Is a Flat Tax Regressive?

[Francesca R]

No it isn't regressive in the standard sense.

 

[WildCat]

See, I am the other way.

My belief is a flat tax on all income. I think we could make a lemonade stand exemption of $1000.

But other than that, I want every one to pay the flat tax.
All not for profits.
All churces.
All individuals.
All corporations.
All private equity and public equity groups.
All capital growth.

All income to be taxed. Gross income taxed. (Okay corporations and bussiness get to figure in cost. No expense accounts, just bricks and mortar. If you use vehicles in your bussiness they count as a cost. No business lunches. Lodging will be a fight.)

No credits, no deductions, no depreciation. No loss write offs. No nothing. No mortage interest write off.

Now do entitlements like SSA, SSDI, SSI get a pass, probably. And the lemonade stand exemption. Sate, local and sales tax removed from gross income.

My belief, and it may be incorrect , is that this would lead to higher revenues and a lower tax rate. It would also simplify the tax code.

Why would anyone take a financial risk under your scenario? There's a risk associated with capital gains (you could lose all your principle) that doesn't exist for a salary. And you take it even farther by disallowing losses! This is why capital gains tax rates are less than income tax rates.

 

[daenku32]

Most, if not all, flat tax ideas do not kick in until about the 50,000 to 75,000 per year income level. That takes your argument right out of the game.

To maintain tax revenues, it would mean massive tax breaks to the top and therefore massive increase on the bottom (or middle, if that is what $50-75k refers to).

But maintaining tax revenues is not the intent behind flat tax, is it...

 

[FlamingMoe]

It sure tells you that the people at the top have nothing to whine about when it comes to taxes.

It also tells you that the 1% should probably have their taxes raised to make them comparable to people in the 85-99 range. If people at the very bottom are paying a low percent because they don't pay income tax, that means the numbers have to be made up somewhere to get to 29%.

Why is your measure more valid than any other measure? Why not take a look at the top 50% against the bottom 50%? Why split it into only two groups?

I suspect you cherry-picked your figures in order to prove your predetermined conclusion.

 

[Dorian Gray]

The original post is misleading. Based on the OP's argument, all taxes be regressive...

Example:
Taxpayer X makes $25,000/yr and pays an effective 10% tax rate
= $2500/yr
Taxpayer X spends $1500/mo on expenses
$1500 X 12 = $18,000 + $2500 = $20500
after taxes, Taxpayer X has $4,500 left over for the year, or 18% of pre-tax income

Taxpayer Y makes $100,000 per year @ and effective tax rate of 30%
= $30,000
Taxpayer Y spends $4000/mo on expenses
$4000 X 12 = $48,000 + $30,000 = $78,000
after taxes, Taxpayer Y has $22,000 left over, or 22% of pre-tax income

So even though Taxpayer Y is taxed three times more than Taxpayer X, and has spends over 2.5 times more than Taxpayer X in monthly expenses, Taxpayer Y still has a larger percentage of income left.

When you compare two hypothetical people you can make the numbers come out however you want to.

 

[KoihimeNakamura]

I.. dunno. I'd say a tax that puts more lower income people under water (like Dancing David's idea) is regressive. Because uh.. Yeah, I'd have minor problems paying my bills if I suddenly lost more of my check income. Like.. a lot of them. Since cost of living here in Seattle is just enough that minimum wage is very barely enough if you're lucky to work full time. And I'm not.

 

[The Painter]

To maintain tax revenues, it would mean massive tax breaks to the top and therefore massive increase on the bottom (or middle, if that is what $50-75k refers to).

But maintaining tax revenues is not the intent behind flat tax, is it...

Explain how there would be massive increase on the bottom if the bottom pays no income tax(below 50k to 75k).

You're right it's not about maintaining tax revenues, it's about increasing them. Lowering taxes increases collect revenues.

 

[shivas67]

When you compare two hypothetical people you can make the numbers come out however you want to.

Agreed.


Now the real question is, at what rate should we tax hypothetical people?

