Flat tax, yay or nay?

Great Debates
41

Oversiplifying is an understatement-- you completely ignored 50% of the whole deal. But never mind. We can all redo the math with the exemption.

How is that situation unique to a flat tax? Your argument could be used against any system that doesn’t tax high income earners at 100%.

It’s not a dismissal to make an argument, which is what I did. Your counterpoint is a good one, and you pointed out how I, in fact, oversimplified the situation. But I don’t understand how you equate “depriving someone” with setting a cutoff. Which tax system doesn’t “deprive someone” in that sense. And please don’t call that a dismissal. It’s an honest question-- I don’t understand how you’re using that term.

How do you set the exemption point? That’s a good debate, and I’m sure there is more than one legitimate way of doing it. I’d start with something like this, combining a “who gets welfare” and a “who gets taxed” strategy:

Welfare should be for the truly needy. Your welfare payments start getting cut when you reach the 10th percentile of income. Hard to imagine that more than 10% of the folks in a free society are “truly needy”. You still get some level of support above that, but a decreasing amount.

Above that 10th percentile, though, you’re still struggling to some extent. Let’s say we set the exemption at the 30th percentile point*. Up to that point, no tax on your income. Above that point, a fixed percent. That ensures that 70% of the folks are still paying some tax. If you make the percentage of tax payers too small, especially if it’s <50%, you’ll get tyrany of the minority. But when the same tax rate applies to everyone (or everyone who pays taxes) you don’t get one income group voting higher taxes on another income group.

At any rate, those are the principles I would use. You could easily argue that the percentile points could be tweaked a bit one way or the other.

*I wasn’t able to find the exact amount that translates to, but it should be somewhere between 25k and 30k/year.

42

Gotta start somewhere.

It isn’t unique, of course. But a flat tax makes it *worse * than a progressive one.

Then I misinterpreted your casual use of “whatever”.

Apparently I wasn’t as clear as I thought about deprivation being in terms of the effect on one’s life and future, not strictly a dollar total. A flat tax does hurt the little guy more than the big guy in tangible ways that go beyond net-worth statements. That matters.

You have described a progressive system, including its rationale, not a flat one. I don’t quarrel with it, except to ask what the difference would really be from current practice besides some tweaking of numbers.

Oddly enough, that’s how the income tax system started. Only the few rich paid it at first, then the government evolved and the threshold moved down. How’d the minority get to be such tyrants? I’ll answer: They had the money. That equalled influence, especially in the government, in the same way the majority’s interests always get overridden when the majority doesn’t have the resources. They expanded the tax base, and in recent years they’ve been trying (with considerable success) to further transfer it off themselves. Assuming you’re no plutocrat yourself, why support that?

43

And a tax break to the hypothetical single mother doesn’t ensure that the extra money goes for baby food for junior rather than beer for mom. While I agree that poor people with kids need extra help, I don’t think the tax code is the best way to deliver that help. Help for kids should be aid given to parents in terms of vouchers, like food stamps, to make sure the money actually goes to the kids.

But here you are arguing for including special exemptions into the tax code-- something that can as easily be done with a flat tax as it can be with a graduated tax system.

Why can’t charitable contributions be deductible under a flat tax scheme? True, most flat tax proponents rule out exemptions, but there is nothing inherent in the flat tax that makes it necessary to do so. You’ll just have to jack up the tax rate to make up the difference.

OK.

44

Ravenman: I hit submit too soon. Add on to my last “OK” the following:

But that is the crux of the matter. Flat tax does not equal “no exemptions”. You could have our exact tax code now, with all the exepmtions, and change the tax rate to a single percentage. If you inextricable link the flat tax to “no exemptions” then you cloud the issue.

I realize that the OP has made such a link, but supposing I openned a thread that said: Which would rather have, a flat tax with lots of exemptions, or a highly progressive, graduated tax with no exemptions? How fruitful would that debate be?

45

But this is the point: There is no quantitative way to say that one tax system is more fair than another, without first making some assumptions about what you MEAN by fair, which another person may not agree with.

In an earlier message, you said:

In this case, you are stating your assumption: A fixed percentage of earnings is most fair. A reasonable assumption. But not one that everyone agrees with!

