With a flat tax, people who don’t make much money will have their taxes go up while people who make lots of money will have their taxes go down. What should my salary be to break even?
(A good response to many questions, but this one in particular). Well… it depends. On a million different things. I assume you’re comparing the current US tax system to a hypothetical ‘flat’ (consumption) tax. There’s a lot of argument about what a good rate of taxation would be.
The most concise I can get is that the break between worse off/better off from the current tax system to a new one is that some middle class people will do better and some middle class people will do worse.
How about if we assume (for the US) the government takes in the same amount of money in income tax as they do now.
There are as many flat tax proposals as there are politicians proposing a flat tax, but almost all of them exempt people making below a certain amount a year. Where the cut off point is for exemption differs, but most politicians who favor a flat tax claim that their plan will exempt more people from paying any taxes than the current tax code does. For instance Steve Forbes proposed a 17% tax that exempts anyone making under $36k no matter what, then he changed it to a 17% flat tax with deductions of $13k for every adult in the family and $5k for every kid. Most of the other proposals that have gotten any serious attention have exemptions and credit systems that make them more complicated than a true flat tax. While it’s true that Forbes plan would exempt more people from paying income tax, it would also raise taxes for a hell-of-a-lotta people too, depending on what deductions and credits they are receiving under the current code.
The biggest problem with popular flat tax proposals is that they would cause a (bigger) federal deficit, in real numbers. Forbes and other supporters would argue that the boost given to the economy by implementing the flat tax would raise total revenue enough to make up for that deficit.
It seems like a flat tax has really fallen out of favor with most politicians and voters anyway. The new hotness in tax talk is a “fair tax” which is basically a national sales tax which, according to the proposal, would include exemptions for certain necessities, provide rebates to low income earners, and tax luxury items at a higher rate. “Fair tax” proposals can get as complicated as our current tax code and can differ greatly in their claims on how they might effect the economy.
I’ve always felt that “flat tax” was a bit of a misnomer. Linear tax, flat rate tax or fixed rate tax maybe, but flat tax?
A flat tax should be something like $4000 per living person per year (which is my ballpark estimate of how much it would have to be to keep IRS individual tax return revenue the same this year)
Edit: That can’t be right, can it? Is it really that low?
Since the current tax system does not tax everyone the same amount even if they make the same salary it would be impossible to answer that question. Your tax is based on a number of variables including salary from work, money earned from various investments, how many kids you have, what kind of debt you have, if you own property, etc. It is quite possible, even probable, that of two people making the exact same salary, one would get a tax break with a flat tax while the other would see a tax increase.
A really rough estimate would show that a person with a taxable income of $36k pays about 15% of that to federal income tax. You could find a tax bracket chart online with a search, but the reason flat tax proposals choose between $33k and $40k as their starting point is that their analysis shows that it is in that range that a 17% to 20% flat tax rate would begin to reduce the individual tax burden rather than increasing it. Of course the problem with any quick analysis is that taxable income as figured by the IRS is less than gross income and can vary greatly by individual. Also those tax brackets don’t apply to other federal income taxes such as capital gains and payroll taxes. Adding those into the analysis would increase the total percentage paid to the feds by various amounts, whereas most flat tax proposals only tax income earned from work.
That makes sense. Lets assume a married couple with two childeren.
The problem with most of these proposals is that they cut the total income tax that the government receives and therefore require massive budget cuts to be feasible. I’m talking about no budget cuts flat tax.
Another way to ask the same question is: What average salary and above does 50% of the total income tax collected come from? That should give the same number.
I took a slightly different approach to actually answering the question the OP postulates.
A) Let’s take the mean household income for 2004 in the US: $60,000 (1)
B) In the 2004, Americans paid $831,890,000,000 in federal income tax (2)
C) The approximate number of households in the US in 2004: 109,902,090 (3)
D) Calculate the mean tax paid per household in 2004 by dividing B by C: $7500
E) Calculate the percentage rate by dividing C by A: 12.5%
Ok. That can’t be right, can it? Would a 12.5% fixed rate tax with no deductions yield the same amount of collections as the current system did in 2004?
