Is a Flat Tax Regressive?

[Francesca R]

I thought a flat tax was effectively regressive due to the marginal utility of excess cash.

Regressive with respect to normative utility, yes. In utilitarian terms, flat tax reduces net happiness compared to progressive (with respect to income/spending/wealth) tax. In utilitarian terms the optimum tax would approximately equalise those.

 

[Almo]

Just a quick note to say that I have found this discussion interesting.

 

[GreyICE]

Probably every tax scale in existence is regressive with respect to an individual's utility. Since that renders the definition unuseful, it is not the one that applies. With respect to the amount taxed, flat tax is not regressive (it's . . . flat)

Regressive with respect to normative utility, yes. In utilitarian terms, flat tax reduces net happiness compared to progressive (with respect to income/spending/wealth) tax. In utilitarian terms the optimum tax would approximately equalise those.

You just like disagreeing with me for the sake of disagreeing

 

[drkitten]

Rich = smashing your ferrari and abandoning it on the side of the road.

How about "smashing your Honda and abandoning it on the side of the road"? Because that is something that a person with an AGI of $186,000+ can do.

And that "normal" people can't.

Seriously though, there is a huge gulf between someone making a few $100K a year and someone that has $20M+ in assets. The first I would consider upper middle class, the latter is *rich*.

Well, then, I suppose you got your wish from the other thread -- there are no taxes imposed under the currents structure that the "middle class" don't have to pay. Of course, you had to define "middle class" in such a way that it includes 95%+ of the American population to do it.....

(The cutoff for the "top 5% in terms of household incomes," as of 2008, is $157,176.)

A more typical definition of "rich" that demographers use is defined in terms of percentile groups of income and/or wealth, not in terms of driving skill. (Beeghley, 2004), for example, defines five groups : the poor (the bottom 10% or so), the "working class," (the next 40% or so, basically enough to bring us to the median income), the "middle class" (the next 44% or so), the "rich" (between percentiles 94-99) and finally the "super-rich" (the top 1%).

Under his definition, anyone in the top 6% of (American) society would be "rich," so the $186,000 cutoff is about right (and actually rather narrow).

But as was pointed out, this is largely a semantic debate. If you won't accept "rich" as a description of someone with an income that 95% of the American population aspires to,... how about "well-off"? "Tax the well-off" doesn't have quite the same populist rallying appeal, but it's still fair to note that a person who is "well-off" (making, say $125,000/year after deductions) is at no significant risk of financial distress. S/he can still still afford a shelter, food, transportation, clothing, and even personal medical insurance.

Even in Manhattan, one of the most expensive cities in the USA, median rent on a one-bedroom apartment is "only" about $4000/month, about $45000/year. (Actually, that gets even better. That's the median rent on an apartment in the most expensive section of Manhattan (SoHo).) This is about in line with what financial planners say that people should expect to pay -- between 30-40% of your income.

Does this put "rich" in perspective?

In what sense is a person who can afford to live literally anywhere in the world she likes not "rich"?

 

[NewtonTrino]

How about "smashing your Honda and abandoning it on the side of the road"? Because that is something that a person with an AGI of $186,000+ can do.

And that "normal" people can't.



Well, then, I suppose you got your wish from the other thread -- there are no taxes imposed under the currents structure that the "middle class" don't have to pay. Of course, you had to define "middle class" in such a way that it includes 95%+ of the American population to do it.....

(The cutoff for the "top 5% in terms of household incomes," as of 2008, is $157,176.)

A more typical definition of "rich" that demographers use is defined in terms of percentile groups of income and/or wealth, not in terms of driving skill. (Beeghley, 2004), for example, defines five groups : the poor (the bottom 10% or so), the "working class," (the next 40% or so, basically enough to bring us to the median income), the "middle class" (the next 44% or so), the "rich" (between percentiles 94-99) and finally the "super-rich" (the top 1%).

Under his definition, anyone in the top 6% of (American) society would be "rich," so the $186,000 cutoff is about right (and actually rather narrow).

