Forbes' flat tax

[Toro]

You can make a flat tax progressive. To do so, make it so nobody below a certain income pays any tax. For example, let's say no one pays any tax below $20,000, then the tax rate is 25% above that level. If someone makes $20k, their tax rate is 0%. If they make $40,000, their tax rate is 12.5%. If someone makes $100,000, their rate is 20%, and so on.

 

[drkitten]

I suppose one interpretation of these results may be that privitization of previously public services would be consistent with a head tax.

I'm not sure how that follows. Depending upon the privatized services, it might be strongly regressive or strongly progressive. For example, if the government were to privatize sewage processing --- well, we all produce about the same amount of sewage per person, so that would be close to a head tax. But if the government were to privatize the roads, people who drive more (the rich) would pay more per person. If the goverment were to privatize bank deposit insurance (i.e. the FDIC or its equivalent), people with larger amounts on deposit would pay more insurance -- again, a progressive cost. If the government were to privatize the bus system, that would likely be regressive, since the wealthy tend to have private cars instead.

 

[Kestrel]

Forbes proposed 17%, with some exemptions:

http://www.pbs.org/newshour/bb/congress/forbes_flat_tax.html
http://www.forbes.com/taxes/2005/08/15/taxes-forbes-webcast-cx_tm_0815flatax.html
http://www.opinionjournal.com/extra/?id=110007139

And, as I said, no tax on investment income or inheritance. In other words, you only pay tax on income you earned by the sweat of your brow.

In other words, he favors a system that doesn't tax any of his wealth or income but sticks it to other people.

 

[Michael Redman]

In other words, he favors a system that doesn't tax any of his wealth or income but sticks it to other people.

I think the reasoning goes something like this:

The wealthy shouldn't pay tax, because their money is needed for the investments that make this country run. People who work for a living (otherwise known as The Poor) are just going to blow their paychecks on beer and cigarettes anyway, so taxing them is actually good for them.

 

[Almo]

You can make a flat tax progressive. To do so, make it so nobody below a certain income pays any tax. For example, let's say no one pays any tax below $20,000, then the tax rate is 25% above that level. If someone makes $20k, their tax rate is 0%. If they make $40,000, their tax rate is 12.5%. If someone makes $100,000, their rate is 20%, and so on.

But that's not flat then. I thought the "flat" referred to taxing everyone at the same %.

 

[drkitten]

But that's not flat then. I thought the "flat" referred to taxing everyone at the same %.

Not in a strict sense of the term, no. But since a strict flat-tax is patently the second stupidest idea in entire history of economic thought, second only to the National Sales Tax, and far ahead of "let's dig all the gold out of the New World and therefore hyperinflate our currency and our empire out of existence," that's not really a problem.

The usual complaint against a progressive is that it is unfair to make the rich pay a substantial sum of tax money just because they can afford it. The usual complaint against a flat or regressive tax is that is is unfair to make the poor pay a substantial sum of tax money just because they can't afford it. The "flat tax above a threshold" is a compromise to address both of those complaints.

 

[JoeEllison]

In other words, he favors a system that doesn't tax any of his wealth or income but sticks it to other people.

What, you didn't think anyone was advocating a "flat tax" to help anyone but themselves, did you? The sad thing is how many foolish and short-sighted people will agree with and help out the ultra-rich, against their own self-interest.

 

[Michael Redman]

The sad thing is how many foolish and short-sighted people will agree with and help out the ultra-rich, against their own self-interest.

I would say they're called Republicans, but that would be an unfair negative generalization, and beneath the calm, collegial atmosphere of the Business Skepticism forum.

 

[madurobob]

Seems what we've not covered yet is the ability to use the tax system to effect public policy - something much more difficult in a 'flat tax, no deductions" regime. In the current regime a simple change to what is or is not deductible can have a significant impact on US society.

Want to encourage home ownership? Allow mortgage interest deductions.
Want to encourage investment? Cap or decrease capital gains taxes.
Want to discourage marriage? Create a tax benefit for remaining single.

That last one hits close to home - my girlfriend and I would lose about $3K/year if we got married. So we "live in sin" and have for several years.

