The Flat Tax

[OzmO]

Any thoughts or comments on the idea of a 10% Flat Tax for everyone?

[a_joker10]

Best idea ever.

You could cut a hole bunch out of the IRS if this happened.

Rolling tax rates suck.

[sandycoosworth]

lol... writeoffs, dependants, capital gains, medical expenses

these are just some of the reasons asking for a flat tax is retarded

[Delusional Liberal]

don't know enough about it.

[a_joker10]

lol... writeoffs, dependants, capital gains, medical expenses

these are just some of the reasons asking for a flat tax is retarded

I disagree there should be no allowance made for dependents, capital gains or medical expenses.

Corporation are considered persons and would be taxed at the same rated as anyone else.

Social policy should be reformed to better reflect the actual nature of service and programs like a national drug care strategy with a credit card system like in South Korea could work.

Creative solutions which minimize people in government, yet maximize service should be investigated.

[Delusional Liberal]

going by this it sounds good.

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July 7, 2005
A Brief Guide to the Flat Tax
by Daniel J. Mitchell, Ph.D.
Backgrounder #1866

There is widespread consensus that the current tax system is a complicated failure that hinders the nation’s growth while allowing the politically well-connected to manipulate the system to get special breaks that are not available to average workers and businesses. This is stimulating a great deal of interest in shifting to a sim­ple and fair flat tax. For instance, President George W. Bush has appointed the President’s Advisory Panel on Tax Reform to recommend options for fundamental tax reform,[1] the Department of the Treasury has produced extensive analysis of the flat tax and other reform options,[2] and lawmakers on Capitol Hill are exploring various ways to reform the tax code.

The United States should move quickly to reform its tax system. In a competitive global economy, jobs and capital flow to jurisdictions with better tax law. Tradi­tionally, this process of “tax competition” has benefited the United States, but there is growing evidence that America is falling behind. Nations around the world are lowering tax rates and reforming their tax systems. Indeed, nine countries that were part of the former Soviet Bloc have adopted versions of the flat tax.[3] These pro-growth reforms are yielding impressive results and are a road map for U.S. policymakers.

What Is a Flat Tax?

Unlike the current system, a flat tax is simple, fair, and good for growth. Instead of the 893 forms required by the current system,[4] a flat tax would use only two postcard-sized forms: one for labor income and the other for business and capital income. Unlike the current system, which discriminates based on the source, use, and level of income, a flat tax treats all taxpayers equally, fulfilling the “equal justice under law” principle etched above the main entrance to the U.S. Supreme Court building. And unlike the current system, which punishes people for contributing to the nation’s wealth, a flat tax would lower marginal tax rates and eliminate the tax bias against saving and investment, thus ensuring better economic performance in a competitive global economy.

There have been several flat tax proposals over the years, all of them based on the pathbreaking proposal developed by two Hoover Institution economists.[5] While no two plans are identical, they all share common features that fix the major flaws of the current Internal Revenue Code. Simplicity and fairness are also natural consequences of these component features of tax reform.

These major features of a flat tax are:

A Single Flat Rate. All flat tax proposals have a single rate, usually less than 20 percent. The low, flat rate solves the problem of high marginal tax rates by reducing penalties against productive behavior, such as work, risk taking, and entrepreneurship.

Elimination of Special Preferences. Flat tax proposals would eliminate provisions of the tax code that bestow preferential tax treatment on certain behaviors and activities. Getting rid of deductions, credits, exemptions, and other loopholes also helps solve the problem of complexity, allowing taxpayers to file their tax returns on a postcard-sized form.

No Double Taxation of Saving and Invest­ment. Flat tax proposals would eliminate the tax code’s bias against capital formation by ending the double taxation of income that is saved and invested. This means no death tax, no capital gains tax, no double taxation of saving, and no double tax on dividends. By taxing income only one time, a flat tax is easier to enforce and more conducive to job creation and capital formation.

Territorial Taxation. Flat tax proposals are based on the commonsense notion of “territorial taxation,” meaning that governments should tax only income that is earned inside national borders. By getting rid of “worldwide taxation,” a flat tax enables U.S. taxpayers and companies to compete on a level playing field around the world.

Family-Friendly. All flat tax proposals have one “loophole.” Households receive a generous exemp­tion based on family size. For instance, a family of four would not begin to pay tax until its annual income reached more than $30,000.[6]

Consumption-Based. A tax code that does not discriminate against saving and investment is con­sidered a consumption-based tax system, regard­less of whether taxes are deducted from the paycheck or collected at the cash register. In this respect, a flat tax is a type of consumption tax. The difference between a flat tax and a national sales tax is where the tax is collected. A flat tax is levied on income—but only once and at one low rate—as it is earned. A sales tax is levied on income—but only once and at one low rate—as it is spent.

Both the flat tax and the sales tax differ dramati­cally from the U.S. Internal Revenue Code. The current tax code has numerous forms of double taxation, such as its treatment of saving and corpo­rate income. The current tax code also has several forms of wealth taxation or asset taxation, such as the capital gains tax and the death tax. (These also are forms of double taxation since the assets were acquired with after-tax dollars.) The current tax code even has provisions that force taxpayers to overstate their income, such as forcing businesses to “depreciate” the cost of new investment instead of allowing immediate and full deduction (a policy known as “expensing”) when costs are incurred.

None of these forms of double taxation, wealth taxation, or overtaxation exist in either a flat tax or a national sales tax, which is why public finance economists categorize both systems as consump­tion-based taxes.