There are lots of other ways people might say is “fairest”:

– Everyone pays exactly the same amount of money.
– Everyone pays the same percent of his or her net worth.
– People with higher incomes should pay a larger percentage of income, since they can afford more.
– People with higher incomes should pay a smaller percentage of income, since they have proven that they know how to handle money properly.
– Everyone pays a fixed percentage of earnings above a certain minimum.
– Everyone pays a fixed percentage of earnings with certain specific deductions for charities.

Now, some of the above ideas are held by very few people, but others are held by many people. For example, lots of people firmly believe that it IS fairest to charge higher income people more.

I hope what I’m saying is clear: I’m not saying that your opinion about what is fairest is wrong. I’m saying that it’s just an opinion, and people’s opinions vary. That’s why tax policy is such a contentious issue.

Ed

46

You are truly confusing me. If you want a flat tax with the same deductions that now exist (since home mortgage and charitable giving are deductions rather than exemptions, I am assuming you’re using the terms interchangably? or were you only referring to the single mother’s two dependents?), then it seems to me what you are really seeking is rate cuts for the wealthy, rather than a simplification of the tax system that is typically the prime reason why people favor the flat tax or the consumption tax. Is that accurate? Aren’t you basically arguing that the Bush tax cuts did not go far enough in lowering tax rates for the wealthy?

If that is what you’re saying, how on earth are you gonging to fund the food stamps that you propose to give to my poor, hypothetical single mother? What’s more, do you propose to give housing vouchers to middle class people so that they can afford to buy their own homes, and how can the government afford those vouchers if the wealthy people who pay the bulk of taxes end up paying a lot less?

47

Sorry, if I’ve mixed the two terms. But yes, I’m using deduction and exemption in the same way. It should be exemption for the income level that isn’t taxed, and deduction for everything else.

If the government really needs more money for programs, we all should be willing to pay for them. Jack up the (single) tax rate. If we, as a society, aren’t willing to do that, then I submit that we, as a society, aren’t really willing to fund that particular program.

I do not propose giving housing vouchers to middle class folks. I don’t expect that it would be politically realistic to get rid of the mortgage deduction. But how the mortgage deduction affect home ownerhip and prices is another debate…

I do think that any rich person is paying more than his fair share right now if he pays straight tax, without utilizing any of the various shelters available. I don’t know how many of those folks exist.

But I wouldn’t be so opposed to the graduated tax system if it weren’t for our penchant to shift the rates around all the time. If we had 5 brackets (or however many), and could only vote to change ALL the brackets up or down by the same percentage, that would be much better than the system we have right now where politicians can play income groups against each other for votes. (“I’m only going to raise taxes on the rich” or “He wants to give the rich all the tax breaks”). Again, if we as a society want all these programs in place, then we as a society should be willing to pay for them across the board.

48

An interesting little fact about taxes and tax revenues.

From 1980 to 1990 the tax rate for the top 1% and the top 10% went down.

In 1980 the top 1% paid 57.6 billion in taxes.

In 1990 the top 1% paid 87.2 billion in taxes.

In 1980 the top 10% paid 149.0 billion in taxes

In 1990 the top 10% paid 191.9 billion in taxes.

As a contrast the other 90% paid 153.3 billion in taxes in 1980 and 153.0 bn in taxes in 1990.

So a reduction in the rates of the wealthy actually resulted in the wealthy paying more in raw revenue.

Now, in real dollars (dollars adjusted for inflation) everyone from the top 1% and top 10% to the other 90% actually paid less in 1990 than they did in 1980.

What is interesting though is that at the 1990 tax rates (which were lower for the wealthy) the extremely rich (top 1%) and the rich (top 10%) ultimately ended up paying a far bigger share of total tax revenue than the rest of the country (the 90%) did combined. In 1990 the top 10% paid 55% of the entire tax revenue for the Federal government while the next 90% combined accounted for the rest (and you would correct to assume that the percentage of total revenue paid per percentage bracket goes down as you move down the income ladder. The top 20% paid a very large portion of the total revenue.)

49

I don’t doubt a single fact you’ve cited, but you may wish to consider the question of whether the increased revenue from top earners is due to the lowering of their tax rates (which you imply but don’t state) or wheterh it is due to factors that have almost nothing to do with the income tax structure. For example, you don’t even mention the growing inequality in incomes during the 1980s: many have pointed out that it was a time in which the rich got richer and the poor got poorer. Surely that is not the fault of the income tax system, but a growing inequality of income distribution can explain your figures equally well.

