Right now, renting business space, even if it is your own home, is tax deductible. As a lawyer, I really enjoy that deduction even though my home office is quite small.
If this deduction is taken away, you force many, many small business owners into their home/garage. However, if small business owner does not provide a service (accounting, hair styling, babysitting, lawyer, doctor, etc.), that business may run afoul of local ordinances regarding zoning (e.g. home business is actually a convenience mart). All things kept equal, all small business owners and all people who work out of their homes on the side will feel the pinch, and arguably lawyers, doctors and accountants will feel it less.
All things being equal, small business owners who need actual selling space will probably be devestated. These are the type of businesses that rely on one big sale a year to show profit. I would imagine that restaurants will be a little more insulated since they should be available to turn a profit all year round. The businesses that will survive will have to raise prices and will be more incentivised to keep wages low.
When Steve Forbes ran for president, on a platform of the flat tax, some of his critics said his flat tax would guarantee that publishing magnate Forbes would never pay another dime in taxes.
I don’t understand that charge entirely, but I presume it means the income from his publishing empire would be renamed something other than income.
If the annual budget for a country is $100 and it has six citizens, and a non-flat tax to start, for instance:
Bill Gates - Salary $100 per year - Taxes 50%
You - Salary $50 per year - Taxes %10
Him - Salary $50 per year - Taxes %10
Her - Salary $50 per year - Taxes %10
Me - Salary $50 per year - Taxes %10
It - Salary $50 per year - Taxes %10
I can’t think of any percentage that could be used across all citizens that wouldn’t raise the taxes of the lower incomed people and lower that of the more highly incomed person. Any solution which didn’t wouldn’t be a flat tax, it would just be a different non-flat one.
So, the Pros and Cons are:
Pros
A flat tax is fair to everyone and doesn’t punish someone for their success
People with more money can invest that in the economy (trickle down–which though berated apparently did raise the lowest standard of living)
Cons
Most of everyone’s tax will raise to counterset the portion that was paid by the wealthy
Politicians will lose votes. So there never will be a flat tax regardless of any lip service to it.
“Flat” tax means different things to different people. The man on the street generally understands it to mean a single rate applied to all income. This would be a single flat rate. The policy wonks generally mean that the tax base is broadened. More income is taxed and less deductions are allowed. This why you sometimes hear a politician say they would like a flat tax with two or three rates.
In the pure form, there would be a single rate applied to all income (less only business deductions). Whether you earn $100 from wages, interest, dividends, capital gains or theft, you would pay the same tax. There would be no deductions for; mortgage interest, charitable contributions, state tax, education etc. For the ordinary person, the tax would be fairly simple. It could be handled through withholding. If you pay 20% on everying, the employer, bank, broker would just withhold 20% on all payments made to you. Since you’d have no deductions, there wouldn’t be much to figure out and little burden for filing a return.
The only deductions would be for business expenses. A business would still be able to deduct all the"ordinary and necessary" expenses just as they can today. There are base broadening things that could be done for business but the underlying assumption of deductible business expenses would not be changed. Business taxes would probably be a complicated as ever.
Not really sure who the real winners and losers would be. Unless there was some provision for a standard deduction or exemption, the poor would be hurt since they would pay the flat tax even though they barely (if that) pay the current income tax. The mega super hyper (idle) rich may actually pay more under the flat tax. If the flat tax was 20%, that could be a big increase to someone that is mostly collecting dividends, captital gains and muni interest. A middle income wage earner with a big mortgage interest deduction could also pay more. These people would probably all come out paying more unless some special provisions are made.
The winners would probably be high income people that currently earn salary and compensation type income. Imagine a high inome; CEO, athelete, doctor, laywer, actor etc. These people earn high compensation income that currently do not have special tax breaks. They pay the current full rate. They would pay less under the pure flat tax proposal.
I realize the Bill Gates example is just for fun but he probably pays very little right now. Microsoft pays a relatively modest salary (say one million dollars) at the full tax rate. When he needs cash he sells stock (15% rate). He also takes huge deductions for charitable contributions. I bet he doesn’t pay much federal income tax relative to his huge economic income. He probably pays a smaller percentage of economic income than most people on this board. If you attributed his share of Microsoft’s income it might be a different story.
Even if he’s only making $100,000 a year, (and this is echoed in Cecil’s article) that’s still within the minority of everyone who is paying the majority of US taxes.
Althought the flat tax would be an improvement over the current boondoggle of a graduated income tax, the only practical means of tax reform is The Fair Tax .