How a Flat Tax Would Work for Individual Taxpayers

Compared to the current system, a flat tax is extremely simple. Households pay tax on their labor income using a 10-line individual postcard. (See Form 1 in Figure 1.) They do not need to worry about reporting dividends, interest, and other forms of business/capital income. Those forms of income are taxed at the business level, thus obviating any need to tax them at the individual level since that would violate the principle of no double taxation.

The individual postcard is so simple that a third-grader could file a family’s tax return in about five minutes. Each household would report wage, salary, and pension income on Line 1, which should be eas­ily available from W-2 forms. Using Lines 2–5, the household then would calculate its personal allow­ance, which is based on family size. The personal allowance on Line 5 is then subtracted from Line 1 to determine taxable income. This amount is reported on Line 6. The amount of tax is calculated on Line 7. This amount is then compared to the amount of tax withheld on Line 8, which then leaves either a tax payment (Line 9) or a refund (Line 10).

How a Flat Tax Would Work for Businesses

Like the individual postcard form, the business postcard form is very simple. (See Form 2 in Figure 1.) All businesses, from Microsoft to a hot dog stand, would play by the same rules. There no longer would be separate tax rules for partnerships, sole proprietorships, S corporations and regular corporations. All business operations in America, whether owned by a U.S. company or owned by a foreign company, would pay tax on the income that they earn in the United States.






All business taxpayers would put their total receipts on Line 1. They would then add together their labor costs, their input costs, and their invest­ment costs on Lines 2 and 3. These costs are sub­tracted from gross receipts to determine taxable income on Line 4. Line 5 is the amount of tax that is due. Lines 6–10 exist in case a company either had losses from previous years and now has an opportunity to offset taxable income or has losses this year and needs to “carry them forward” to the next tax year.

The Advantages of a Flat Tax

There are two principal arguments for a flat tax—growth and fairness. Many economists are attracted to the idea because the current tax system, with its high rates and discriminatory taxation of saving and investment, reduces growth, destroys jobs, and lowers incomes. A flat tax would not eliminate the damaging impact of taxes altogether, but by dramatically lowering rates and ending the tax code’s bias against saving and investment, it would boost the economy’s performance when compared with the present tax code.

However, the most persuasive feature of a flat tax for many Americans is its fairness. The complicated documents, instruction manuals, and numerous forms that taxpayers struggle to decipher every April would be replaced by a brief set of instruc­tions and two simple postcards. This radical reform appeals to citizens who not only resent the time and expense consumed by filing their own tax forms, but also suspect that the existing maze of credits, deductions, and exemptions gives a special advantage to those who wield political power and can afford expert tax advisers.

If enacted, a flat tax would yield major benefits to the nation, including:

Faster Economic Growth. A flat tax would spur increased work, saving, and investment. By increasing incentives to engage in productive eco­nomic behavior, it would also boost the economy’s long-term growth rate. Even if a flat tax boosted long-term growth by only 0.5 percent, the income of the average family of four after 10 years would be as much as $5,000 higher than it would be under current tax laws.

Instant Wealth Creation. According to Harvard economist Dale Jorgenson, tax reform would boost national wealth by nearly $5 trillion.[7] It would do this in part because all income-producing assets would rise in value since the flat tax would increase the after-tax stream of income that they generate.

Simplicity. Complexity is a hidden tax amount­ing to more than $100 billion. This is the cost of tax preparation, lawyers, accountants, and other resources used to comply with the Internal Revenue Code. The Internal Revenue Service even admits that the current tax code requires taxpayers to devote 6.6 billion hours each year to their tax returns.[8] Yet even this commitment of time is no guarantee of accuracy. The code is so complex that even tax experts and the IRS often make mistakes. All taxpayers, from General Motors to a hamburger-flipping teenager, would be able to fill out their tax return on a postcard-sized form, and compliance costs would drop by tens of billions of dollars.[9]

Fairness. A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes. No longer would the tax code penal­ize success and discriminate against citizens on the basis of income. Tax burdens would no longer depend on the number of lawyers, lobbyists, and accountants on the payroll.

An End to Micromanaging and Political Favor­itism. A flat tax gets rid of all deductions, loop­holes, credits, and exemptions. Politicians would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy. Not only does this end a major source of political corruption, but it is also pro-growth since companies would no longer squander resources lobbying politicians or making foolish investments just to obtain favorable tax treatment.

Increased Civil Liberties. Under current law, people charged with murder are presumed inno­cent and thus have more rights than taxpayers deal­ing with the Internal Revenue Service. By contrast, a flat tax would eliminate almost all sources of con­flict between taxpayers and the government. More­over, infringements on freedom and privacy would fall dramatically since the government would no longer need to know the intimate details of each taxpayer’s financial assets.[10]

Global Competitiveness. In a remarkable development, former communist nations are lead­ing a global tax reform revolution. Estonia was the first to adopt a flat tax, implementing a 26 percent rate in 1994, just a few years after the collapse of the Soviet Union. The other two Baltic republics of the former Soviet Union enacted flat taxes in the mid-1990s, with Latvia choosing a 25 percent rate and Lithuania picking 33 percent. Along with other free-market reforms, the flat tax significantly improved economic growth, and the “Baltic Tigers” became role models for the region. Learning from its neighbors, Russia stunned the world by adopting a 13 percent flat tax, which went into effect in 2001.