I don’t think a 34% top tax rate for any income earned in excess of a quarter of a million dollars each year is excessive. I don’t understand why dollar number 20,001 of a persons income should be taxed in exactly the same manner as dollar number 250,001. Let’s not make the simplistic mistake of thinking that folks in high tax brackets pay a 34% tax rate on ALL their income – their first $28,000 is taxed at 15%, just like someone who only earns $28 grand a year. (Apologies for the inaccurate figures: I’m too lazy to look up the cutoffs for each tax bracket.)

In any case, John Mace, I take it from your response that you support a tax system that moves the burden of taxes further toward the left. That is, people with less money should carry more of the tax burden. Do you at least agree that a flat tax proposal, with or without deductions, is directly targeted at making lower and middle class workers pay more in taxes?

50

Fairness. I’m not trying to be flipant, but it’s important to remember that guy number 2 has already paid a LOT of tax on dollars 20,000 thru 250,000.

I haven’t made that mistake. FYI, a nice table of the federal income tax rates can be found here But the exact numbers aren’t really important, as we’re talking about the general idea of having different brackets.

The short answer is yes and yes, but that overlooks an important part of the story. I think the size of the government is way too big. And I think it’s too big because, as we all know, it’s always easy to spend someone else’s money. If the tax rates were more level, we’d see much more pressure on polticians to reduce government spending. Thus, I would expect the middle class to pay a higher percentage of the overall taxes than they do now, but not necessarily a higher absolute amount than they pay now.

I really think this ability to tax someone else, and grow the size of government accordingly, is a major design flaw of our current system.

51

I urge everyone to actually read the article because it addresses many of the points you have rasied. The difference between a no-exemptions, progressive tax and a flat tax is that you can administer a flat tax at the corporate level wheras progressive taxes are administered at the individual level. If you have a flat income tax of 20%, just take 20% out of the payroll of every company, If you have a flat 20% income AND corporate tax, just take 20% off revenue.

This makes enforcement much easier and makes it virtually impossible to avoid taxation.

I was originally a sceptic in the flat tax debate but I trust the knowledge of the writers at the economist and they have made a very compelling case for it.

52

By my count, he will have paid an effective tax rate of 29% on those dollars… and that’s if he doesn’t take a single exemption or deduction that his additional income would allow him to take. Seeing as how the number being bandied about here for a flat tax is somewhere around 20%, I think implicitly labeling a 29% tax rate as being confiscatory is pretty laughable.

That reminds me of when I attended community college in California. Back then, it cost $5 a unit to take undergraduate classes. During the Pete Wilson budget crunch, the state had to find more money, so they raised the fees to $7.50 per unit. The crunchy types were absolutely outraged at this 50% increase in student fees! How could that evil Republican stick it to hardworking pottery students like Moonbeam, Che, and Sunshine! The major point being omitted is that the students were still getting a pretty solid education for a reasonable price, 50% increase in fees or no. I think that point applies doubly to the top 5 percent of wage earners in the US in the context of this debate.

53

I’m in favor of a flat tax, but ~ 15% of tax revenue should be from taxes on net worth and not just income.

Almost anything is better than transitioning to a system predominantly dependent on sales tax, though.

54

I think saying I implicitly called it confiscatory is wildly inaccurate, at best. At worst, it’s a deliberately distracting strawman argument. There is a lot of ground between “fair is fair” and “now you’ve made it confiscatory”.

I’m disappointed you didn’t address the major point I was making-- ie, that problems arise when one group can raise taxes on another group. I’ve already said I wouldn’t have a problem with graduated tax rates if any future changes affected ALL the tax brackets proportionally. But realistically, I don’t see how that could be done, and a tax with only one rate greatly facilitate that process.

55

A few points:

  1. Are we talking one big flat tax that covers everything, or are we simply talking about a flat income tax, accompanied by the existing panoply of regressive sales taxes, gas taxes, payroll taxes, etc.?

