A copy of The Economist that is passed (briefly) round our office had an article and editorial on flat taxation, citing its apparant success in Eastern Europe. Is it something that would be good for Western Europe, or the Western World in general?
The benefits apparantly come from the elimination of any deductions or exemptions, leading to a system that is cheaper to run and makes people less likely to avoid paying their tax or try to find ways of paying less (because there aren’t any)
Would this benefit the West, do people really weasel out of paying a significant amount of taxes through exemptions and the like? Would it benefit those earning less in society or more?
I imagine that the primary beneficial aspect of non-flat is that you can use deductions and fines to evolve various attitudes without bringing out the sledgehammer of law. For instance, giving deductions if you help girl scouts sell cookies, or teaching the old to yodel.
I was wondering about that aspect. It mentioned its success in East Europe and Russia. Countries where its beneficial to get people to stop avoiding paying taxes full stop, never mind worrying about special deductions.
The article seemed keen to apply this system to Western societies.
Hong Kong has had essentially a flat tax system for a long time. The rate most people pay is 15%. You even get health care (not great but there’s something).
Yea. The only argument against it is that it’s not progressive, which is true, but I don’t know why taxes should be progressive (I do, but I strongly disagree with punishing people for success).
Knowing that I owe 20% will make life infinitely easier for budgeting purposes.
I don’t get the assumed connection. Not having a progressive tax system does not ipso facto mean you also eliminate deductions (or vice versa!).
FWIW I support removing all deductions, introducing compensations where required in other ways, but still having a strongly progressive system topping out at no more than 49%.
If the total tax burden doesn’t change, the only thing “flattening” the rates is going to do is shift more of the burden down the ladder. Unless you’re contending that because of loopholes and exemptions the current system is actually regressive. But if that’s the case, doesn’t it make sense to start by fixing the problem, rather than chucking the system? Start by aggressively closing loopholes and tossing violators in jail.
I flatly disbelieve that the difference in the cost of taxing people under the two systems is a significant percentage of the revenue. And why would a simpler system convince people who dodge taxes illegaly not to do so?
[The biggest problem resulting in deficits has been the steadily decreasing contribution of corporations. Cite
While I find the idea of a flat, no deductions tax code appealing from a personal effort stand point, I have to agree that I don’t think the costs of administering the current tax code is all that significant as compared to total tax revenue.
If there were a flat tax, I would very much want the botton X% of the wage earners exempted from paying. They have a hard enough time making ends meet as it is.
I’ve heard that it would be to some extent, but perhaps not in the OP. The vesions I heard would be somthing like take your income and subtract something, like $20,000, if the value is positive you will pay a percent (say 10%) of that.
So if you make $20k you pay 0% in taxes
$40K = $2k in taxes = 5%
$60k = $4k in taxes = 6.67%
120K = $10K in taxes = 8.3%
And it would approach 10% as income went up.
Also the numbers and percentage I chose here was just to make the caluclations easy.
Another positive aspect is you would be first working for yourself, as the 1st $20K is all yours, unlike today where the image is that you are working as a slave of the gov’t till tax freedom day.
A flat tax rate would be fine. The problem is how to transition to it without pissing people off. If we’d had a flat tax right from the start then that’d be a lot better than going from a progressive system to a flat one. All of sudden you have people who were paying %50 in taxes now paying %15 (for example). That’s going to annoy all the people who have been paying %15 all the time and don’t get a tax cut. It will be percieved as a tax cut for the rich.
For those who are worried that a flat tax system would shift the burden of taxation to the lower earners, the article the OP mentions addresses this. Using solely two variables, namely a tax-free exemption and a tax rate on earnings beyond that level, they claim it is possible to manipulate the taxation curve to be almost identical to that achieved with a graduated taxation scheme.
Ah, actually the article is available for free on the Economist’s website, so I’ll link to it rather than parroting all of their arguments. The second graphic shows the tax burden by income decile in New Zealand, both with a graduated tax system and a (proposed) flat one of 25%. The system does indeed become slightly less progressive, but not significantly so; it certainly is not flat across income groups, due to the universal exemption. Additionally, if one is worried about the redistributory nature of the tax system, any loss of progressiveness in the tax code can easily be compensated for at the spending end. Given that it’s estimated that anywhere between 10% and 20% of US tax receipts are spent on collecting said tax, it could easily be argued that the administrative savings alone could more than compensate for the shift in tax burden.
