if you exempt the first x dollars of income then you don’t solve that “problem” either.
The relatively low tax rates of Romney (15%) and Obama (20%) are not because of our progressive tax structure, they are the result of how we treat capital gains and the plethora of tax shelters, loopholes, and exemptions. Those are orthogonal to the debate of flat vs progressive tax rates.
Personally, I see no reason to tax capital gains at a lower rate than wages, nor do I like the byzantine rules that enable the wealthy to shelter income. Those can be eliminated without getting rid of the progressive tax structure, and if they were eliminated then the progressive tax rates could be reduced.
But if flat tax proponents were proposing something along the lines of what you mentioned, with a relatively large exemption for the first x dollars, then I might well support it. But given that conservatives and libertarians seem hung up on the freeloader issue I do not believe they have in mind what you have proposed.
Any tax reform also needs to look at payroll taxes, so the combined tax rate would either need to be substantially higher than 20%, or we would still have low income workers paying approximately the same taxes that they are now.