The Russian flat tax quickly yielded positive results: The economy prospered, and revenues poured into government coffers since tax evasion and avoidance became much less profitable. The flat tax then spread to Serbia, which in 2003 chose a 14 percent rate. Slovakia hopped on the bandwagon the following year with a 19 percent flat tax, as did Ukraine, which chose a 13 percent tax rate. Earlier this year, Romania joined the flat tax revolution with a 16 percent tax rate, and Georgia adopted a 12 per­cent flat tax rate, which has the honor, at least tem­porarily, of being the lowest rate in the world.

The flat tax revolution has been so successful that Estonia is lowering its rate to keep pace with other nations. The Estonian flat tax is now down to 24 percent and will drop to 20 percent by 2007, and Lithuania is in the process of lowering its 33 percent flat tax to a more reasonable 24 percent.[11] Poland’s government just announced that it will implement an 18 percent flat tax, and lawmakers in Croatia, Bulgaria, and Hungary are also considering tax reform. Last but not least, the opposition par­ties in the Czech Republic have promised to imple­ment 15 percent flat tax regimes if they win the upcoming elections.[12]

In a global economy, it is increasingly easy for jobs and capital to escape high-tax nations and migrate to low-tax nations. This means that the reward for good tax policy is greater than ever before, but it also means that the penalties for bad policy are greater than ever before. This is why so many nations are lowering tax rates and reforming their tax systems.[13] A flat tax will make America a magnet for investment and job creation.

Frequently Asked Questions

Q: Should the rich pay more?

A: Under a flat tax, the rich do pay more than the poor. A wealthy taxpayer with 100 times more tax­able income than his neighbor will pay 100 times more in taxes. However, a flat tax does not impose special penalties on those who contribute the most to the nation’s prosperity by subjecting them to punitive and discriminatory tax rates. For those who think the “rich” should pay a higher percent­age of their income, the generous family allowance effectively creates a modest level of “progressivity.” For instance, a family with an annual income of $20,000 faces a tax rate of zero. Wealthy taxpayers also benefit from the family allowance, but the effective tax rate on an income of $1 million will be only a tiny fraction below the statutory tax rate.

This approach is much fairer than the current system, which penalizes investors, entrepreneurs, and others who create wealth for the American economy while simultaneously providing myriad deductions, credits, exemptions, and other prefer­ences that are much more likely to be exploited by upper-income taxpayers. The flat tax eliminates these special-interest loopholes, ensuring that the rich play by the same rules as other taxpayers.

Q: Would a flat tax reduce the budget deficit?

A: It depends on the tax rate, what happens to spending, and how much faster the economy grows under a flat tax. Even after taking supply-side effects into consideration, lower rates translate into less revenue at some point. The size of the family allowance also plays a key role since the decision to protect a certain amount of income generally means that the rate on income above that level has to be higher.

Q: What would happen to charitable contribu­tions and housing markets?

A: Some worry that the transition from the cur­rent system to a new one would create problems for charities and homeowners. History suggests that these fears are misplaced. During the 1980s, the top tax rate was reduced dramatically, from 70 per­cent in 1980 to 28 percent in 1988. This also reduced the value of itemized deductions by the same amount, but the value of housing did not drop. Similarly, charitable contributions actually rose sharply during the 1980s. This does not mean that itemized deductions have no importance; it simply indicates that the benefits generated by a robust economy more than offset any costs associ­ated with lost deductions.

Q: Is there a risk that politicians will raise tax rates in the future?

A: As recent events demonstrate—a partial tax reform in 1986 followed by tax rate increases in 1990 and 1993—this is a real danger. However, this is not an argument against the flat tax. It is fur­ther evidence of the need for a constitutional amendment that requires a supermajority to raise taxes.

Q: Should the income tax simply be abolished and replaced by a sales tax?

A: As noted, the sales tax and flat tax are different sides of the same coin. Some have suggested that the better approach would be to replace the income tax with a national tax on consumption. However, while attractive in theory, the danger is that Ameri­cans could end up not with a sales tax in place of the income tax, but with a sales tax and an income tax. A sales tax should be considered only after the 16th Amendment, which allowed the income tax, is repealed. Otherwise, such an effort could play into the hands of those who want to impose a national sales tax or value-added tax (VAT) so that politi­cians get more money to spend.[14]

Q: Does a flat tax eliminate the marriage penalty?

A: There are two types of marriage penalties, and the flat tax eliminates both of them. There is only one tax rate, so it would no longer be possible for one spouse’s income to push a couple into a higher tax bracket. Furthermore, since the family-based allowance under a flat tax is twice as high for a mar­ried couple as it is for those filing singly, that part of the marriage penalty also disappears.

Q: What counts as taxable income under a flat tax? Fringe benefits? Capital gains?

A: One of the key principles of the flat tax is that all income is taxed, but only once. As a result, all provisions in the current tax code that result in double taxation are abolished. The capital gains tax certainly falls in this category, as would the double tax on dividends and the death tax. By contrast, income in the form of fringe benefits is not taxed at all under the current system. This policy not only allows upper-income people to receive large amounts of tax-free income in the form of health insurance benefits, but also undermines much-needed market forces in the field of health care.

The flat tax addresses this inequity by taxing all forms of employee compensation equally. More specifically, employers would withhold tax on this type of income and remit it to the government on behalf of employees.

Q: How does a flat tax affect payroll taxes?

