Sofa King:
You made a reasonable argument as to why Bill Gates should pay more taxes than you. However, why should he pay a higher PERCENTAGE than you? With a flat tax, if he makes 1000x as much as you do, he’ll pay 1000x more.
Even conceptually you cannot develop an ideal tax code without also talking about how the money is spent.
Gangster:
Can’t we assume that “we’re all in this together”, so we should all pony up for all the legitimate expenses of the gov’t? In other words, you don’t get to pick and choose what you are willing to support and what you are not (you vote for representatives who do that for you). Then you set up a tax code that makes everyone chip in as fairly as possible.
I prefer the flat rate style that John Mace has suggested for 2 key reasons.
First, each dollar of additional income is taxed at the same rate, and that rate is fairly low. Highly progressive tax schemes, IMHO, take away too much from the highest earning people, reducing the incentive to increase earnings. The incentive to make more money is important, it pushes people to work harder and smarter. One could conceivably implement a 100% tax rate above $200K, but anybody making near that amount would stop trying to improve themselves, as there is no benefit.
Second, the high initial exemption allows the poor to not pay ANY tax, and spend their money instead on necessities for themselves and their families.
A question that has popped into my mind… Is it wrong that we do not take into account the vast regional differences in cost of living? My income is enough to own a small condo in my area, but could buy a nice house in some areas of the country. Is it fair that I pay the same tax as someone who can afford a nicer house or more luxuries than I?
Well, how you’re defining “functions of gov’t” is very relevent to how the tax code would work. What exactly do you consider social engineering? Do things like Welfare count? Social Security? Certainly such entities as the NEA would. At any rate, whatever definition of “social engineering” you use, it’s certain that the government does its fair share of it. As such, the tax revenue we’d need to raise would decrease. The less revenue we need, the more flexible we can be in designing our tax code.
At any rate, before I designed my tax code, I would first get rid of a few things, including a gradual phase out of social security (hey, if you’re not smart enough to put money away for retirement, tough noogies), axing the Dept. of Education (should be a state-thing, not a fed-thing) and the NEA, and eliminating all subsidies to assorted industries (notably steel and farming). Okay, now that I’ve shaved about 40% off the budget, let’s see what I would do:
-
Eliminate SS tax. There’s no SS, so no need for a tax on it.
-
Get rid of all deductions, except for the Standard Deduction we’re all used to.
-
Adopt a mildly progressive income tax. The top bracket would be twice that of the bottom bracket, maybe something along the lines of 9%-18%. Likely less, since I’ve eliminated a bunch of wasteful and useless gov’t programs. Division of the income brackets would resemble what we have today.
-
I considered eliminating corporate income tax, because I see no equitable justification for it. However, I can foresee serious abuses going on without it, so I’ll leave it there. Corporations are taxed at the top bracket. Corporations are also the exception to the “no deductions” rule, as all capital and labor expenses can be written off (so as to avoid double taxation).
-
Capital Gains are taxed as normal income, and only when such gains are realized.
With this simplification of the tax code, the only people who would need to hire accountants to do their taxes would be businesses. The rest of us could fill out the half-page form that consisted of “What was your income? Here’s your tax.”
The IRS would also shrink from the Econo-Sized behemoth it is into something more manageable, as there would be fewer ways to cheat on your taxes.
Ah, to dream…
Jeff
Cheese:
The best way to take regional differences into account is to drastically limit the role of gov’t, especially as it gets farther from home. The more we allow local governments to handle things, the more you will pay according the CoL in your area. For example, teachers probably make a lot less in Des Moines than in San Francisco, and so SF’ans should pay more to support their education system.
Also, we are all free to move anywhere in the country, if the CoL is that important in your life.
Jeffe:
Concerning “social engineering”, I mean that no tax should be enacted for any reason other than to raise money from all taxpayers alike. The tax code should not be used to encourage or discourage any type of behaviour. No child deductions, no tax credit for sending your kid to college, no special tax on “luxury items”. Just a broad based tax that makes everyone (except the very poor) chip in the same. We are free adults in this country and should be able to spend our money as we see fit.
No “sin taxes” and no use of the tax code to “promote” this, that, or the other “desirable behavior”.
I’m for making things more simple and less unfair. I’m tempted by the flat tax idea, but can it be set up so as not to hit the poor too hard? A large personal deduction, perhaps, so that the very poor pay no tax, the slightly less poor pay a very small tax, and so on?