He is paying more tax but at a lower rate. In your example, you showed him with a high income but also a high rate. I’ll agree his income is high but he pays a low rate once you factor in the capital gains rate and the charitable contribution deductions. His rate could be under 10% but still pay more tax than the other five people in your example due to his high income. Maybe:
Bill Gates - Income $100,000 per year - Taxes 7.5% - Total tax $7,500
You - Salary $50 per year - Taxes 10% - Total Tax $5
Him - Salary $50 per year - Taxes 10% - Total Tax $5
Her - Salary $50 per year - Taxes 10% - Total Tax $5
Me - Salary $50 per year - Taxes 10% - Total Tax $5
It - Salary $50 per year - Taxes 10% - Total Tax $5
Bill Gates pays more than everyone else combined but at a lower rate.
But wait, all this stuff just makes the poor healthier. And that means they’ll be better workers—for the rich who own all the companies. And that’s a direct benefit to them.
Not only that, it allows the rich to pay lower wages. And have the tab picked up elsewhere.
But it’s true even without Haliburton in the equation. Even a defensive war against those trying to do us harm benefits the rich. It protects the lives of all Americans, but the rich have lives that are much more enjoyable than the poor, with more material things to protect. So it is more of a direct benefit to the rich.
And don’t forget, those other countries have rich and poor, too. Guess who benefits more?
And when space travel starts for the populace, at a few hundred thousand dollars for a ticket to the moon and back, who do you think will be enjoying those vacations? I measn, one can traipse off to St. Bart’s or Monte Carlo only so many times before the routine becomes tiresome.
Yeah, but the peolpe with vast acreage in the country and lots of greenery are the ones that benefit. How much do you think those estates would be worth if all the grass burned and the trees and flowers died? Such an event would greatly diminish the value of inheritances and threaten their hold on the country’s wealth.
Plus. many of the companies in this sector are start-ups with tremendous upside growth. And guess who both 1) own the companies and 2) get in on the IPOs if they don’t? That’s right. The rich.
True, a lot of poor people have become rich through these very vehicles, increasiing their ranks. But that just gives them even more clout at the ballot box to do things like enact more tax laws that make it even easier for even more people to become rich. Where will it end?
Everyone uses them to drive to work—at companies owned by the rich. And don’t forget, it’s a lot more enjoyabe to drive down a nice smooth road in a new Jaguar than it is a second-hand Ford pick-up with a rattle in the dash. It also makes it more efficient for the rich to have their nannies collect their kids and run errands all day long.
My take on the taxes is that you’re not paying for direct expenditures on your behalf, but that it’s part of the social contract for living in this society, and that it’s fair that your taxes are higher if you derive more benefit from it.
What I mean by this is that if you were dropped in the woods and had to survive on your own, you would enjoy a certain standard of living, although enjoy is probably not the right word. Any increment above that standard of living that you now have is a benefit which accrues to you because you are a member of society. It seems like those people who have greater incremental benefits should be paying higher taxes.
Even a homeless guy derives some small benefits, at least he may have a bridge to sleep under, and dumpsters to eat out of, but his standard of living is not much better than he would have without the rest of us. Bill Gates, not so much. Certainly he’s a bright guy, and would be able to devise shelter and grow food and all that, but how much over the average standard of living would his own skills gain him?
Having run my own business, I can safely say that you are somewhat wide of the mark - at least with regards to the U.K.
Firstly, the tax authorities make a distinction between perks and expenses. The former are taxable, and the latter have to be able to be justified. They don’t check everything, of course, but random spot checks are made. And the people who sign off the accounts are responsible (I forget whether it’s civilly or criminally resonsible). Here’s an example: I was away from home for an extended time. I was therefore allowed to claim food as an expense. But only a certain, small amount. If I had charged any more to the company, it would have been a taxable perk, if it wasn’t outright rejected by the accountants.
Second, the company is responsible to the shareholders. You, as a shareholder, can stand up at the shareholders’ meeting and demand to know why the directors (or whoever) have been on so many ‘jollies’. Who betide he who has an inadequate answer.
As I said earlier, every flat tax plan that I’ve seen proposed has a standard deduction that everyone takes-- no tax on the first “X” amount of income. That’s the error you’re making.
Now, if you want to argue the semantics about whether or not that’s really a “flat tax”, you can argue that with someone else. What is commonly refered to as a flat tax in the US is a fixed percent tax on all income above a certain amount. That’s what Steve Forbes proposed and that’s what Dick Army proposed.
What I don’t understand is why so many people think a flat tax is more “fair”.
The rate of taxation would presumably be the same across the board, but you still would have to pay more if you are rich. Whatever fairness that would exist under a flat tax system is imaginary, since the rich folk will still get “penalized” for having more money.