What did I do wrong? I am disgracing my math degree here.
References:
groman I think what you are missing is that taxable income is going to be markedly less than total/gross income when all deductions are said and done. You would have to find out what the mean taxable income is (whether you are going by households or individuals).
Well no, I stated no deductions. I mean if you’re changing the tax system you’re changing the tax system. With all income as taxable, 12.5% fixed rate tax still… feels low.
Let’s just say for the sake of argument that the 12.5% rate is roughly correct. (If there were no deductions or exemptions whatsoever, my wag would be that may yet be a little high.)
If you’re a family with children making on average 100,000 in 2001, the Congressional Budget Office calculated your effective income tax rate to be in the neighborhood of 7 percent. Cite. So for households with children, a flat tax with no exemptions would have those who earn less than $100,000 paying substantially more taxes, whereas the top earners making an average of $240,000 would pay substantially less taxes (17% vs. 12.5%). Again, those are households with children.
If you do not have children, CBO calculated that households earning around $157,000 a year in 2001 paid an effective income tax rate of around 15%. So my wag is that if you earned around $100,000 or less, your taxes would again go up very substantially under a flat tax, and if you made more than $100k, your taxes would go down pretty substantially. Cite.
So what do we learn from this? First, that a flat tax with no exemptions would hit those with lower to middle incomes in a pretty drastic way. That’s why nobody takes a pure flat tax very seriously – there simply has to be a substantial exemption for income in order to avoid having most Americans pay a huge amount more in taxes (the poorest Americans would go from perhaps receiving a couple grand in EITC (essentially a negative income tax) credits to having to pay out thousands in taxes each year. Under virtually any flat tax scenario, the wealthier you are, the more a flat tax would save you, even after all deductions are taken into account, because the Alternative Minimum Tax really racks up the tax bill for top earners.
(Note: the figures on effective tax rates I quoted above do not count payroll taxes! They also account deductions for mortgages and whathaveyou, therefore the effective tax rate is so different than the marginal tax rates now in force.)
Hmm, I guess I mentally lump in things like SS with federal taxes while they are not. I remember tallying up my effective tax rate (including social security, state income and state sales tax) to be a little under 40%. I guess my gauges are set for “the feds take most” so 12.5% seemed very low.
I don’t want to start debates or hijack too much but can somebody point me in the direction that explains what the accepted logical justification for income taxes is? What I mean is that the government needs money, as an entity, so it takes it from somewhere, but what is the accepted justification for taxing individual income? I guess in the economic flow of things, individual income is a choke point through which a huge part of the economy must flow through, and typically affects a single individual only once – but that’s not a justification but rather an explanation. Are individual income taxes supposed to be society use fees, with your individual income being a measure of derived benefit of your use of society?
Hijack: People often add up the marginal rates of their taxes and think, “Wow, I’m paying 8% state income tax, 25% Federal tax, 7% sales tax, 1.2% property tax, 14% payroll tax – that adds up to half my income!” but don’t really stop to compare how much is actually taken out. Adding up the percentages doesn’t yield an effective tax rate, it equals meaningless numbers. For example, I’m in the 28% Federal tax bracket, but that doesn’t mean I pay 28% of my money to Uncle Sam in income taxes, first because that’s a marginal rate, second because there’s exemptions, and third because of deductions: state taxes are deductable, mortgage interest is deductable, etc – as a result, I’d guess I pay about 10% of my pay in Federal income taxes. YMMV.
Well, this method works if you add up dollar amounts actually paid, instead of tax rates, (with any tax return subtracted) and divide by your gross income when doing your taxes. It could be surprisingly more than you think.
Clearly this was a better approach. Now how much money would a family of four have to make to pay 12.5% in federal income taxes income taxes? From the discusion it seems to be between 100,000 and 150,000 dollars. That is pretty much what I expected.