A: The flat tax does not address payroll taxes. Both Social Security and Medicare face significant long-term structural problems, but those prob­lems, along with the taxes that help finance those programs, are presumably addressed most effec­tively as part of entitlement reform.

Conclusion

The current income tax system punishes the economy, imposes heavy compliance costs on tax­payers, rewards special interests, and makes America less competitive. A flat tax would dra­matically reduce these ill effects. Perhaps more important, it would reduce the federal govern­ment’s power over the lives of taxpayers and get the government out of the business of trying to micromanage the economy.

There will never be a tax that is good for the economy, but the flat tax moves the system much closer to where it should be—raising the revenues that government demands, but in the least destruc­tive and least intrusive way possible.

Daniel J. Mitchell, Ph.D., is McKenna Senior Research Fellow in the Thomas A. Roe Institute for Eco­nomic Policy Studies at The Heritage Foundation.

 

[Delusional Liberal]

going by this, it sounds bad.

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A flat tax is a bad idea.
Why you're right:

1. It forces a choice between higher deficits or an increased burden for the middle class. Under the current progressive system, the rich pay a larger share of their income. To make up that difference the government must either: 1) shift a significant portion of the tax burden to the middle class or 2) borrow money to make up the difference. (EPI)

Why they're wrong:

1. There are other ways to simplify the tax code. It is complex because of years of adding loopholes and exemptions. The tax code is not complex because it's progressive. If you eliminated exemptions and loopholes, a progressive tax code could be implemented on a postcard. (EPI)

2. It doesn't encourage work. Empirical research shows "the labor supply of full-time, primary earners in families to be unaffected by tax rates." Most workers have their hours set by their managers – they aren't able to change their work habits based on their tax rate. (EPI)

A better idea:

Eliminate loopholes and exceptions that add complexity and allow some to avoid paying their fair share of taxes – but keep the graduated tax rate.

[Delusional Liberal]

going by this, again sounds bad, you decide!

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Flat Tax Fiasco

by Douglas Dunn

Copyright (c) 1998, 2006 Douglas Dunn / Word Wizards communications -- all rights reserved

The simplistic "flat tax" idea is once again a topic of hot conversation in political and economic circles. While this interest is largely fueled by a spate of proposals calling themselves a "flat tax" it is important to consider the idea of the flat tax itself apart from the specific proposals, especially since NONE of the "flat tax" proposals currently being considered actually addresses the true theoretical concept of a real flat tax. The proposals are primarily offered as either recommendations for tax simplification (which is an important issue but entirely unrelated to the issue of tax rate structure, as noted later in this commentary) or are not actually flat, as also noted below.

In addition to discussing the problems with the theoretical model of a true flat tax, this commentary will also briefly discuss why current proposals are not real flat tax systems at all and also discuss the important issue of tax simplification and reform.

Flat Tax Frauds
In the U.S. Senate, Arlen Specter proposed a flat 20% tax on earned income (working people's wages), from which rich people's unearned income (capital gains, interest and dividends) would be exempt. Congressman Dick Armey supports similar legislation in the House. Former presidential candidate Steve Forbes (who has exhibited virtually no entrepreneurial innovation in his life and became wealthy by inheriting his late father's publishing empire) made as a centerpiece of his failed campaigns a flat tax scheme that salutes the idle rich (as distinguished from hard-working innovators or entrepreneurs who actually earned their wealth) by exempting UNEARNED income gained as a return on investment (not merely protecting the value of the principal, but allowing those who gain wealth without working for it to avoid taxes while those who work hard for what they gain pay all the taxes). Since Forbes' plan reduces taxes on the poorest and especially favors the wealthy, but is supposed to be revenue-neutral (no loss of incoming tax revenues) once again it means the middle class working people would be the ones squeezed to make up for benefits to the rich.

In California, former Assemblyman Howard Kaloogian teamed up (unsuccessfully) with Arthur Laffer and others to introduce a similar proposal for our state. Laffer is the economics guru who inspired Ronald Reagan's "supply side economics." Starting Laffer's theories on cutting marginal tax rates on the highest incomes, Reagan developed a plan to balance the budget by cutting taxes for rich people while increasing spending, resulting in all-time record deficits paid for by the middle class and future generations, and which George Bush (senior) labeled "Voodoo Economics" when he first heard about it in 1980. The essence of Reagan's "tax cuts," which Laffer engineered, was to reduce the progressive character of federal taxes by eliminating the highest tax brackets. Middle-class and low-income working people never saw any substantial difference in their taxes.

All of the various proposals (Specter, Armey, Forbes, Kaloogian) are fraudulent. None of them is a true "flat tax." In actuality, each of these proposals recognizes the need for progressivity (the differing relative value of dollars at differing income levels, as discussed below) by allowing a primary exemption -- that no tax will be assessed against a primary layer of income. This creates a "progressive" system with two tax brackets: zero and the top rate. Allowing this primary exemption acknowledges the need to distinguish between the differing levels of marginal utility of money, but goes from one extreme, a "zero" rate, all the way to the other extreme of the top rate in one single jump. Since they have acknowledged the need for at least one level of graduation, it makes sense to phase it in through gradual layers of progressivity, as was done during the prosperous era of the 1950s and 1960s.

Proponents of these "flat" taxes love to point out that it is unfair to charge some people a different rate than others. But under their proposals, some people would pay no tax at all and others would pay the full rate. This is supposed to be more fair?

