Why wouldn't a flat income tax work?

Great Debates
101

As has already been covered by the thread, all of the complications of the tax code come from determining what counts as income and what can be deducted. Once you come up with an income amount, applying marginal tax rates to it is trivial - someone with a hand calculator could do it in 5 seconds.

If you say “well the flat tax could come with a simplification of the types of income and deductions”, well, so can a progressive tax. Use all those simplification reforms and then apply progressive marginal rates to it.

102

I have, in the past, been a proponent of the flat tax, or similar concepts, but there’s some issues with over-simplifying the tax code. The first, and most obvious, example is that the utility function for money is not linear, whereas a flat tax assumes it is. To illustrate this point, a simple analogy should do. Let’s say I make an offer to you that if you pay me $10, I’ll flip a coin and if it’s heads you get $20 and if it’s tails, I keep your $10. Maybe you’ll play if you feel lucky, maybe you won’t. Now let’s say I make the same offer, except the cost is $10,000 to play and the pay-off is $20,000. For an average middle-class person, I think almost all of us would say it’d be stupid to play, even though the odds and winnings are exactly the same.

Simply put, for a given individual, the value of the currency decreases as one has more of it. This would seem to imply that some degree of progressive taxation is, in fact, more fair than a flat percentage, but it also implies that there is a point beyond which it is too progressive and does become unfair.

Another problem is that there is necessarily a minimum on what one can reasonably survive on, and this could easily be handled with a deduction such that the zero point for the utility function progressive tax is at the poverty line, but even that is a little too simplistic. The thing is, cost of living is very different in different areas. If anything, that would imply that, at least the standard deduction should maybe even be more complex.
That all said, I think the idea of the flat tax is simply that the tax system is just too complex. We can simplify the tax system significantly and still use a progressive or a flat tax. When I was a proponent of that system, I was much more interested in simplifying the rules about what types of income count in what situations and what deductions count and which ones don’t. I’m particularly bothered at the how taxation is used as a form of social engineering by implicitly (if not explicitly) encouraging people to, for instance, buy houses or have kids as it will result in tax breaks, even if those situations aren’t actually in the best interest of those people.

Another issue with complex tax codes is that it creates all those loop holes that there always seems to be people complaining about the wealthy individuals and companies being able to exploit. A simpler system should, not only limit the number of possible loopholes, but also make it easier to fix them when they’re uncovered.
Anyway, back on topic, I think it just won’t work because I think it makes an invalid assumption about how money is or should be valued.

103

Sorry to divert back to the fair tax again, but there’s one thing that just keeps bothering me about why conservatives are so smitten by the idea.

Over and over and over again, we hear how income taxes are “disincentives to work,” or “punishing success,” or various other glib criticisms that state that taxation is a strong and effective barrier to economic activity.

If it is true that taxation is a strong disincentive to economic activity – which I do not really believe, except in extreme circumstances – why would we want to discourage people from consumption? Don’t we want people to go out and buy news cars, TVs, and plane tickets? Why would we want to discourage people from consumption?

104

Flat tax proposals frequently exclude investment income from the definition of income.

105

Yes but the rule of law is not supposed to distinguish between the wealthy man and the poor man.

106

Well, preferential tax regimes you mention in the second sentence are one of those advantages you mention in the first sentence.

107

The site defines income as salary wages and pension. Thats it. Nothing else gets taxed.

108

I am shocked.

109

Nope, they are often written by the very rich to fool the middle class. Let me quote the Master again “The flat-tax scam is more of the same. Nobody’s sure what the actual flat-tax rate would be, but let’s suppose it was 20 percent. Based on the 1992 returns, if this inane proposal were implemented, taxes on everybody making $200,000-plus will go down and those on everybody else will go up. Malcolm Forbes Jr., one of the richest men in America, was the leading backer of the flat tax during the 1996 presidential campaign. Now do you see why?”"

Bolding mine.

110

Fair tax (i.e. national sales tax) proposals have the same issue. We are fairly well off and able to save 40% of our income. Currently, some of that is tax deferred through vehicles like our 401k or our medical savings plan. A fair tax would defer taxes on spending on even more of our income - allowing it to grow from its pre-tax state. Cool for us. Moreover, we have done a fair amount of our spending overseas, where its hard for the IRS to capture. We don’t bring enough back that we have to declare at customs - but we spend on consumables while traveling (accomodations, food).

Now, how much spending can someone with half or a quarter of our income defer?

111

Whoosh…

112

So the earnings of the owner of a small business doesn’t get taxed at all?

114

$ or %?

115

Do zombies pay tax?

116

Wouldn’t work any better today than 9 years ago.

117

Or you could make it completely* flat: Tax everyone in such a way that everyone ends up with the same take-home income. Everyone gets the same; isn’t that fair?

But seriously, what I would actually like to see would be a very high flat tax, coupled with a substantial UBI (somewhere in the neighborhood of $15,000-$20,000, with whatever tax rate is needed to pay for that). This would end up, on net, like a progressive tax rate, because for the poor, the untaxed UBI would be a greater proportion of their total income. But it would remove a lot of the discontinuities from the current system (for instance, the bottom line for a household would be the same no matter how they filed).

118

Adj gross income for US individual taxpayers is about $10.2 trillion, for about 141,000,000 taxpayers that filed. If you raise that amount to 200,000,000 that would be eligible for UBI at $20,000 each, then you would have to have a flat tax of about 39% to generate around the $4 trillion you would need to pay the UBI. The tax rate would need to be higher to afford the rest of the government programs excluding the safety nets, assuming that the UBI would replace them. So, say you needed another $750 billion, the flat tax rate would need to be around 46-47%.

Considering that about 35% of Federal tax revenue comes from payroll taxes, that would need to be considered in this equation as well. Only about 8-10% of Federal tax revenue comes from Corporate income tax.

119

Interesting, my wild guess for what the rate would need to be was around 50%. I guess I wasn’t far off the mark.

120

It’s been stated several times in this thread that sales taxes are flat. They are not. They are very regressive. Poor people spend all of their money, the rich spend a portion of it, and a smaller portion the richer they are. Furthermore, the poor often spend more than their income, so these people are going into debt to pay the tax man. So imagine a poor person makes $20k/year, spends all of it, and additionally spends another five grand using payday loans or credit cards or high interest loans, while a rich guy makes a million dollars a year and spends $100k, not counting investments. With a 10% sales tax, the poor guy is paying 12.5% of his income in taxes, while the rich guy is paying 1%. The numbers are for illustration purposes. They aren’t realistic necessarily, but they get the point across. Sales taxes are not at all flat, they are quite regressive.

121

I think the answer is that they’re both- the percentages are flat- EVERYONE pays X% of the price of the goods they bought.

But that’s also regressive, in that if someone making 100k a year buys $50 worth of taxable groceries here in Dallas, and some person making minimum wage also does, that $4.13 makes a LOT bigger deal to them than it does to me.

One way of looking at it in terms of why it’s regressive is that the $4.13 is worth something like 40 minutes of work for a minimum wage person, while for that 100k salaried person, it’s around 5 minutes and 15 seconds.

In my experience, most people advocating a flat tax are usually butthurt for some reason that the poor “aren’t pulling their load”, because they disproportionately consume government services and pay lower tax rates than everyone else. (“Why do THEY get X service for free from the government? And they pay less taxes to boot!”). In their lizard brains, they imagine that a flat tax is more equitable in a fourth grade mathematical sense (“everyone pays 17%! It’s fair!”), without really putting any thought into why it’s NOT actually fair or equitable in any sense but the elementary school math sense.