I’d also like to get rid of sales taxes. Three reasons: (1) they’re regressive (the poorer you are, the harder you’re hit by them), (2) they’re annoying (every small purchase comes to a few cents over an even dollar amount), and (3) owners of brick and mortar stores keep whining that it isn’t fair to them that Internet sales are untaxed. Instead of adding sales taxation to the Internet, let’s remove it from all sales. Could boost the economy a little, maybe?
P.S. And, yes, do reduce the size of the fed govt. Then we’d need less in tax revenue, making it easier to come up with ways to have lower taxes as well as fairer ones.
That’s a decent enough point, John Mace. I suppose ideally such a thing might be fair.
But practically, Bill requires a vastly more sophisticated government institution to protect his assets than I do. I suspect, but do not know for sure, that protecting and regulating our financial and trade institutions costs far more–as a percentage of what both of us might put in–than welfare, unemployment, and a lack of health insurance costs all of us. Bill’s interest in everything from defense to diplomacy to trade to tariffs is vastly greater than mine, yet I’d be paying for all that protection, too.
I suppose one could argue that Bill’s money keeps the economy running far more than mine does, and that I’m dependent upon his assets somewhat in order to ensure a (relatively) stable economy and therefore my livelihood. But if that were the case I’d simply reverse the argument and say I work hard for my cash–why the hell should I subsidize Bill Gates?
I like the flat tax, but what if we eliminated income tax altogether, and only had a (say) 25% sales tax? Then we wouldn’t need to worry about filling out taxes at all, would we? We could get rid of the IRS, and April 15 would, instead of being referred to as “tax day”, now, be referred to as “Tuesday” (this year, at least).
On the other hand, for the reasons that Hazel mentioned, perhaps doing away with the annual chore isn’t a good enough reason.
So, I guess I’ll have to weigh in in support of a flat tax. Since the lefties don’t like this, however, when I’m President I’ll compromise with a 2-tier system: No taxes on the first $15k, 10% on the rest up to $35k, and 20% on income above that. (I’m just pulling numbers out of my butt, I haven’t done any math on this.)
ElJeffe, I’m about as cold-hearted a fiscal conservative as you’ll find, and I agree that people should plan for retirement themselves, but I can’t see doing away with SS and leaving old people out in the cold. Someone who’s young and runs out of money can get a job. But somebody who lives longer than they had planned shouldn’t have to spend the rest of their life in a ditch. IMHO
The only problem that I see about the first suggestion (the Armey-Shelby flat tax) is that there are no deductions. Granted, I know that deductions are the root of half of the loopholes, but suddenly, with no economic benefit to give to charities, the charities suddenly lose tons of income (granted, there still is the moral aspect, but seriously, most people I know give to charities thinking also about the deduction they get.) That’s the only hole I see. Other than that, I’d be all for it.
Sofa:
I’m not sure what you’re getting at. In what way are you subsidising Bill Gates when he’s paying 1000x of what you are? I just can’t see why people think that it is “fair” when one group of people pay a higher percentage than another group. How would you determine what rate Bill Gates has to pay in order for you not to be subsidising him?
Hazel:
The flat tax with a personal expemtion does exactly what you want. For simplicity, lets say we have a 20% tax on all income about 30K
Salary Tax % of Salary Paid in Tax
25K 0 0
40K 2k 5
60k 6k 10
100k 14k 14
200k 34k 17
1M 194k 19
I think I did the math right…
—Granted, I know that deductions are the root of half of the loopholes, but suddenly, with no economic benefit to give to charities, the charities suddenly lose tons of income (granted, there still is the moral aspect, but seriously, most people I know give to charities thinking also about the deduction they get.)—
Most calculations of the effect of the charititable deduction put the elasticity at about 1. That means that the amount of extra money we encourage people to donate is pretty much exactly the same amount as the tax system loses due to the deduction in the first place. In other words, we aren’t encouraging any more giving than the amount of money we could have collected in taxes and used to give to charities in the first place.
The major case for the deduction, then, is NOT that it helps charities at all, but rather that it allows rich people to decide how to spend the extra money they are being forced to give to charities. Of course, you might not think that’s such a great thing, but here we are.