This ability to manipulate society is the key to why we have a complex tax system and why it is not likely to become any less complex. Politicians need to be able to motivate certain behaviors at the individual level and tax law is one of the surest ways to do that.

Think how many "home offices" would disappear in a puff of smoke under a flat tax/no deductions regime. Hell, I have two...

 

[Francesca R]

Sorry, I don't follow your reasoning. I value civil liberties over cost savings, it my post was unclear.

I'm afraid that didn't come through in your "subdue the masses" comment

 

[rbairos]

I'm not sure how that follows. Depending upon the privatized services, it might be strongly regressive or strongly progressive. For example, if the government were to privatize sewage processing --- well, we all produce about the same amount of sewage per person, so that would be close to a head tax. But if the government were to privatize the roads, people who drive more (the rich) would pay more per person. If the goverment were to privatize bank deposit insurance (i.e. the FDIC or its equivalent), people with larger amounts on deposit would pay more insurance -- again, a progressive cost. If the government were to privatize the bus system, that would likely be regressive, since the wealthy tend to have private cars instead.

If the government were to privitize the road system, then people would be charged per unit of usage (eg toll per mile travelled). If the government were to privatize the bank deposit insurance, then people would be charged per unit of money deposited, etc. I would not agree with the conclusion the system would be progressive.

 

[Solitaire]

You're assuming that 100% of the tax revenue to the Federal government is from the income tax, whereas IIRC only about a third of it is derived from that source.

Actually I'm using the GDP of 13.13 trillion dollars. Actually it's more of an outgo because it includes personal spending, such as money spend on all the things people buy like automobiles, food, and haircuts. Plus investments in housing, office buildings, machinery, and tools. Also, government spending on highways and teachers, though government probably shouldn't tax that - a bit redundant. Oh, and exports of goods and services minus imported goods a services.

Beside this... What remains?

P.S. A 23% tax rate gets pretty close to the 3 trillion dollar figure needed to run the government.

 

[Solitaire]

Not in a strict sense of the term, no. But since a strict flat-tax is patently the second stupidest idea in entire history of economic thought, second only to the National Sales Tax, and far ahead of "let's dig all the gold out of the New World and therefore hyperinflate our currency and our empire out of existence," that's not really a problem.

The usual complaint against a progressive is that it is unfair to make the rich pay a substantial sum of tax money just because they can afford it. The usual complaint against a flat or regressive tax is that is is unfair to make the poor pay a substantial sum of tax money just because they can't afford it. The "flat tax above a threshold" is a compromise to address both of those complaints.

You've found the thing that bugs me about the Fair Tax, see Page 20 specifically.

The flaw assumes that fairness matters in this system. But the system does not care one whit about fairness.

So, if we raise taxes on the poor then they will momentarily experience a rise in outgo. But a year later, a few will quit their jobs and go on welfare, others will demand higher wages, and those fired afterward will seek better paying jobs. A decline in labor will cause wages to rise and that rise will more than enough pay for the increased taxes.

In other words the government shouldn't be more fair to the poor because this only subsidizes businesses owned by the rich.

 

[Francesca R]

Not in a strict sense of the term, no. But since a strict flat-tax is patently the second stupidest idea in entire history of economic thought, second only to the National Sales Tax [ . . . ]

What is wrong about national sales tax? This is--I assume--the same as goods and services tax (GST), or value-added tax (VAT, IVA). Pretty common across Europe, also Australia and NZ and (I thought) Canada.

I don't think it is a good idea as the only source of government revenue, but as one source what's the problem? In the US aren't sales taxes simply variable by region?

 

[Wazy121]

You can make a flat tax progressive. To do so, make it so nobody below a certain income pays any tax. For example, let's say no one pays any tax below $20,000, then the tax rate is 25% above that level. If someone makes $20k, their tax rate is 0%. If they make $40,000, their tax rate is 12.5%. If someone makes $100,000, their rate is 20%, and so on.

You propose this system I assume to make it more fair. But what about a person with 3 kids making 40k compared to a single individual with no kids. This individual now has more money, which isn't fair.