Problems with a flat tax
The notion of a flat tax does have a certain simplistic, egalitarian appeal. But it has three main flaws: 1) It seeks to improve something that is already completely equal; 2) It forces middle-class taxpayers to subsidize the wealthy (especially those incarnations such as Forbes' that exempt "unearned" income such as the interest on his invested inheritance, so that working people would support the idle rich); and, 3) It confuses much-needed tax reform and tax simplification in defining taxable income with the unrelated issue of whether the rate applied to that income is flat or graduated. Anyone who wants to support a flat tax better run the numbers first and see how much more they're going to pay!

The Graduated Progressive Tax is FAIR
A lot of people don't understand graduated taxes. They think if you make more money you pay a higher rate on your entire earnings, which seems unfair. Graduated progressive taxes are FAIR for three reasons: 1) they treat all taxpayers exactly the same; 2) they treat dollars with appropriate difference based on differing levels of marginal utility; and 3) those who receive the most benefit should pay for the disproportionate benefit derived from the system. Let's examine each of these reasons in more detail:

Graduated Progressive Tax Treats Every Taxpayer the Same
Graduated progressive taxes do treat all taxpayers equally. Every taxpayer pays the same rate on equivalent layers of income. People in higher brackets don't pay the higher rate on their entire income, only on the portions of income in the higher layers of marginal income. People, not dollars, are treated equally.

Simplified hypothetical example:
Let's examine a hypothetical example of a true flat tax (we have to use a hypothetical example because none of the actual proposals is a true flat tax) and compare it with a simplified example of a hypothetical progressive system. Let's imagine a progressive system with three rates: 15% on the first $25,000 income layer, 28% on the next $30,000 layer (from $25,000 to $55,000) and 33% above $55,000. A person who earns $25,000 would be entirely in the first 15% layer, for a tax of $3,750. His take-home pay is $21,250. A flat 20% rate would raise the working guy's taxes by $1,250.

A person earning $200,000 (the wealthiest 2% of the population) pays an exactly equal $3,750 for the first $25,000 layer. For the layer from $25,000 to $55,000 he pays the 28% tax of $8,400; and for the final $145,000 layer he pays the 33% tax of $47,850 for a total tax of $60,000. His take-home pay is $140,000 -- more than six times that of the $25,000 worker. With a flat 20% rate the investor's taxes would go down by $20,000!
   


Under the current proposals, the taxes for low-income workers (in the exemption level) would be substantially reduced or eliminated altogether, at the same time taxes for the wealthy would be greatly reduced. The result would be one of three possible outcomes:

1. Cut back government operations. Sounds good to many people but "cutting down the government" is also very simplistic. The government (at local, state and federal levels) does lots of very good and important things that have to be handled at the public (community) level because they affect all of us. It keeps our food and medical supply system safe. It develops, builds and operates a highways system and other transportation policies that allow people to move freely and become economically productive on a scale that could not occur in the private sector alone (have you ever tried to drive through large freeway-less cities in third-world countries?). It operates public parks and lands on a huge scale and manages them rather efficiently for the benefit of the people as a whole. It operates systems of law enforcement, judicial systems and penal systems to ensure public safety. It operates public health and emergency systems to maintain order during natural disasters or crises. It operates education systems that keep our nation technologically and economically competitive, despite huge problems in sending kids into public schools from family environments where they have been exposed to guns, drugs, poverty, abuse, or come from different cultures and languages and have a hard time keeping up with education in English. It operates massive military systems to protect us from invasion and to defend our interests worldwide. And this does not even include things such as job training programs to get people off welfare, programs for the disabled, and Social Security or Medicare. These are massive, complex operations and they take a lot of money. If the government would shut down for just a few days we would all be in a panic. Is there waste, fraud and abuse? Of course there is. Much of that has to do with economies of scale, just because the government is necessarily so humonguous. Large corporations (the famous "private sector") also are fraught with waste, fraud and corruption. Look at Enron and Global Crossing (and probably many more that haven't been making the headlines). Look at the faceless corporate bureaucracies parodied in "Dilbert" -- there is a reason that comic is so popular: it strikes a chord in the hearts of those who have to deal with those corporate bureaucracies on a daily basis. My business is to provide communications services, and I do contract work with small businesses, large corporations, private nonprofit organizations and public agencies (everything from law enforcement, courts, schools, and every kind of public agency you can imagine), either in preparing documents or working at their sites or other venues such as conferences/conventions. Small businesses are lean and mean and most efficient (not that I'm biased or anything). Large corporations and the government are most wasteful; small public agencies are more efficient than large bureaucracies. I note, for example, that if I am working a corporate conference or public training seminar, corporate hosts generally provide food, drinks, coffee, etc. (nice!) whereas public (tax-supported agencies) provide water -- not even coffee -- not as nice, but makes me feel there is some effort to avoid being wasteful. And we do need to continue to be vigilant in watching for and rooting out waste, fraud and corruption when they do occur (and they do).

2. Return to "borrow-and-spend" deficit governments. Deficits ballooned exponentially under the Reagan and Bush-I administrations, as taxes were cut for the rich but (despite lip service of reducing the size of government) government was not reduced. The costs of deficits are paid for by the middle class in three important ways: higher inflation as their paychecks become worth less and less; paying for increased government costs for interest on public debt; and, higher costs of private borrowing when public debt takes money out of circulation that could have been available for private lending markets and increases the costs of loans for houses, cars, appliances and other consumer uses.