 

[GreyICE]

Flat taxes are regressive, unless you think that money has a constant marginal utility. Since that view is nonsense, flat taxes are regressive. /thread

 

[FlamingMoe]

Flat/regressive/progressive tax schemes are not defined as such according to marginal utility of every dollar earned, but how much they take of taxable income. A flat tax takes a set percentage from taxable income, while a regressive tax takes a greater percentage of taxable income as the amount of taxable income decreases. This is why a flat tax is different from a regressive tax and they cannot, by definition, be the same thing.

 

[NewtonTrino]

See, I am the other way.

My belief is a flat tax on all income. I think we could make a lemonade stand exemption of $1000.

But other than that, I want every one to pay the flat tax.
All not for profits.
All churces.
All individuals.
All corporations.
All private equity and public equity groups.
All capital growth.

All income to be taxed. Gross income taxed. (Okay corporations and bussiness get to figure in cost. No expense accounts, just bricks and mortar. If you use vehicles in your bussiness they count as a cost. No business lunches. Lodging will be a fight.)

No credits, no deductions, no depreciation. No loss write offs. No nothing. No mortage interest write off.

Now do entitlements like SSA, SSDI, SSI get a pass, probably. And the lemonade stand exemption. Sate, local and sales tax removed from gross income.

My belief, and it may be incorrect , is that this would lead to higher revenues and a lower tax rate. It would also simplify the tax code.

As someone who runs a business this would pretty much not work. Without deductions it's entirely possible we wouldn't even have the money to pay your tax because it went to expenses. Also I really don't understand the objection to paying for things like business meals. They are already deducted at a reduced rate but we do in fact have to wine and dine customers and employees.

Anyway this sounds even crazier than my idea to make all tax voluntary

 

[GreyICE]

Flat/regressive/progressive tax schemes are not defined as such according to marginal utility of every dollar earned, but how much they take of taxable income. A flat tax takes a set percentage from taxable income, while a regressive tax takes a greater percentage of taxable income as the amount of taxable income decreases. This is why a flat tax is different from a regressive tax and they cannot, by definition, be the same thing.

It's as you yourself wrote. A regressive tax takes more from the poor than the rich. All that's left is for you to realize that the marginal value of money decreases as you get more of it, and you'll realize that it's regressive.

 

[NewtonTrino]

It's as you yourself wrote. A regressive tax takes more from the poor than the rich. All that's left is for you to realize that the marginal value of money decreases as you get more of it, and you'll realize that it's regressive.

I would like to see what the curve of the marginal value of money looks like. I can completely understand wanting to have the basic needs met. Doesn't the curve get pretty flat after that though? Isn't this somewhat a matter of opinion? Anyone have any good references on this?

 

[GreyICE]

I would like to see what the curve of the marginal value of money looks like. I can completely understand wanting to have the basic needs met. Doesn't the curve get pretty flat after that though? Isn't this somewhat a matter of opinion? Anyone have any good references on this?

Here you go, a primer. Not even all that bad.

In general, you can summarize the concept, in simplest terms, that Bob the Janitor would probably jump at the opportunity to talk to a few people for an hour for $200, while Bill Gates would probably be totally uninterested. $200 is far less useful to Gates than an hour of his time, whereas the janitor would much rather have the $200.

It's a tad simplistic, but that's the basics of the concept without too much economic gloss.

 

[NewtonTrino]

I understand the theory. What I'm looking for is an actual calculated curve for the marginal utility of income. E.g. based on the costs of real goods at what point does income start becoming less useful. I would expect the curve to flatten out substantially after the basics of life are taken care of. Then I would like to compare this to the actual progressive tax rates and see if they match up. My theory is that if people believe that this is the reason for progressive taxation that the tax rates should match the curve which to me implies that the higher tax rates should be applied to lower income levels. After all once you have eaten and have shelter everything else is a luxury, right?

