But that has nothing to do with the basic philosophy of the tax code. That is pure politics. Notice how Republicans who claim they hate government handouts put their handouts as tax breaks instead of payments. That kind of thing is why we have such a complicated tax code. I suspect that everyone, left and right, would agree that the code should be simplified, but your loophole is my incentive.
BTW, congrats on seeing the importance of marginal utility. Such flexibility is all too rare around here or anywhere else.
You are missing the main point. What is inherently “fair” about your proposal? Why is everyone paying 19% “fairer” than people paying varying amounts? As you surely know, everyone paying 19% will lead to people paying different absolute amounts of tax. Presumably if you accept that as fair it is because you think it is fair that people with more should pay more, regardless of what they get out of the system. What is it about your concept of “fairness” that requires a straight line progression of amount paid as related to income, rather than a progression involving an increasing gradient, where as income rises, the rate of change of the amount paid accelerates?
Until you define “fairness” you are being circular. You seem to be saying fairness = paying the same percentage, and pat yourself on the back for working out that a flat tax is then fair.
To put it simply, a rule that says “Pay 19%” is meaningless until you can answer the question “19% of what?” A 19% rate across the board could be just as progressive as the current tax system–if we use deductions and credits to make it so. It could be entirely flat (with no deductions). It could be regressive (if a sales tax–since the rich spend a much lower proportion of their income than the poor do). And that is the problem—how a “19%” tax will work is almost entirely reliant on how you change the definition of “taxable income”
Also, (and I think this has been said before here–but is worth saying again)
The complexity, and the “loopholes” in the tax code are not primarily found in the rates themselves (with perhaps the exception of capital gains)–but in the determination of taxable income.
So if you want to simplify the tax code, changing the rates will do almost nothing. The rates just aren’t the complicated part of the tax code. The hard part is finding some fair way to go from the various economic activities of a person, or a business, to a functional definition of their “income.”
As I show below, many of those “loopholes” are necessary to “fairly” determine income. Further, for many of them, you have to have some complex rule–so you either end up with a rule that doesn’t define “income” in a particularly reasonable way, or that is just as complicated as the one you got rid of.
Some tax breaks are handouts. Others are entirely legitimate policy tools (e.g. encouraging marriage by giving (on the whole) better tax treatment to married couples)–they have nothing to do with “fairness”–they’re just ways for congress to achieve some substantive policy goal.
Others (for example, business deductions for costs of production) are simply tools to accurately determine income.
That is why an across-the-board elimination of the tax code’s “complexity” is doomed to fail–because much of that complexity is trying to solve a complicated problem–what, exactly, is this thing we call “taxable income.”
The example has been given before, but it’s useful: a supermarket sells $1,000 worth of food, and paid $900 to buy that food. If you treat their “income” as $1,000–i.e. no deductions, they go out of business at any tax rate over 10%. They made a hundred, not a thousand dollars–$100 is what we’d think of as their “income.” But that isn’t the amount of dollar bills they got paid by customers last year.
But that is not the only way a business, or a person can be unfairly treated by just looking to his “income” in a simple way.
For example, if I own a construction business with lots of capital equipment, and it loses value (because I’m using it) I’ll want to deduct the loss I suffer for its loss in value every year (depreciation)–because I’ve put that value into my production-it’s a business expense, just like the money I spent for feed was.
My “income” is artificially high if you allow me to deduct business expenses, but don’t account for share of a capital expense (a large piece of machinery I use for several years, for example) that goes into this year’s production.
Again, this is a complicated problem. There is no “simple” rule that will fairly determine how to depreciate a tractor, and a farm building, and a well, and a farm building I’ve repaired, and improved. Further, you need to have a rule that treats a farmer and a grocer fairly-when their “income” is distorted in different ways.
The rule is complicated because the problems are complicated. Even if you don’t like the current set of depreciation rules, I hope I have shown that there is no way to create a simple, across-the-board rule that accurately takes depreciation into account in determining income. Even if you write a whole new set of rules, they will be complicated.
Similarly, if I trade one plot of farmland for another one, do I have lots of capital gains, as if I “sold” my land? (even though I realized no money from the transaction?) Or should we let gains and losses carryover into the new property? Same question if I trade my land for a herd of sheep?
The point is that these are complicated questions–and that they are all answered by the “complexities” of the current tax code.
The reason the code is complex is (for example) to figure out some concept of "income’ that have some businesses (e.g. accountants) which have low overhead, some with lots of depreciating capital equipment (e.g. farmers), some with little capital but lots of inventory (e.g. grocers).