3. Squeeze the middle class. If the rich pay less and the poor pay less and we don't cut government or run deficits, then the difference is going to be made up for, you guessed it, on the backs of the middle class workers who work hard already and are the ones who really need tax relief. If we're going to have reforms, it should benefit the middle class, not those who already pay the least.

Graduated Progressive Tax Addresses Differing Levels of Marginal Utility
Under graduated, progressive rates, all people are created equal, but not all dollars are created equal. Earnings of the working poor (not those on welfare) go almost entirely for survival expenses such as food, shelter and clothing. At that level, every dollar is critical; even a small difference causes tremendous changes in the quality of life. Those in the middle class are still very conscious of expenses, but have much greater flexibility in absorbing small fluctuations in income. On the other hand, a family earning $200,000 or more (wealthiest 2%) not only enjoys a higher standard in the quality of their "necessities" (better home, car and food), they also have much more discretionary income for recreation or investment. While no one enjoys a dip in income, a loss of ten or twenty thousand dollars is often within the normal fluctuation of a wealthy investor's investment portfolio, whereas that amount would be disastrous to the middle-class worker. This applies even more for those with even larger incomes, such as those who receive multi-million dollar salaries. This principle is most obvious at the extremes: consider the effect of a flat 10% on a single mother supporting her family working as a seamstress in a garment sweatshop for minimum wage ($10,000 per year) and the effect of a flat 10% on a corporate CEO earning ten million dollars per year. For the minimum wage seamstress, that ten percent is $1,000 -- a huge bite in the wallet for someone barely trying to survive. For the CEO, the bite is a million dollars. Sure, that's no small amount of change, but he is left with nine million dollars. A person can live pretty well on that amount of take-home pay. The fact is, even a tax bite of a million dollars does not really impact the day-to-day reality of his quality of life, which is very high. The equivalent value of each dollar (even as an equivalent percentage value rather than a fixed dollar amount) is simply less at higher levels of income, and the differing value of each additional dollar at the top (the margin) is simply not the same as primary marginal levels needed for bare survival. While this is most clearly seen when comparing the extremes, the same principle applies throughout all income strata.

Even some of the national proposals recognize this, and want to exempt a primary layer from the tax system (which is why they can not accurately be described as true flat taxes). So, since they recognize that survival dollars are different than wealthy dollars, why go suddenly from one extreme (paying no taxes) to the other (paying the top rate). So, since they recognize that survival dollars are different than wealthy dollars, why should we go suddenly from one extreme (paying no taxes) all the way to the other extreme (paying the top rate) in one single step? This is what graduated rates are all about. Since the current proposals are supposed to be bring in the same total amount of tax revenue, if the poor are going to pay less and the rich are going to pay less, it is naturally going to fall on the middle class (as usual) to make up the difference!

In the 1950's, the tax rate for the highest income layers was much higher than now, and there were many more brackets. There were 13 brackets, and the top marginal rate was 91%, though very few people had incomes reaching into that strata and those who did only paid that percentage on the fractional portion of their income that made it into that level. Most agreed it was too high, and in the early 1960's, President John F. Kennedy proposed that it be lowered it by 25% and the proposal was actually enacted in early 1964, after his death. Yet, the economy was not burdened by excessive taxes. Those were very prosperous decades, in large part because a greater share of the burden came from those who could most afford it, while middle class working families paid lower rates (before inflation-generated "bracket creep"), leaving more disposable income for more people to pump back into the economy.

Graduated Progressive Tax Requires those who Benefit the Most to Pay the Most
In addition to the differing value of marginal utility for money at higher levels of income, it is further true that those who are most wealthy also benefit more from all dimensions of the current system at a level far disproportionate to a simple scaled application of a flat percentage rate. Whether by our system of inheritance that permits families to pass down huge amounts of wealth to those who had no hand in its creation, or by their opportunities for access to and maneuvering through the economic system as it is (including disproportionate income levels for elites which may be thousands of times that of front-line workers who work at least as hard under less satisfying conditions), those at the highest levels of income have simply benefited disproportionately on a scale not reflect in simply applying the same rate across those larger amounts.

Further, those who are wealthiest benefit the most from the system because they simply own and control a disproportionate share of the assets that are protected by that system, through its legal systems of civil and contractual laws which are enforced more to their favor by law enforcement, civil legal proceedings, and the military system that protects from foreign invasion. Those who are richest simply are favored. They can buy advantage in access to the legal system (civil or criminal) from which the poorest are simply shut out and they are better protected by law enforcement. In wealthy neighborhoods, one can call the police and get a reasonable response just because someone is playing their music too loud, while a poor but honest resident in a drug-infested ghetto who is surrounded by major felonies and direct constant exposure to damage will barely get the slightest attention from law enforcement when they call to report gunshots near their residences. Additionally, those who benefit the most from our system of commerce are the ones who disproportionately benefit from the system of public works (infrastructure for highways, bridges, urban roadways, satellites and communication systems) that make it possible. Those who benefit the most for these things should be the ones who contribute the most to support them.

