Say the feds do the math and a flat income tax of 27% for all Americans who have an income is needed to balance the budget (I know the number would be higher, it’s the concept I am curious about).
The full time college student who works part time and earns $8000 owes $2160.
The single parent who works full time and earns $31,000 owes $8370 in income tax.
The physician who earns $245,000 owes $66,150.
And the NBA player who earns $2.6 million owes $702.000.
Is there an argument that this is unfair in any way?
mmm
ETA: Whoops, I thought I was posting this in GQ. Perhaps a mod could move it (unless a resulting great debate is anticipated)
It depends on what you mean by “fair”. Both the student and the athlete take home 73% of their gross incomes, $5840 and $1,898,000 respectively. It isn’t hard to see that the 27% cut is going to be a far greater hardship on the student.
Perhaps you could work in a standard deduction: pay 27% on all income above $10,000 or something like that. If you add some brackets you will get something a lot like the AMT.
I would go for a flat tax with a standard deduction at $16k or so if sales and property taxes were abolished. Sales taxes tend to be regressive and property taxes tend to target middle income taxpayers.
The reason a flat tax is generally not a good idea is that there is a certain irreducable minimum of money necessary for people to live in a modern society. A low-income person could be pushed below this minimum by a flat tax.
This person now has $22,630 take home, where she had much closer to $31,000 last year and was probably fighting to make ends meet on that budget. You have probably taken $5-6k more money in tax from this person, how would you propose they make ends meet now?
This person, and many many people like them, who have very little already, are now in a colossal financial hole, and the primary benefit is to ensure that Mr NBA gets to keep more of his millions to add a wing to his mansion.
Well, it would almost certainly be higher and that would essentially mean a tax increase for most Americans and a tax decrease for some few wealthy Americans.
Also, if you disallow all tax write-offs you seriously damage the not-for-profit sector which currently provides a great many services that government can’t or won’t.
There’d have to be some phase-in at the least as a huge number of people got mortgages calculated on assuming they could write-off their interest paid on the loan.
ETA: I will have to look for the cite but when you consider all taxes people pay (sales tax, property tax, etc.) then the tax burden on everyone is actually pretty close and while not “flat” near enough to not get in much fuss about. If you flatten the income tax and the other regressive taxes remain you are seriously knocking the poor and middle class upside the head and handing a windfall to the wealthy.
But still in reality a factor - the feds can’t control every tax, but that’s part of why the income tax is progressive. If you were to flatten the income tax and maintain the same overall tax burden, as the other taxes are regressive, the poorer you are the more taxes you’d pay as a percentage of your income. Income tax is one of the taxes where it’s practical to make it progressive relative to income. It distorts the tax burden for the feds to pretend that those other regressive taxes don’t exist because they aren’t in direct control of them.
Another issue is that income isn’t the only way to make money - would a flat tax proposal also include the same tax rates for stuff like dividends and capital gains? If not, the poor again get hit with a greater effective tax rate as more of their total incoming money is going to be in the form of regular paycheck income rather than other sources.
The reality is - the people who push for a flat tax are generally the rich. A change in the tax code isn’t going to automatically reduce the overall tax burden, so the money has to come from somewhere. If the rich are paying less, that money must necesarily come from the non-rich. And as to why that’s bad - that’s simply an issue of the declining utility of each dollar you have over the last one.
Some can view it as fair because everyone pays the same rate, but pretty much any flat tax proposal I have seen means very large tax increases on lower to middle classes, and generally substantial tax cuts for the very wealthy.
For example, the lowest 20% of earners (those with incomes that average $17,000) currently pay about 5% of their income in Federal taxes (including payroll and income taxes). It is really only until your get to incomes in excess of $500,000 (which is the top 5% of earners) a year that tax rates exceed 27%. Link.
Even if one provided a substantial standard deduction, let’s say $15,000 with a tax rate of 27%, middle earners (averaging $60k a year) would have their tax burdens rise from 14% a year to 20% (or roughly $8.5k in taxes to $12k), and upper-middle types (averaging $90k a year) would see their tax burdens rise from 17% to 22% (or roughly $15.3k in taxes up to $19.5k).