You can “simplify” it by just wiping all the complexity out–but that will also wipe out any hope of having a definition of “income” that is fair to the employee, investor, accountant, farmer, and grocer.
IANAL,and none of this is tax advice or relates to any specific situation, etc, etc.
I haven’t seen any self back patting but thanks. Like I said, information, debate, discourse, they can all bring about something greater than the status quo. Unless, of course, you believe the status quo to be perfect.
In the OP you described a flat tax as the most “fair” tax possible.
Sorry to repeat myself, but you aren’t answering…
If you think it is fair that people pay the same for government services, you should support a capitation fee type system, where everyone pays the same. Now, you might think (and be right) that this would be impractical and an economic disaster, but it would still be the most fair tax possible, if that was your definition of fair.
Given that you don’t seem to believe that, you accept the principle that people should pay more in absolute terms if they earn more. Now, why is it suddenly “fairer” that the tax curve is a straight line, rather than one with an accelerating gradient. In both systems, the individual pays more taxes as he or she earns more income. Yet you have defined one as a prior fairer than the other. Until you define what you mean by fairness, that’s kind of meaningless.
Unless by fairness you simply mean everyone paying the same percentage of their income. Which makes it circular.
It’s only circular if the definitions of fair contrast. Now don’t get me wrong, they obviously do. For instance, can you answer why the resulting curved line is more fair than a linear one?
Off the top of my head, a justification for a linear line would to give people incentive to make as much as they could without worry that going over some arbitrary number will make them taxed in an entirely different manner.
As you stated earlier, the curve gets progressively steeper (and the taxes would as well) the more money you potentially make.
How much money is in the US? How much is paid in taxes? Does that mean that because the top 5% of money makers in the US account for 90% of the country’s wealth that they should pay 90% of the taxes as well?
I never considered it that way and I guess it could be argued that, that is fair. Why does the line need to be drawing closer and closer to the middle class for them to end up shouldering the burden? For instance, Id ask who came up with the combined income of $250k for Obama’s plan to work? A combined income of $250k isn’t all that high, all things considered.
You were the one who brought up fair… I am not trying to advance the argument that the resulting curved line is fairer - it is, but it is you who carries the burden of justifying a flat tax is fairer, because you made that claim.
That is a justification for a linear tax (actually a weak one, and if you wanted work incentives to determine policy you would have a ‘bell curve’ type tax rate, with rates rising up to a point, and then falling back for further incomes). But it sure as hell isn’t a “fairness” based justification.
It is what annoys me about the flat tax people. They attempt to hide behind this nice word of “fair” without ever justifying what it is that is supposedly fair about a flat tax rate. They, and you in this thread, act as if it is self evident, and I don’t think it is.
No, you are right in that regard. Fair is purely arbitrary and the reason I asked you for your opinion. I wouldn’t mind taking pieces from anyone’s thought process if it meant making my arguments, later on, stronger.
So I’ll ask again, what is your opinion of “fair”?
I’d argue a fair tax system is one that (amongst other things) ensures that the burden of paying taxes is spread in a manner such that the personal impact of the tax is proportionate. And the impact of paying 19% is significantly higher on someone who earns $20,000 than it is on someone who earns $200,000, even though the latter person pays more in an absolute sense. An increasing marginal rate recognizes that at higher levels of income, a person can afford to sacrifice said income at a higher rate for an equivalent amount of pain. It’s all back to the marginal utility of income concept.
I can see what you mean if it worked that way, but this is not really how progressive taxes work. It is true that you get taxed incrementally higher on dollars that you make above a given limit. However every dollar that you make up to that limit (and up to the ones before) is taxed at the same rate as everyone else who has that much income coming in. It’s not as if someone in a 35% tax bracket pays 35% on all of their income- they pay nothing on 8000, 15% on the next 30, etc.* I am sure you know this but your quote above makes me think that you’re saying something different.
The progressive tax actually does an OK job of approximating the marginal utility curve several folks have talked about. It could probably stand to be more progressive, not less, in my opinion, with additional income strata added onto the top.
In a way, you can think of a progressive tax system as completely “fair” in that everyone (with a little give and take for deductions) is tallied up by the same system- if a single homeless guy makes 1.5 million in income next year, he will be taxed the exact same way as a single attorney that makes 1.5 mil every year. The homeless guy is subject to the same system except he does not normally make enough to reach income strata that are taxed at a higher rate.
Of course, all of this sets aside the fact that most of America’s truly wealthy people make a lot of money in capital gains, which are taxed in a very different way.
*I am certain these figures don’t reflect the real tax structure, just an example.