 

[GreyICE]

I understand the theory. What I'm looking for is an actual calculated curve for the marginal utility of income. E.g. based on the costs of real goods at what point does income start becoming less useful. I would expect the curve to flatten out substantially after the basics of life are taken care of. Then I would like to compare this to the actual progressive tax rates and see if they match up. My theory is that if people believe that this is the reason for progressive taxation that the tax rates should match the curve which to me implies that the higher tax rates should be applied to lower income levels. After all once you have eaten and have shelter everything else is a luxury, right?

Your first sentence and your second sentence are mutually incompatible.

I don't know how else to explain it. You can't have both statements be true. Marginal value is always custom to the individual, that's why economies work. For instance, for some people, the marginal value of a new car is more than $20k. That new car they buy will give them more than $20k worth of value, in terms of reliability, comfort, speed, fuel economy, luxury, etc. For others, they want to spend $5k, so they buy a cheap used civic. The marginal value of the car to them is more than $5k, so they exchange $5k for the car. $20k is worth more to them.

It's the basic principle on which economics is founded.

On the actual curve for money, it doesn't really flatten out the way you think, as is almost assured. Most people making $100k for working 50 hours a week would not work 70 hours a week for a $20k raise. Most people working 40 hours a week for $30k would work 60 hours a week for $50k. These generalizations are reasonably general, but even your simplistic 'food, clothing, shelter' model doesn't work the way you think it does. A $400 two bedroom apartment is acceptable for people on poverty line, but many will spend $900 for one with an actual working roof and heat in the winter, for instance.

 

[NewtonTrino]

Your first sentence and your second sentence are mutually incompatible.

I don't know how else to explain it. You can't have both statements be true. Marginal value is always custom to the individual, that's why economies work. For instance, for some people, the marginal value of a new car is more than $20k. That new car they buy will give them more than $20k worth of value, in terms of reliability, comfort, speed, fuel economy, luxury, etc. For others, they want to spend $5k, so they buy a cheap used civic. The marginal value of the car to them is more than $5k, so they exchange $5k for the car. $20k is worth more to them.

It's the basic principle on which economics is founded.

On the actual curve for money, it doesn't really flatten out the way you think, as is almost assured. Most people making $100k for working 50 hours a week would not work 70 hours a week for a $20k raise. Most people working 40 hours a week for $30k would work 60 hours a week for $50k. These generalizations are reasonably general, but even your simplistic 'food, clothing, shelter' model doesn't work the way you think it does. A $400 two bedroom apartment is acceptable for people on poverty line, but many will spend $900 for one with an actual working roof and heat in the winter, for instance.

It sounds like what you're saying is that it's a matter of opinion then? So how are the tax rates set then? Just made progressive and hopefully that's "close enough"? There are no studies about the real utility of income in the real world?

Another way of asking this is why don't we tax income at 100% after people hit the poverty line? After all why does anyone need more than food and shelter? That's exactly the same argument made for progressive taxation, just with a more extreme turning of the big knob.

 

[GreyICE]

It sounds like what you're saying is that it's a matter of opinion then? So how are the tax rates set then? Just made progressive and hopefully that's "close enough"? There are no studies about the real utility of income in the real world?

Another way of asking this is why don't we tax income at 100% after people hit the poverty line? After all why does anyone need more than food and shelter? That's exactly the same argument made for progressive taxation, just with a more extreme turning of the big knob.

Well a matter of opinion? It depends. Are you using the new school, "everyone has the right to their opinion Timmy, so its okay that you think 2+2=5" model? Then no. It's absolutely, completely, nothing like that. This is a studied phenomena with very, very real consequences in the real world.

If you mean 'matter of opinion' as there is a diverse range that makes it generally hard to quantify, then yes. You'd be correct.

As for articles, there's dozens:
http://www.highbeam.com/doc/1G1-138582107.html

Studies? One. Reality. As I said in my post, it is reality that someone making 100k a year will probably not work an extra 20 hours a week for $20k, but someone making $30k probably will. There are a few people making $100k who would, and a few making $30k who would not.

Progressive taxation acknowledges this. There is no tax bracket in America where you can possibly 'earn more to earn less.' The brackets in the booklet scale in 50 dollar increments, and its almost impossible to granularize your income to that level (there may be times where making $34,751 was slightly worse than making $34,749, but this falls strictly into the level of 'trivial').