But as was pointed out, this is largely a semantic debate. If you won't accept "rich" as a description of someone with an income that 95% of the American population aspires to,... how about "well-off"? "Tax the well-off" doesn't have quite the same populist rallying appeal, but it's still fair to note that a person who is "well-off" (making, say $125,000/year after deductions) is at no significant risk of financial distress. S/he can still still afford a shelter, food, transportation, clothing, and even personal medical insurance.

Even in Manhattan, one of the most expensive cities in the USA, median rent on a one-bedroom apartment is "only" about $4000/month, about $45000/year. (Actually, that gets even better. That's the median rent on an apartment in the most expensive section of Manhattan (SoHo).) This is about in line with what financial planners say that people should expect to pay -- between 30-40% of your income.

Does this put "rich" in perspective?

In what sense is a person who can afford to live literally anywhere in the world she likes not "rich"?

It's funny because in some ways I pretty much consider you rich if you have enough food to eat and indoor plumbing.

Anyway I guess my "rich" would be as you defined the "super rich" above. Someone making $150k definitely isn't rich in my book but they are upper middle class. IMHO.

 

[drkitten]

It's funny because in some ways I pretty much consider you rich if you have enough food to eat and indoor plumbing.

Anyway I guess my "rich" would be as you defined the "super rich" above. Someone making $150k definitely isn't rich in my book but they are upper middle class. IMHO.

I think your classification system definitely has some granularity issues there....

Perhaps this is a better way of looking at it.

First, bear in mind that no one can have all their wants satisfied. Wants are unlimited. Even Bill Gates finds that there are things that he wants that he can't have.....

But let's look at what a person might "want."

For most "middle class" people, at least in the United States, they don't "want" for much in terms of day-to-day living. They have, as you point out, enough food to eat and indoor plumbing. They also typically have warmth, clothing, roofs that don't leak, and so forth.

What do they lack? In a word, long-term security. (I saw something interesting a while ago on Family Feud. The question was "On a scale of 1 to 10, how worried are you about the future?" The most common answer given in the survey was "10.") People are worried about the future. They're worried about job loss, they're worried about medical expenses, and they're worried about upcoming large costs such as college tuition for their kids, or retirement income.

(From a social psychology perspective, I'd be inclined to use this as a definition of middle class -- Paul Fussell would agree, for what it's worth. Lower class can't rely on having their day-to-day needs met; upper class have achieved long-term security and can afford to relax about it.)

Now, let's look at what kind of "wants" a person making $200k/year (after deductions) is likely to have.

Housing? Median house price in the United States is about $200k -- a year's salary. Real estate professionals suggest that a 3:1 ratio between house price and salary is typical. For $600k, you can get a palatial estate almost anywhere.... and if you're living in New York City, you can rent.

Medical expenses? A non-issue. Medical insurance for a family of four costs an average of about $15000/year, even if you pay for it yourself.

College tuition? Again, not a problem. The DoE estimates that most families are asked to pay about 50% of their income as "family contribution," even to expensive colleges. Even paying full price at Harvard wouldn't come anywhere near this -- anyone in this tax bracket doesn't need financial assistance to educate their children.

Job loss? Most people in this bracket own their jobs (i.e. lawyers who have made partner, doctors in private practice, small businessmen, people with extensive stock portfolios) so they can't be fired. Much less of an issue.

Really, their "wants" that are unfillable are the sort of frivolities you alluded to before. "I want the ability to total the Ferrari and walk away." "I want to be able to quit my job and live entirely on income from my estates." "I want to take a ride on the Space Shuttle."

Those are hardly "middle class" desires by any reasonable assessment.

 

[Hellbound]

Really, their "wants" that are unfillable are the sort of frivolities you alluded to before. "I want the ability to total the Ferrari and walk away." "I want to be able to quit my job and live entirely on income from my estates." "I want to take a ride on the Space Shuttle."

I want enough money to buy a herd of elephants

 

[GreyICE]

Hell just froze over, I'm in complete agreement with Kitten.

Quick, say something totally wrong so we can have one of our spats

 

[drkitten]

Quick, say something totally wrong so we can have one of our spats

Oh, and by the way, Abbey Road is the greatest rock album of all time.

 

[GreyICE]

Oh, and by the way, Abbey Road is the greatest rock album of all time.

What an insult to Ummagumma!