— The whole point of taxing income is that the tax burden is (supposedly) related to ability to pay.—
Obviously, I reject that reasoning on two grounds: moral and efficiency. The moral ground is this: if there is some sort of social obligation to pay, it falls on everyone equally. The fact that you spend your 24hrs a day working your ass off to make income to buy things you enjoy, and I spend my 24hrs lying on the beach enjoying leisure shouldn’t make ANY DIFFERENCE to our supposed moral obligation to provide for the needs of others. The efficiency problem is simply that you can avoid the tax by reducing your ability to pay: not working. It’s not exactly the best idea in the world to give people relative incentives not to work.
Oops. The spacing in my table got screwed up. There should be 3 columns: Salary/Tax/%of Salary Paid in Tax.
Stuff like this is way WAY too much fun!
OK then: I have two approaches, more or less independent of one another.
[NOTE: Let me here introduce the term “money-owning entity” (MOE), meaning anything that controls some denotable clump of monetary assets–in other words corporations, non-corporate business entities, families (and other such unincorporated associations of mutual support), and individual persons–and has the legal ability to increment that clump–ie, to earn income.]
APPROACH ONE: tax the “luxury increment” at a flat rate
Every MOE can choose between taking the standard deduction (which is basically aimed at those at or below an inflation-adjusted poverty line, which is calibrated for the “kind” of MOE you are) or itemization. Itemization here encompasses a very wide range of things falling under two general categories.
Category 1: self-sustenance expenditures (nonluxury housing/shelter–mortgage payments, monthly rent–; clothing; food; medication, medical care, and medical insurance; employment-related travel-commute costs; basic costs of necessary transportation; costs of utilities; upkeep costs of various kinds; insurance; employee salaries; payment of dividends; equipment depreciation and replacement; and in general the basic and necessary costs of “keeping things going” during the year.
Category 2: self-investment expenditures (costs of education, training, and retraining–for the children as well as self; computer equipment and internet costs; telecommunications costs; certain kinds of travel and conference expenses; research and development costs; and a host of other expenditures that are, arguably, relevant to improving oneself and one’s earning ability.)
There is a reasonable chance that one will be auditted at least once in one’s life; the larger MOEs–big businesses, very wealthy individuals–can be assured an audit during every five-year period. You are expected to retain receipts, and receipts are required to present, accurately, certain information in a standardized manner.
So: take your annual income, you MOEs, and subtract any and all expenditures under these two categories. Ask if in doubt; there will be routes of appeal if you disagree with the initial decision–“user friendly,” not in the courts.
What remains constitutes, by definition, your “luxury increment.” Don’t fight the definition (or its name).
Everyone pays a tax at the same flat rate on this luxury increment. What rate? No idea. How about 15% and see what happens?
Paperworky? You bet. But fair, because fairness means that those who suffer, experience their sufferings in equal degree: the loss of $100 by a poor man may equal the loss of $100,000 by a rich man. That’s the point–that kind of “impact on my life” fairness.
APPROACH TWO: the big list
On February 15th, every MOE submits a postcard-sized tax form giving that MOE’s total income for the year preceding. Total means TOTAL.
On March 15th, every MOE receives back a statement of taxes due: your portion of the national bill. It’s figured by IN EFFECT (there will obviously be a few subtleties) listing every single MOE from the highest income-earner to the lowest (probably some number of persons earning zero income), and then applying a dollar-for-dollar sliding scale from the poverty line all the way to the top. I envision the scale as varying from 1% to, say, 50%. Bona fide new income-earners (ie, you can’t just change the name of your company) would be able to income-average over the first five years of operation.
By April 15–pay up!
The fairness assumption: The benefit you have accrued from the existence of our society is directly proportional to your net assets (liquid and nonliquid), which may be estimated fairly well by applying the sort of function implied a couple paragraphs back (someone else can write it!) to your total annual income. (The stated parameters are extraneous to that function.)
So taxpayers are paying in accord with the benefits they receive.
Scott:
A question about your scenario 1. Why get the gov’t invovled in HOW you spend the deductions? Just give everyone the same $ amount for a deduction (say $30k), let them decide how it’s spent and then tax the rest. I don’t see the need to get so intimately invovled in how people spend money on the “necessities” and to make them justify individual expenditures in order to deduct them. Seems like you’ve taken a nice simple plan (the flat tax) and made it unnecessarily complicated.
Scenario 2 scares me in that it’s unclear what checks the gov’t will have on keeping spending down. It’s like giving your kid a credit card with no limit and then getting a bill from the bank at the end of the month.