And of course, a flat tax does not equal a low tax, as any Lithuanian could probably tell you. The headline rate will be lower than the top rate for an equivalent progressive system, but that’s not the same thing.
I once redid my taxes based on Steve Forbes’ flat tax proposal. My taxes went up by 20%. Therefore, I did not vote for Mr Forbes in the presidenntial primary.
Sometimes simpler is not better and I do not exist in order to bring his taxes down.
Realistically, the complexity of our tax system is not the progressive rates, but the vast array of deductions you need to wade through. I think you get more than enough progressivity from kanicbird’s structure, though, so you don’t even need progressive rates.
Trouble is that for each person who gets their taxes reduced, someone gets their taxes raised. Each deduction you remove hits someone right in the pocketbook, and they may have been counting on that deduction in their budget.
If I was starting from a blank slate, I’d probably go flat tax, with a big initial exemption, and just a handful of important deductions like mortgage and business expenses. Without that blank slate, it will be a long, painful process to eliminate the deductions.
It was my belief that a flat tax system did not mean 20% for everyone, but rather s tax system that did not allow for deductions and such…?
I don’t see that it would be feasible, nor wise for any politician to tax all evenly. I mean the difference between taxing 5% and 50% of not much isn’t much–so no sense angering the people with not much in a representative system–while as the difference for governmental income in taxing Bill gates 5% vs. 50% is quite impressive. And he still only has one vote (though, behind-the-scenes power to keep things balanced I assume.)
My god that is barely readible–I kept being interrupted while writing it.
Essentially just saying that from the government’s view, taxing the rich for a larger percentage than the poor will get them more money and more voters. So I can’t envision a true flat tax system, nor what good it would do anyone. The poor people need their percentage a lot more than the wealthy (not to say that this means you should roast the rich for everything they’ve got.)
Bottom line, every flat-tax proposal that I’ve seen is a massive tax cut for the rich
(Plus a double-whammy for the middle classs in the U.S., who benefit hugely from the mortgage deduction), and it’s difficult for me to imagine one that isn’t.
Sure, a flat tax makes figuring your taxes easier, but unless you’re already in the ‘not worried about where my next vacation house is coming from’ bracket, then you’ll pay more.
The Economist says
They make that sound like a benefit, but it means that 90% of the people would have to pay more under a flat tax. After all, it’s not like a flat tax is going to magically create extra money.
I’m going to have to ask for a cite on
I find that hard to believe. Unless you mean the IRS estimate in the Economist article which says that 10-20% of income is not reported; but how would a flat tax change that?
And everybody understands that the first large chunk of income isn’t taxed in the U.S. right now? (I don’t remember exact numbers, but there’s a $3,500 or so exemption, then a personal deduction of $2,500 or something. Plus low-income tax credits and other things).
There may be some benefit to simplifying the U.S. tax code, but it’s a political problem with getting Congress to let go of each of their personal favorite deductions.
There might be some benefit for a flat tax in Eastern Europe, where the income tax system is not as well established culturally, but in the U.S. (and other western countries), it’s just a tax cut for the very rich.
Or, as The Economist put it
Which of course means everybody else gets screwed.
Well, it should be noted that nobody in any position to be taken seriously is advocating an actual flat tax. The proposals that go by that name are actually two-rate progressive taxes (zero up to X amount of income, and then some percentage of everything above X).
Everyone should pay taxes, even the poor. If only the rich are paying then you end up with a segment of the population that’s in favor of any spending or entitlement program since they aren’t the one’s paying for it.
Also, the current tax system in the US is about 100 times more complicated than it need be. The process should be simplified. One rate for everyone. That’s fair. That’s simple. A lot of tax preparers and accountants would have to find other work, but we’d be a lot better off.
To Steve’s point: To actually do such a plan you would have to make a cutoff point somewhere. Otherwise it would never fly politically.
Eliminating deductions isn’t required in a flat tax scheme, but most flat tax advocates do propose such an elimination. At any rate, I’d ague the exact opposite of your statement: Taxes should serve one purpose and one purpose only: raising revenue for the state in the fairest possible manner. Once you open the tax code to special interests, you increase the probablility of corruption in politics, and you give the politicians enormous power over our daily lives.
As to the OP, I like the flat tax on philosophical grounds and have been over this a nunber of times in GD. Set it up with a healthy deduction for the frist X amount of income, and everyone is treated equallly. Transition would indeed be a bitch, but if I were starting form scratch, that’s the way I’d go.