Also, I’d be totally cool with a tax rate that is completely smooth over a given minimum, computed by an equation that approximates a marginal utility curve- then there are no discrete steps, you just plug your income into an equation and it gives you your tax. It would never happen but it would also take away this bracket thing which seems to just cause more confusion about what a progressive tax actually does.
15% on the income between $8,350 and $33,950; plus $835
25% on the income between $33,950 and $82,250; plus $4,675
28% on the income between $82,250 and $171,550; plus $16,750
33% on the income between $171,550 and $372,950; plus $41,754
35% on the income over $372,950; plus $108,216
Or lets say you make $82,249 a year. You pay $16749.75 in taxes (tax tables round.
Or you make $82,251 a year. You pay $16750.28
That extra 2 in income has cost you .53 in taxes - a tax rate of 26.5%
By the way, I think this is very fair. Everyone pays the same tax on the same level of income. Once you jump brackets, only THAT income is taxed at a higher level - because of marginal utility.
I thought I made it clear that I thought simplifying the tax code by eliminating these breaks was doomed to failure. My wife is a freelancer, and so I’m intimately familiar with Schedule C and those kind of deductions, which I wasn’t even thinking of. They have little to do with policy.
Clearly policy tools can be either tax incentives of payments from the government. Tax incentives have the advantage that they come from those self-identified as qualifying for them. However, besides cluttering up the code they have the disadvantage of being harder to get rid of when the need for them as passed, since some yell “tax hike” whenever one is slated for elimination.
I wasn’t disagreeing with you in many ways–my point was precisely that those weren’t policy deductions–but that many complex rules and/or deductions are there for a good reason.
As you say, many of the complex rules are policy tools which can’t in practice be gotten rid of–my point is that much of the complexity of the code consists of rules that have a valid and useful purpose–and so must stay even if one accepts (for the purpose of argument), that policy-based tax rules ought to be gotten rid of.
The point I was making to kearsen, which I’m sure you understand, was that deductions/rules to get to an accurate value for taxable income by their very nature are complex and contain “loopholes”—hence, a tax “reform” can’t just simplify the code down to a simple percentage–because many complex rules are necessary to accurately get to income.
If we abandon those rules, (say) by a “19% on income, no deductions” rule, we’d create enormous unfairness-by eliminating all the rules necessary to ensure we calculate income fairly in a range of settings. To put it another way, I was pointing out that there can’t be the kind of dramatic “simplification” proposed while keeping a fair way to calculate income.
Those advocating tax “reform” often propose getting rid of all deductions/loopholes/complexities–while not understanding that much (but as you point out, not all) of that complexity is necessary to fairly calculate taxable income.
I hope that several things have become clear to the OP:
The term %-based tax is not very descriptive. We have a percent based tax now. I think the term you are looking for is “single rate” or “flat tax”.
Tax simplification and having a single rate are orthogonal. It is not progressive rates that makes taxes complex.
Much of the complexity in tax law has to do with what how one determines income; what sorts of deductions against revenue are appropriate, how one assigns costs over several years, etc.
Marginal tax rates apply to each additional dollar once you cross the threshold of a new tax bracket.
If you creat a new tx structure in which the rich pay less, then someone else will need to pay more. Chances are this is the middle class since poor people don’t have anything to tax.
Admittedly, that is a rule about everything, not just taxation.
Since we are ranging a bit and there are some interested parties here, I am wondering how well my thought process holds up as referenced in an earlier post. It really seems to me that the rich “consume” more government benefits, especially in somewhat intangible ways like property protection and the benefit of a stable, educated, healthy, safe population to people who are running a business or selling a product or service or even just earning interest on a big kitty.
What are the problems with this view? I know it is a “feel-good” explanation of progressive tax rates and maybe for that reason I prefer it to the “equal pain” viewpoint of the marginal utility crowd (which I agree with). So I am very interested in counterarguments.
I think the problem with that argument is that rich people could get away with less govt provided services and substitute their own. For example, at some point when you pay enough taxes it would be cheaper to rely on private security rather than the police, pay for private mediators rather than rely on civil courts, send you kids to private schools, etc. When it gets to national security it becomes less clear, because a foreign threat could put your entire wealth in danger and it would be difficult to provide your own army. So maybe your argument would apply to 20-30% of our budget, but not the rest.
I think the best argument is pragmatic. Rich people have more money, they will miss it less, and they are in a minority so we have the potential political clout to collect taxes from them. Balancing that on the pragmatism scale is that if taxes are too high it may hurt the economy or drive the wealth out of the country. The United States as a whole is more emotionally charged than pragmatic.