Because right now, we only have two progressive taxes, really: the income tax and the estate tax. All other taxes of any significance, AFAICT, are either already essentially flat (e.g. most states’ income taxes, which tend to hit the top rate at amounts like $12K), or regressive (like the taxes I just mentioned).

There’s an argument for making the overall system of taxation in this country a flat one. I disagree with that argument, but there’s an argument to be made for it. But I can’t see an argument for making the income tax flat, but accompanied by a panoply of regressive taxes that would insure that, overall, Joe and Jane Sixpack pay a higher share of their income in taxes than the rich.

  1. As others have pointed out ahead of me, tax simplification and the flat tax are two separate and independent notions. One can keep or get rid of deductions and exemptions just as easily with a flat or progressive tax structure.

I’m all for getting rid of all the deductions, and keeping only the personal exemptions and the standard deduction. I’d cheerfully give up my mortgage interest and property tax deductions, my deduction for charitable contributions, and all the rest, if all the other deductions I don’t use are also killed.

  1. I think the succinct logic for a graduated tax scheme can be encapsulated as follows:
    a) the utility of the next dollar of income decreases as one’s income increases; and
    b) the effort involved in gaining that next dollar of income also decreases as one’s income increases.

To someone making $20K a year, a $5K raise is a godsend. To someone earning $65K a year, it’s routine. To someone earning $200K a year, it’s a disappointment.

  1. In response to Martin Hyde’s list, I note that it includes the taxes paid by the top 1% and the top 10% at various times; I note as well the absence of the corresponding income number. If income is getting more concentrated in the top 1% or 0.1% or even 0.01%, they should pay a larger share of taxes, but I would hardly regard that as a net good.

What would be more illuminating is to see the taxes paid by the top 1%, 10%, etc. of income, rather than the top 1%, 10%, etc. of earners.

  1. If we take income and payroll taxes together, we already essentially have a flat tax (PDF - see Figure F on page 6), thanks especially to the 2003 tax cuts, which reduced the tax rate on dividends to less than what I pay on most of my wage income.

Figure F shows the average tax rates (including the Social Security payroll tax) on verious income groups, in 1979, 1989, 1999, and (the last line) what the average tax rates would have been for the 1999 tax cohort if the 2001 and 2003 tax cuts had been in effect then.

What it says is that the top 0.1% pay an average combined Federal income/SocSec tax rate of 22.57%. For the top 1%, excluding the top 0.1%, it’s 23.34%. Maybe this would be better in tabular form:

Income
Bracket . . . . Avg Tax

>0.1% . . . . . 22.57%
0.1 - 1.0% . . 23.34%
1 - 5% . . . . . 25.76%
5 - 10% . . . . 25.48%
10 - 20% . . . 23.81%
20 - 40% . . . 21.58%
40 - 60% . . . 18.25%
60 - 80% . . . 10.94%
80 - 100% . . . 6.97%

So it’s pretty flat until you get down towards the bottom, when it attains a bit of progressivity. And average taxes actually go down a bit as one gets into the top 1%, and more so in the top 0.1%.

I’m somewhat startled by the mildness of the progressivity in the 1979 numbers. It was a lot more progressive then than now, but still…31.92% average tax rate for the top 0.1% of earners, v. 17.35% for the middle quintile? That’s progressive, sure, but it’s hardly what I’d consider a crushing burden on the richest of the rich. (YMMV, of course.)

But if we combine the graph in Figure B (p.3) with the data in Figure E (p.5), we get something like what I was asking for at the end of part (4) above. In 1999, the top 0.1% earned just under 10% of the income, and the rest of the top 1% earned just over 10%, for a total of ~20% for the top 1%. In 1999, the top 1% paid 23.32% of the combined income and SocSec taxes. Outrageous, huh? Fortunately, help was on the way: if the 2001 and 2003 tax cuts had been in effect then, they would have only had to pay 20.83% of the taxes, on their 20% of the income.

So the rich weren’t exactly getting socked then, and even less so now.

56

RTF: I don’t want to defend the current FICA tax, but calling it regressive misses an important feature. On the surface, yes, it is regressive. But, keep in mind that payment of that tax is tied EXPLCITLY to a commitment to receive CASH payments from the government at a later date. It’s really a forced retirement program, although your heirs get *nada *if you croak early. Income taxes, sales taxes, even property taxes simply don’t fall in that category-- ie, cash payments at a future date. So, when calculating the effect of FICA on people, you really need to, in some way shape or form, factor in those future payments.