It is to laff. That would be an economic disater of Biblical proportions. You can’t just scrap a tax system that has (more or less) worked for 100 years, and replace it with something completely untried, and “hope for the best”. Not with America’s economy. Now sure, we could phase a national sales tax in, but at those rates (combined with States taxs, too mind you) the non-compliance would be a HUGE problem. Or maybe not too huge, but we don’t know. So, it’d be stupid to put something like that in, based entirely on guesswork. The current Income Taxes replaced high tariffs and high Excise taxes (and also ushered in an era of Big Government, too). But they did so gradually.
People like the idea because there would be a lot less complication and calculation for the average person. You wouldn’t try to figure out whether the hope credit or the life time learning credit would be better. You wouldn’t need to figure out if you should deduct the state and local income tax or state and local sales tax. You wouldn’t need to track all your purchases to determine your state sales tax. People suspect the complexity works against them. People with professional help get to “run the numbers” and determine which is best.
I handle business tax issues for a living but gave up doing my own personal taxes a few years ago. I don’t deal with the issues regularly and the rules are brutal. I bought turbo tax and now have no problems. The targeted breaks, limits and phase outs are hard for me. The average person must be pissed.
I really think people look at these rules once a year and just figure the complexity must be shafting them somehow. Some number of them just figure anything would be better.
is so much “pie in the sky”. His plan is not “revenue neutral” and calls for deep- and UNSPECIFIED- spending program cuts.
“Based on Treasury’s analyses of the Armey plan, Forbes’s proposal would appear to entail a revenue shortfall of between $180 and $210 billion a year (in 1996 dollars). Others believe the revenue losses to be much larger.” (see cite below)
And, calling for deep- and UNSPECIFIED- spending program cuts is a cop out. Hey, I can do that too! I propose a flat tax of 1%. (oh, and deep- and UNSPECIFIED- spending program cuts of 90% But don’t worry*, your * favorite program won’t be cut. )
So, the Forbes plan is bullshit. The Armey plan http://www.ncpa.org/ba/ba136.html
also calls for *vague * spending cuts, just not as deep.
"A Tax Cut. If the Armey plan for tax simplification were completely revenue neutral, it would require a tax rate in the range of 19 to 20 percent. Establishing a rate of 17 percent, therefore, constitutes a tax cut. The loss of revenue is paid for by capping government spending,including so-called entitlements. Also, the 17 percent rate is phased in, starting at 20 percent and falling to 17 percent after three years. Thus the deficit would not rise under the Armey plan. "
Social Security is an “entitlement”- thus it appears like Grandma wouldn’t get any increases in her $900/mo Soc Sec check, and thus that means a 2-5% decrease in her income every year, so that solves that problem, as after a decade, Grandma will starve to death or freeze in her unheated home, and thus no more “entitlements” for Grandma. Nice. :rolleyes: No Politician in America will vote this in, thus the Armey plan is also bogus. Now, if the Armey plan was Revenue Nuetral, then "According to the Treasury Department, at what Treasury says is a break even rate of 20.82% (or for that matter, at Armey’s proposed 20% rate), the *Armey plan would increase taxes sharply on all income groups except those earning more than $200,000 a year. * " http://www.ctj.org/html/flatsum.htm
Read that again "the Armey plan would increase taxes sharply on all income groups except those earning more than $200,000 a year."
Nice try, fellows. Next time try something “revenue neutral” so we have a valid comparision, eh? :dubious: Or, CUT THE SPENDING FIRST- THEN COME UP WITH A TAX PLAN FOR THE NEW BUDGET. I notice Armey isn’t out there pushing for cuts in Social Security.
So what. Your original statment is still incorrect. Since this is GQ, we’re trying to get out the facts, not your opinion. And ctj is hardly an objective source-- they’re a partisan group pushing an agenda. I wouldn’t trust their numbers in evlauating either Forbes’ or Army’s plans.
Why is my original statement incorrect? Gates- and Forbes mind you- get a nice big fat tax cut under these plans. The Middle class will thus pay more (unless there are “deep- and UNSPECIFIED- spending program cuts” and even still it doesn’t look good). So, still “you’ll pay more, Bill Gates will pay less”. True, I assumed the OP joins the vast majority here as part of the “middle class”. I suppose you could nitpick that statement, as I guess the OP could be poor (might or might not pay more; since although under both plans the poor pay little or no taxes, they lose the EITC, which is in effect a large increase in their net “taxes”) or filthy stinking rich. :dubious: But I think that was a fair assumption to make.
Well, the current tax system doesn’t work properly and never has. The National Sales Tax is used in other countries and works quite well. It was even proposed as the means of taxation by the Founding Fathers. I quote Hamilton, The Federalist Papers #21.
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