Your final point is unutterably stupid. To give an analogy, I propose the following two methods of reducing drunken driving:

A) Putting more cops on patrol late at nights, watching for erratic, speeding, or otherwise oddly behaving cars, as well as publicizing this campaign.

B) Putting an automated machine gun on most major intersections to shoot anyone driving after 9 at night on Fridays and Saturdays.

Both would probably accomplish the goals of reducing drunken driving. But one is insane.

 

[NewtonTrino]

Well a matter of opinion? It depends. Are you using the new school, "everyone has the right to their opinion Timmy, so its okay that you think 2+2=5" model? Then no. It's absolutely, completely, nothing like that. This is a studied phenomena with very, very real consequences in the real world.

If you mean 'matter of opinion' as there is a diverse range that makes it generally hard to quantify, then yes. You'd be correct.

Yes, the second, more generally hard to quantify.

As for articles, there's dozens:
http://www.highbeam.com/doc/1G1-138582107.html

Studies? One. Reality. As I said in my post, it is reality that someone making 100k a year will probably not work an extra 20 hours a week for $20k, but someone making $30k probably will. There are a few people making $100k who would, and a few making $30k who would not.

So basically it is a matter of opinion. For example I consider the money that I make after basic cost of living (e.g. food, house) to be MORE useful to me because I can invest it.

Progressive taxation acknowledges this. There is no tax bracket in America where you can possibly 'earn more to earn less.' The brackets in the booklet scale in 50 dollar increments, and its almost impossible to granularize your income to that level (there may be times where making $34,751 was slightly worse than making $34,749, but this falls strictly into the level of 'trivial').

I wasn't claiming this was the case. I get that part quite well.

Your final point is unutterably stupid. To give an analogy, I propose the following two methods of reducing drunken driving:

A) Putting more cops on patrol late at nights, watching for erratic, speeding, or otherwise oddly behaving cars, as well as publicizing this campaign.

B) Putting an automated machine gun on most major intersections to shoot anyone driving after 9 at night on Fridays and Saturdays.

Both would probably accomplish the goals of reducing drunken driving. But one is insane.

Well there are plenty of radicals who probably would like your machine gun idea. Same with the income thing, there are plenty of people who think the government should simply redistribute all wealth. I think both of these are insane as well but they are simply turning a know on the same idea.

 

[GreyICE]

Yes, the second, more generally hard to quantify.

So basically it is a matter of opinion. For example I consider the money that I make after basic cost of living (e.g. food, house) to be MORE useful to me because I can invest it.

Sure. Now in economic terms, we're not even close to taxation yet. You value money very highly. I value my freedom to read, write, and think freely very highly.

Now it is entirely possible that if you were to ask me to give up my lazy afternoons riding my bike and reading in the park (damn I cannot wait for good weather), and in return offer me money, I'd reject the offer.

And maybe you'd accept the offer. This is fine and good, economics is working as planned. (and there's a host of conditionals. For both of us, we'd probably laugh in the face of someone who offered us $50, unless it was a favor for a friend or some of the other crap we get roaped into. For us both, we'd probably leap hard at the prospect of $1,000 for the weekend. Then there's things you could pay me to do that I'd probably take and you'd turn down. I love editing writing, I'd happily edit 30-40 college essays on a weekend for a few hundred, you might hate that. And so on and so forth).

Taxation adjusts the numbers offered to us, so that they're lower than they seem at first. Progressively, they adjust them lower than the rate that you're currently having adjusted downward. So it twigs incentives for us both.

As a price to this, the poorest in our country have a little more for what they need.

It's a price that I think can be borne.

Well there are plenty of radicals who probably would like your machine gun idea. Same with the income thing, there are plenty of people who think the government should simply redistribute all wealth. I think both of these are insane as well but they are simply turning a know on the same idea.

Communism is the irrelevant philosophy of the young and naive or the idiot. They'll grow out of it.