Folks, I'm currently a senior in college becoming an accountant. I won't claim to be an expert on the situation (as my grades may suggest otherwise). But the thing I have learned in my tax classes is that the rules and regulations in place are actually pretty fair. While they certainly are complex, they are often beneficial to the government, the rich, the poor. Obviously some cases favor one over the other, but all in all I was surprised when learning all the different things how fair the tax laws can be.

A flat tax certain is easier for individuals to understand, but it is not fair to individuals.

 

[balrog666]

You propose this system I assume to make it more fair. But what about a person with 3 kids making 40k compared to a single individual with no kids. This individual now has more money, which isn't fair.

Folks, I'm currently a senior in college becoming an accountant. I won't claim to be an expert on the situation (as my grades may suggest otherwise). But the thing I have learned in my tax classes is that the rules and regulations in place are actually pretty fair. While they certainly are complex, they are often beneficial to the government, the rich, the poor. Obviously some cases favor one over the other, but all in all I was surprised when learning all the different things how fair the tax laws can be.

A flat tax certain is easier for individuals to understand, but it is not fair to individuals.

Yes, individuals do better ... why is that a problem for society?

 

[Chaos]

You propose this system I assume to make it more fair. But what about a person with 3 kids making 40k compared to a single individual with no kids. This individual now has more money, which isn't fair.

Folks, I'm currently a senior in college becoming an accountant. I won't claim to be an expert on the situation (as my grades may suggest otherwise). But the thing I have learned in my tax classes is that the rules and regulations in place are actually pretty fair. While they certainly are complex, they are often beneficial to the government, the rich, the poor. Obviously some cases favor one over the other, but all in all I was surprised when learning all the different things how fair the tax laws can be.

A flat tax certain is easier for individuals to understand, but it is not fair to individuals.

Good first post, dude. Welcome to the forum.

Your last sentence, though could be turned around... the current system is, at face value, fair, but difficult to understand. That latter part, however, makes the "fair" more or less meaningless, because the amount of fairness you as an individual can derive from the tax code is more or less proportional to your understanding of said tax code, which in turn is usually proportinal to the amount of money you pay for a professional to do your taxes. A rich person can hire a better tax consultant than a poor person.

By the way, if you want to see a really complicated tax code, look at the German model. I won´t go into details, but will let it rest at saying that about 70% of the literature on taxes printed worldwide every year is printed in German.

 

[drkitten]

If the government were to privitize the road system, then people would be charged per unit of usage (eg toll per mile travelled). If the government were to privatize the bank deposit insurance, then people would be charged per unit of money deposited, etc. I would not agree with the conclusion the system would be progressive.

You haven't thought it through, then. Who are the people who have a lot of money deposited? The rich -- the poor don't have a lot of money to deposit. In fact, the rich will tend to have more money on deposit as a percentage of their income than the poor, many of whom won't have deposit accounts at all.

 

[drkitten]

So, if we raise taxes on the poor then they will momentarily experience a rise in outgo. But a year later, few will quit their jobs and go on welfare, others will demand higher wages, and those fired afterward will seek better paying jobs. A decline in labor will cause wages to rise and that rise will more than enough pay for the increased taxes.

No, it won't. This is simply Republican counter-factual thinking -- I say counterfactual because we've done the experiment. Raising taxes on the poor does NOT result in wage increases. And the increased demand on publically funded government service is more than enough to cause a net loss to the treasury even with the higher marginal tax rate.

In other words the government shouldn't be more fair to the poor because this only subsidizes businesses owned by the rich.

This isn't right. This isn't even wrong.

 

[drkitten]

What is wrong about national sales tax?

As one source of income, not much (except that it is strongly regressive). As a single source of income, it's patently inadequate and cannot be made adequate because "sales" do not generate enough income.

There's actually a substantial difference in many cases between a GST and a sales tax; the GST covers services as well as sales. In many US jurisdictions, it costs money to purchase goods, but not services (and there is a lot of legal ink defining the difference). The examples I like to use is that I can hire someone to paint my house and not pay tax, but I can't simply buy the paint and do it myself without paying the tax. (Heck, in many jurisdictions, the wholesaler does not pay tax, either, so the house painter gets his paint tax-free.) This ends up being another example of regressiveness in the tax system --- those who can afford to hire services pay less tax than those who must do the work themselves.