The point is that it is hard to imagine an anarchist society wherein there would be anyone able to earn even 0.1% of what Bill Gates has earned in our society, whereas it is not hard to imagine someone who earns, say $50000 being able to earn $50 (either in money or equivalent goods) in such a situation. Therefore, it seems that Bill Gates has benefitted more, even proportionally from our society than the average Joe.
The question of what is fair is a hard one to answer and it is obvious from this thread that noone really knows. However, it doesn’t follow logically that having each person pay the same percentage is therefore fairer than other systems, particularly ones that take into account the effect I discussed above as well as some idea of paying according to your means.
We’ve had this “rightfully yours” argument on these message boards before and I simply don’t buy it. Society is a collective enterprise. The income you receive is clearly not all “rightfully yours”. If it were, the very roads that you used to drive to work, etc., etc. would go unpaid for.
Now given that we all need to chip in, how do we decide who pays what? Some might say each pays according to the benefit they derive but that is impossible to figure out. Some might say each pays a fixed dollar amount. Some might say each pays a fixed percentage. Someone (John Rawls) might say that society should structured to maximize the benefits to the least well-off [it’s always fun to be able to quote someone whose views are way more extreme than your own 
].
We might disagree on what is fair but for you to claim that one way is somehow fairer in a very fundamental sense, like some other way amounts to stealing someone’s money and giving it to someone else, is really not justifiable. Fine, you think that equal percentage is the fairest. But, for goodness sakes, at least make some intelligible arguments why this is the case rather than somehow implying any other way is unfair simply by the tautology that everyone paying the same percentage is the only fair way.
I think it is rooted more in realism…The rich will in fact miss it less and they are the ones who have clearly benefitted the most from society.
By the way, my personal beliefs in progressive taxation have, if anything, only gotten stronger as my income has risen so that I am now firmly in the top quintile [and certainly higher (maybe even top 5%) if you consider solely single taxpayers with no dependents. I also have no “tax shelters” (other than my 401K) like a house, so my guess is that the percentage that I pay in taxes is quite a bit higher than most…even quite a few with more income than I.
And many of the tax cuts that I argue against could well benefit me quite a bit personally. Out of curiosity, I checked my federal tax returns yesterday and saw that Bush’s plan to eliminate the tax on dividends would have saved me just over $1000 in Year 2000 (only about $450 or so last year when the market was bad). If NY State followed suit, you could add about another 20% to that.
So, no, I’m not basing my personal beliefs in progressive taxation on jealousy.
Of course, this lowering of marginal tax rates providing more incentive is the classic argument on the Wall Street Journal editorial page but I would really like to see the evidence on this. I mean, I understand it in certain situations. The 100% marginal tax rate is one of them. Another is when it produces vastly differing incentives for different choices (e.g., if I could earn a lot more by not working and being on welfare than I can be working).
However, the claim that you are going to vastly increase the productivity of the wealthy by lowering their marginal tax rate from 39.6% to 33%…Is there really hard evidence for this? [And, if so, is there evidence that this produces more productivity than, say, lowering the tax rate on the poor by an amount that produces a similar drop in tax revenue?]
My guess is that at some point once you get wealthy enough, money becomes more and more about keeping score and less and less about the money itself. I mean, does Bill Gates really go to work everyday and work that much harder because he knows he’ll get to keep 67 rather than 60.4 cents of every dollar? This sounds bizarre to me!
The one thing I do believe might be true, as I said, is that differential incentives might matter. So, having a lower tax rate on capital gains than on other forms of earned income may encourage Bill (or the money manager he pays to figure out these things) how to maximize his capital gains income relative to the other income. But, again, it is more about the keeping score…and scoring as high as you possibly can than about working less hard because they are only gonna let you get 5 points instead of 7 points for a touchdown!
Any thoughts on this? Do any economists have more feel for what evidence is actually out there?
Jshore:
I don’t buy your “anarchist state” argument. It’s 100% conjecture. In fact, if you look around the world, there are countries that very closely approximate anarchy. Albania (maybe not now, but right after the overthrow of communism), some African states. And you will find in those places of anarchy a few fabulously wealthy individuals. They’ll be more like mafia family heads with private armies, but that’s what it takes in an anarchy situation.
Also your argument about lowering the tax rate on the poor is pretty hollow. How much income tax do the" poor" pay? In most cases, none! Now if you’re talking about the payroll tax, hey, I’m all for chucking that out the window and privatizing SS.