Tax Rates and Stimulating Investment to Create Wealth (and Jobs)
Some have complained that higher marginal rates act as a deterrent to the kind of wealth creation that trickles down to working people in the form of more jobs. Again, this is not an issue because the higher marginal rates only apply to the higher levels of income; all taxpayers still pay exactly the same rates on equivalent layers of income. Morever, this widely-believed fallacy simply fails to grasp the true nature of wealth (or job) creation which is based on the faulty view that if you give tax breaks to the rich, or otherwise put more money into the pockets of those who already have the most, that they will use it to create jobs. While it is primarily the wealthy who invest the capital needed to create more wealth (and jobs), jobs are not created just because people have money. If they just have money, and that's all, they'll just keep it or spend it on themselves, as they always have done in the past. Jobs are not created as acts of charity for working people that the wealthy elites don't even have personal acquaintance with. Jobs (and broad-based wealth) are created when those in a position to administer productive resources see a demand for goods to be produced. And if they see such a demand, they will generate the increased production -- create new jobs -- whether or not they have the money on hand -- even if they have to raise money by borrowing the necessary capital for financing. If the general public, which is made up far ore by working people than by the wealthy elite, does not have discretionary income to spend on products, the broad-based demand needed to stimulate wealth creation (and job creation) is inhibited. It has more to do with creating a broad base of demand than by making sure rich people have enough money. This concept is discussed in much more depth on my economics web page, at:
http://www.wordwiz72.com/econ.html

Simplification and reform
There are legitimate gripes about the tax system, but they have little to do with the graduated rate structure. We need more progressivity, not less, and real -- not superficial -- reforms, such as:

1. Close loopholes: We need to close loopholes that the rich use to avoid paying taxes on the portions of income in the higher levels. The real complexity in filling out forms and schedules at tax time is not in calculating the final tax, but in determining what "income" is, with all the exemptions, deductions and other loopholes. However, this is a separate issue from the question of what rate or schedule should be applied to whatever income is calculated. If we want to get the government off people's backs in the area of tax reform, we have to lead the way in "Taxpayer Bill of Rights" issues, eliminating taxpayer compliance statistical super-audits (or at least compensating those who participate) and other such areas of reform and simplification.

2. Property and Business Taxes: If we want California to be more attractive to middle-class working people and businesses, we need to make property taxes and business taxes more progressive. A family buying an owner-occupied residence in the low 100,000's should pay little or no property taxes while those with multi-million dollar mansions or large commercial landlords should pay higher rates for amounts in excess of the first layer. If we want to attract job-producing capital investment, business tax rates should favor small and startup companies, while industrial giants should pay higher rates on the higher portions of their net incomes.

Eliminating Deductions
One "reform" that is often suggested in the interest of "tax simplification," and which (again) sounds simplistically appealing, is the idea of "eliminating all deductions." The basic concept of deductions is based on determining what one's actual income is. For example, consider two working guys. They're both plumbers. They both receive checks throughout the year paid to them which total $100,000. The first guy is an employee. He works for a company that has a scheduler who sets his appointments, and provides him with a truck and tools. The second guy is self-employed (sole proprietorship, and let's say most of his income is from a handful of corporate clients who report their payments to him on 1099's). He hires a secretary to schedule his appointments and pays her $30,000. He buys a truck for $25,000. He spends $5,000 more on tools. Is it really fair to say there will be NO deductions? The issue should not be to eliminate all deductions, but to isolate legitimate ones and separate them from welfare for the rich.

It is foolish to think that a scheme to raise taxes on the middle class, while lowering them for rich people and avoiding any real tax simplification or reform, is in any way fair or equal. There is much tax reform that is needed. Let's build on the aspects of our tax system that are fair, reform the areas where needed, and address real issues in an equitable manner.

In addition to other books and articles by the author noted below, specific analysis of economic issues can be found in the commentary "Economic Justice and Fairness" by the same author, at:
http://www.wordwiz72.com/econ.html.

Copyright (c) 1998, 2006 Douglas Dunn / Word Wizards communications

[Dos Equis]

Sounds like a good idea.  A former Texas Congressman was a big proponent of this.  I think Malcom Forbes was too?  Here is why I think it's worth discussing:

"Fairness. A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes. No longer would the tax code penal­ize success and discriminate against citizens on the basis of income. Tax burdens would no longer depend on the number of lawyers, lobbyists, and accountants on the payroll."

[sandycoosworth]

I disagree there should be no allowance made for dependents, capital gains or medical expenses.

doesnt sound like you have a strong grasp of accounting principals...

[a_joker10]

doesnt sound like you have a strong grasp of accounting principals...

Thats your field not mine.

Just like your engineering skills.

[sandycoosworth]

asshole

[a_joker10]

HAHA

[OzmO]

Thats your field not mine.

Just like your engineering skills.

ouch.


Hey,  Sandy, can you please explain in a little bit more detail, other then citing the write offs, which can be adjusted/limited why it's a bad idea?

I'm  just trying to understand it a little better.

[Hedgehog]

Sounds like a good idea.  A former Texas Congressman was a big proponent of this.  I think Malcom Forbes was too?  Here is why I think it's worth discussing:

"Fairness. A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes. No longer would the tax code penal­ize success and discriminate against citizens on the basis of income. Tax burdens would no longer depend on the number of lawyers, lobbyists, and accountants on the payroll."

Forbes is full of shit.

People with big incomes are usually able to plan to pay a minimum amount of taxes.

"1000 times"? LMFAO.

He shouldn't be bullshitting when arguing why there should be a flat tax. There are other arguments for a flat tax, such as giving people with high income rewards for being successful. Some think this could create a situation where people would always strive to better themselves, other believes it to be a flawed theory.

Forbes needs to talk straight, instead of lying his ass off.