On the other hand, the top 1% of earners (earning an average of $1.5 million a year) would see their tax payments decrease from an average of $470,000 to an average of $400,000.
One can fiddle with the size of the deduction and the rate of the flat tax, but in virtually every combination, it means that the overall tax burden must shift from the very rich to everyone else, mostly the middle class.
It may be “fair” in some people’s view to have a single tax rate, but I don’t see the results as desirable.
There are two sources of unfairness in this. First, the richer you are the more benefit you tend to get from society. Second, the idea of marginal utility. The more money you have, the less value each additional dollar. So, for someone making $500,000 a year, an extra $10,000 in taxes hurts less than $5000 to someone making $100,000, and even less than $2500 to someone making $25,000.
Part of the tax code is the idea of the standard deduction. The idea is that you should get a tax break on the minimum you need to survive. If you make barely enough to pay rent and buy the cheapest food, 27% tax will break you.
There is also the issue of shift of burden. A revenue neutral flat tax would cut the taxes of the highest earners and raise the taxes of the lowest. The income gap would go up even faster.
There is also the issue that taxes overall are already pretty flat (payroll taxes are regressive, sales taxes are flat, etc.) The last I looked, the poor pay a larger percentage in sales and payroll, while the middle income pay more in property taxes.
It would cause a necessary rise in wages, or else put a lot of people under the bare minimum needed to survive. Right now, a low-wage worker only needs to earn something like X+5%, or even just X with enough deductions (X being the bare minimum of take-home income to survive). But under a flat tax, that same person would need to find a job that pays X+27% just to stay afloat, and it’s highly unlikely businesses are going to start raising their wages.
Either the minimum wage will need to be increased which will hurt a lot of businesses, or the homeless population will skyrocket.
What counts as income; rentals, interest, dividends, inheritance, capital gains, stock options, farm sales, etc.?
Most flat tax proposals are offered in the name of simplicity, that’s a red herring. once you’ve sifted through all the rules to find out what your real taxable income was, looking up the tax you owe is the simplest part of filling out the forms.
Depends on your definition of ‘flat’. If it means everybody pays the same amount, the vast majority of people couldn’t afford to pay off their share of the debt. If you mean a flat rate, it’s pretty close to flat already. The arguments over the small percentage differentials is pointless. If you mean everybody has to actually pay, or at least owe at flat percentage rate, it’s because the rich own the politicians, and they don’t like to pay any taxes at all.
Imagine the US collect $10/year and needs that to run. Whatever tax system you propose the government needs $10.
You have a 10%, 20%, 30% and 50% rate.
So, one group pays $1/year, the next pays $2/year then $3 and $5.
For a flat tax to work you need to make everyone pay 25% (or $2.50 each).
A 150% increase on the poorest people.
A 25% increase for the next bunch.
A 17% decrease on the next.
A 50% decrease on the last bracket.
The way it currently works (loosely speaking) you will find 85% of the population in the first two brackets, 10% in the next and 5% in the last (I made those numbers up to illustrate the idea).
So, most of the population gets nailed with higher taxes and some few gain.
Looking at your title, it depends on your meaning of the word ‘work’.
Could we do it in a revenue-neutral, or even more-rev-to-the-government way? Sure, just fiddle with the rate until you get it right.
Does this mean that Congress would lose their main source of controlling people’s behavior? Yup. Can’t encourage homeownership, can’t encourage charitable deductions, can’t discourage smoking (through S-CHIP… unless you’re not talking about those taxes), can’t discourage tanning to fund that crazy Obamacare, etc. In short, the Democrats would be screwed.
Also, I assume you’re going to not include payroll taxes in this discussion?
There’s clearly something to be said about widening the tax base, making those who cry most often for more government actually have to pay for it. If the bottom half of the income groups are only paying something like 4 or 5% of the Federal government, it creates huge incentives for the majority to clamor for more services, which it’s pretty clear we can’t afford as a nation.
What would the flat tax % need to be if there was a deductible of, say $40k? I’m not in favor of a flat tax but I’m interested in knowing what the numbers would be.
For the benefit of making a small segment of the population slightly more comfortable, you get the negative of making a large segment of your population go bankrupt.