57

Well, fair cop. When you say that wealthy people have paid “A LOT” (note capitalization) of taxes on their income, I jumped to the conclusion that you meant that the taxes were eggregious in nature. I take it back.

Hold on a minute. We can’t assume that the earning power of various income levels to remain static. But we full well know that the income distribution in this country is becoming increasingly skewed toward low and very high incomes.

If, for example, the US were increasingly to lean toward highly stratified layers of income, I think it would be foolhardy to assume that the resulting (assumed) deficits should be made up by increasing taxes by equal amounts on the poor and the wealthy. Especially in this type of situation, the first thing that will be “taken away” through increased taxes might be conspicuous consumption by the wealthy, but for lower income folks, I think health care, education, and savings would feel the crunch first. That’s bad for the economy and bad for income mobility. Poor people don’t rise to the middle class if they are sick and dumb.

There is no way that there can be a one-size fits all approach to raising or lowering taxes: the effects of increased or lowered taxation should first be measured for their effect on the economy, and then adjusted as necessary. Locking into either a flat tax or to proportional tax increases/decreases as a matter of principle that must be pursued without regard to economic consequences may be fair in your book, but I believe it is completely reckless from an economic standpoint. If taxation was only an abstraction, disconnected from reality, then perhaps it would make sense to lay down firm principles about how taxes ought to be raised and lowered. But since taxation is an essential lever of the economy, decisions must be taken pragmatically.

58

I’d disagree. The government’s commitment to return those taxes in some way at a later date is more explicit than with most things, but Congress can still pass laws turning the benefit structure topsy-turvy - as Bush is currently asking it to. And if we go along with his argument that there is no trust fund, one could make the point that all Social Security taxes paid over the past 20+ years, in excess of Social security benefits paid out, have gone to help pay for tax cuts for the wealthy.

At any rate, it is a tax - it is a compulsory payment - and while it’s also a particular way of ensuring that an important social-insurance program doesn’t get eliminated (successful or not), there’s no question of the reality of the tax collections.

59

While we disagree about the size of government, we can agree to disagree in this thread, anyway. However, I’d disagree with you about your statement that “this ability to tax someone else, and grow the size of government accordingly, is a major design flaw of our current system.” The size of government as a portion of GDP has stayed in a fairly narrow range over the past 40-50 years, so there’s been no indication that the current tax system has led to untrammeled growth of government. In fact, government’s growth has been pretty trammeled at times.

Also, when the “someone else” being taxed are the richest people in a society, we’re not talking about a bunch of helpless, defenseless people; they are quite able to use their resources to even the field, and then some. (That’s why the estate tax is on the ropes.) Clearly the extent to which government is maintaining its size is not dependent on soaking the rich, given that the tax situation of rich people has been getting more favorable for the past quarter-century.

60

The non-static nature of earning power is indeed one feature that acts as a break on people’s willingness to “soad the rich”. But when you vote for a tax that affects only the top 2% (or even 10%), your odds of ending up in that bracket is small-- very smal in the short term.

Do you consider it fair for people to vote to impose a tax they do not have to pay? Even in a flat tax system, the people who pay nothing still vote on the tax rate, but there isn’t any practical way around that-- forbidding them to vote on the tax would do more harm than good, and there’s no way to seperate out a vote for or against a tax in a representative democracy.

Regarding your last sentence: What do you mean by the income distribution being skewed? I have seen data showing that “the rich are getting richer” but not any showing “the poor are getting poorer”. Are you assuming that the former implies the latter, or do you have some data to show this? Besides, I think I’ve taken the poor out of the tax equation altogether.

But the poor don’t pay ANY income tax-- in fact they receive income from the government (ie, the rest of us). Certainly not in the system I proposed earlier. I don’t know what you mean by “assumed deficits”. Can you clarifty that?

How exactily do you go about predicting the effect of a given tax policy on the economy? Ask 5 different economists, and you get 5 different answers. You are assuming that we can do something that we are simply unable to do in the real world. If you don’t want to rock the boat on the economy, then make your tax policy stable and predictable, keep government expenditures in lines with tax revenues, and work to minimize the overall size of government in the first place.