-Hedge

[Dos Equis]

Forbes is full of shit.

People with big incomes are usually able to plan to pay a minimum amount of taxes.

"1000 times"? LMFAO.

He shouldn't be bullshitting when arguing why there should be a flat tax. There are other arguments for a flat tax, such as giving people with high income rewards for being successful. Some think this could create a situation where people would always strive to better themselves, other believes it to be a flawed theory.

Forbes needs to talk straight, instead of lying his ass off.

-Hedge

I'm not sure that was a Forbes quote?  I took it from the long post by Delusional.

In any event, the current system does punish success.  We're not as bad as Canada, yet, but I personally don't believe a person should pay a higher percentage of income tax just because they make more money.  Yes there are ways to limit how deep the government's hand can go in your pocket, but like the previous quote says, that may depend "on the number of lawyers, lobbyists, and accountants on the payroll."

I am willing to discuss almost any proposal that will cut my taxes.   

[a_joker10]

Forbes is full of shit.

People with big incomes are usually able to plan to pay a minimum amount of taxes.

"1000 times"? LMFAO.

He shouldn't be bullshitting when arguing why there should be a flat tax. There are other arguments for a flat tax, such as giving people with high income rewards for being successful. Some think this could create a situation where people would always strive to better themselves, other believes it to be a flawed theory.

Forbes needs to talk straight, instead of lying his ass off.

-Hedge

The truth is the higher amount you make the less you pay. People with large incomes can defer more money, spend more on Charities and hire accountants to help them avoid tax.

The middle class can't avoid taxes.

That is why I argue for a flat tax. I feel that it forces more people to pay their share.
I also think that the minimum exemption should stay, however it should be substantially raised.

[Tre]

A capitalist economy will always be subsidized by the working poor. 

A family of 4 grossing $48,000/year is just getting by when over 25% of that is lost to income taxes.

The country needs a national dialogue on the 'poor tax'.

[sandycoosworth]

ouch.


Hey,  Sandy, can you please explain in a little bit more detail, other then citing the write offs, which can be adjusted/limited why it's a bad idea?

I'm  just trying to understand it a little better.

aside from generating revenues, on a personal level tax code/laws are designed to create incentives for investment (corporate, educational, residetial), and subsidy (ie taking care of your kids, parents etc so the government doesnt have to) ... on a corporate level, they are designed to encourage development, research, investment, and in some cases "green policies"

obviously the tax laws are unnecessarily complicated to ensure accountants and lawyers have business, but in the same breath they need to be so complicated to close loopholes and most accurately reflect the economic circumstances of anyone

a flat tax would be a knee jerk infantile solution to a very complicated problem IMO

[Hedgehog]

I don't care about "fairness", whatever tax system is most effective in keeping the monetary society evolving would be my choice.

If Flat Tax would be most effective, then I would be a proponent for it. But I don't think so, I think there are other, more effective layouts.

Side note: Surprisingly, science has shown that salary raises will only give temporary boosts to the wellness of employees. Also, studies has shown that above a very low annual income (somewhere around $25 000 from what I recall), happyness isn't influenced by the amount of money you have, in other words, you can't buy love.

So what gives? Big taxes on everything? Or low taxes? Or no taxes? I cannot say. I only know that macroeconomists should have a big say on it, they are the people we need to listen to, not billionaire wackos like Forbes who thinks Flat Tax is a great idea because it's fair or because it makes sense...

-Hedge

[a_joker10]

aside from generating revenues, on a personal level tax code/laws are designed to create incentives for investment (corporate, educational, residetial), and subsidy (ie taking care of your kids, parents etc so the government doesnt have to) ... on a corporate level, they are designed to encourage development, research, investment, and in some cases "green policies"

obviously the tax laws are unnecessarily complicated to ensure accountants and lawyers have business, but in the same breath they need to be so complicated to close loopholes and most accurately reflect the economic circumstances of anyone

a flat tax would be a knee jerk infantile solution to a very complicated problem IMO

Your right, if you think that the government should be controlling of our lives. I think direct support and a flat tax is a better way.
I think financial incentives make the government more transparent, much like the GST replacing the general goods tax.

I don't think it is up to government to dictate how we live, it is up to us to dictate to the government what we want.

[sandycoosworth]

direct support would be even more government control would it not?

its true they push in a direction with financial incentives, at least this way the government gives us options

[a_joker10]

direct support would be even more government control would it not?

its true they push in a direction with financial incentives, at least this way the government gives us options

I don't agree. Which gives the government greater control, giving bombardier a large payout to stay in Quebec or forcing western farmers to use the Western Canadian Wheat Board?
Direct Support is at least transparent and when we can see where the money goes we can tell them to stop by voting them out.
Hidden taxes and incentives, lead to more corruption.

[sandycoosworth]

Which gives the government greater control, giving bombardier a large payout to stay in Quebec or forcing western farmers to use the Western Canadian Wheat Board?

its nonsensical to compare 2 radically different situations such as those...

try comparing the government giving you a tax credit for letting your elderly parents live with you to the government paying for their housing and care

the difference is logistical, not idealogical

[a_joker10]

Actually I thought those were very good differences.

In Canada large payouts are made to keep manufacturing in Ontario and Quebec. Meanwhile the wheat board controls farm income and the wanted to be example from the access to information.

Never the less

I think the amount of administration to give money to someone is less than it is to administer a tax change. But you would know more.