Flat tax

Factual Questions
41

Name a major nation where it’s used as the sole major source of taxation. In most nations, it’s used to supplement the Income Tax, not replace it.

42

I know you are just using Bill Gates as an example of a very rich man but I want to keep stating that Bill Gates would probably pay more under the flat tax. His major source of income (when he needs it) is through long term capital gains on the sale of Microsoft stock. That is currently taxed at 15%. He also gives a huge amount to charity (in the form of Microsoft stock). When he does that he gets a charitable deduction for the value of the stock. He reduces his income by those donations. With those donations, his rate begins to drop below 15% under current law. It could easily be under 10% currently. If long term capital gains were taxed at a rate higher than 15% under the flat tax and the deduction for charitible donations was eliminated, Bill Gates would pay more under the Flat Tax than he does now.

Who pays more and who pays less is fact specific. Steve Forbes may well pay less. Big time CEOs and movie stars would pay less. Teresa Heinz Kerry and Dick Cheney would pay more. Both recieve a lot of tax advantaged income and make large charitable donations. Bill Gates would almost certainly pay more. Within the income bands, there will be winners and losers. It would depend on the facts.

43

Here’s why you’re wrong.

  1. You have not demonstrated what Bill Gates actually pays now.

  2. I can always set the personal deduction at some level where “you” will pay less taxes than you are now. Let’s say you make $40k with no significant deductions. If I set the personal deduction at $30k, I can still set the tax rate at 20% or higher and you’ll pay less with the flat tax than you pay now. (I didn’t actually do the math, so I could be wrong on that specific example. If so, jack up the deduction higher.)

  3. Bill Gates is probably paying AMT right now, which is pretty much a flat tax at 28%. As long as the “real” flat tax is set higher than 28%, he will end up paying more.

Capice*?

44

If some of Gates’ income comes from unqualied option sales, the picture changes. If the option prices is $5, say, and he exercises them at $20, $15 is taxed at normal rates. If he holds the stock, and sells at $30, $10 is taxed at the capital gains rate and $15 at the normal rate.

Many people got screwed on this when the bubble burst. They exercised at $20 in this example, then the stock went to $10. They still had to pay tax on the $15 increase at the time of exercising, but only actually made $5.

I have no idea of how much of his money comes from options. Microsoft also declared a dividend, and he got a bundle out of that.

45

Well, it is true that I was using Bill Gates simply as the Archtypical Filthy Rich Guy.

And, I was basing my estimates on the Armey or the Forbes proposals, both rather similar. So, based on those two, Bill Gates would pay a lot less than 28%- somewhere between 17-22%, with a Capital gains tax rate of 0-15%. So- less than he is very likely paying now. Let’s not nitpick on just Bill, OK?

And I do have a cite- "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. " Yopu may not like it, but there it is, and it proves my point. Do you have a cite which says the normal middle class dude will pay less under any publically proposed & debated *revenue neutral *flat tax? (I add “revenue neutral” as if we cut spending by 20% then in theory everyone can get a 20% tax cut. :rolleyes: But that doesn’t make anyones Flat tax system work. If deep spending cuts were so easy, they could do them without a radical change to the Income Tax. :dubious: ).

So, perhaps I could have added an extra caveat or two and made it clear we were using a Architypical “filthy rich bill gates” not nessesarily the real Bill gates. In any case, what I said was true- under the two or three most commonly proposed “flat tax” proposals- one you adjust them to be Revenue Nuetral- the Ultra Rich are going to - as a group- pay less; and the Middle class will thus pay more.

46

And, the pro-flat taxes have gottn dudes mixed up by combining three things into one program, and calling it a 'flat tax".

  1. A real flat tax is one with one rate. If we have the normal Tax Code just like we have it now, but with one rate, say around 25%, that’d be a true “flat tax”. So, under that system, you’d figure your Taxable Income like always- with all those deductions and credits and stuff, then multiply by 25%.

  2. Another type of tax might be called a “no deduction tax”. Here’s an example:

First $10000 of gross income= 5%
10,000 to 100000= 15%
100000 to 1000000= 30%
1000000+= 40%.

Now, that’d have no deductions at all, but still have the progressive 'rich dudes pay more" system most of us prefer. This could also be done on a postcard.

  1. Then some of the flat taxers throw in “deep- and UNSPECIFIED- spending program cuts”. You don’t need to change the tax system at all to get these. But somehow Congress can’t do it.

Both of the two commonly talked about Flat taxes aren’t really “no-deduction” taxes. So that the poor don’t end up paying a lot more than they do now, they include a rather substancial “standard deductions”. But as we all know, once Congress starts, they can’t stop. So, I doubt if there’d be just the one deduction after a while.

In any case, quite a few of the Middle class have their finances all planned around getting a substancial deduction for their Home Mortgage Interest. Without that, many might well have to default or go bankrupt.