 

[NewtonTrino]

I think your classification system definitely has some granularity issues there....

Perhaps this is a better way of looking at it.

First, bear in mind that no one can have all their wants satisfied. Wants are unlimited. Even Bill Gates finds that there are things that he wants that he can't have.....

But let's look at what a person might "want."

For most "middle class" people, at least in the United States, they don't "want" for much in terms of day-to-day living. They have, as you point out, enough food to eat and indoor plumbing. They also typically have warmth, clothing, roofs that don't leak, and so forth.

Isn't this rich compared to most people on the planet though?

What do they lack? In a word, long-term security. (I saw something interesting a while ago on Family Feud. The question was "On a scale of 1 to 10, how worried are you about the future?" The most common answer given in the survey was "10.") People are worried about the future. They're worried about job loss, they're worried about medical expenses, and they're worried about upcoming large costs such as college tuition for their kids, or retirement income.

(From a social psychology perspective, I'd be inclined to use this as a definition of middle class -- Paul Fussell would agree, for what it's worth. Lower class can't rely on having their day-to-day needs met; upper class have achieved long-term security and can afford to relax about it.)

Now, let's look at what kind of "wants" a person making $200k/year (after deductions) is likely to have.

Housing? Median house price in the United States is about $200k -- a year's salary. Real estate professionals suggest that a 3:1 ratio between house price and salary is typical. For $600k, you can get a palatial estate almost anywhere.... and if you're living in New York City, you can rent.

Medical expenses? A non-issue. Medical insurance for a family of four costs an average of about $15000/year, even if you pay for it yourself.

College tuition? Again, not a problem. The DoE estimates that most families are asked to pay about 50% of their income as "family contribution," even to expensive colleges. Even paying full price at Harvard wouldn't come anywhere near this -- anyone in this tax bracket doesn't need financial assistance to educate their children.

Job loss? Most people in this bracket own their jobs (i.e. lawyers who have made partner, doctors in private practice, small businessmen, people with extensive stock portfolios) so they can't be fired. Much less of an issue.

Really, their "wants" that are unfillable are the sort of frivolities you alluded to before. "I want the ability to total the Ferrari and walk away." "I want to be able to quit my job and live entirely on income from my estates." "I want to take a ride on the Space Shuttle."

Those are hardly "middle class" desires by any reasonable assessment.

I still say upper middle class. Also keep in mind that a lot of the families who make $150k do it by having both spouses work. I can easily see some of the wants being things like spending more time with the family for someone in that position. Individuals making $150K+ are more rare than families from what I've seen.

I simply don't see families making $150k as being anywhere near rich. If they handle money well they will get there after 20 years though.

 

[drkitten]

Isn't this rich compared to most people on the planet though?

Not really relevant, since tax policies are set by country, not by planet.

I still say upper middle class.

Yes, I've noticed that you have a tendency to "say" things with total disregard of whether or not they're right or whether anyone else who has actually studied the subject agrees with you.

Believe it or not, there are people who study economics and social class professionally. And they suggest that "rich" doesn't mean what you think it means.

Also keep in mind that a lot of the families who make $150k do it by having both spouses work.

Not relevant.

I can easily see some of the wants being things like spending more time with the family for someone in that position.

And, again, that's no more a "middle class" wish than a herd of elephants or a ride on the space shuttle. Middle class people work for a living and don't have much free time; that's part of the definition. There's a reason that Thorsten Veblen called his mammoth work "The Theory of the Leisure Class[/i]," because the middle class didn't and doesn't have much leisure.

 

[Hellbound]

I'll have you know my wish was thoroughly middle class.

I didn't wish for a herd of elephants, just for enough money to buy one. I don't want the elephants, I just want that much money

(Sorry, couldn't hold off any longer for the joke setup )

 

[NewtonTrino]

Not really relevant, since tax policies are set by country, not by planet.

Really? We are in a global economy. I don't see how it's not relevant.

Yes, I've noticed that you have a tendency to "say" things with total disregard of whether or not they're right or whether anyone else who has actually studied the subject agrees with you.

I could care less what the official definition is. $150k a year isn't rich.

Believe it or not, there are people who study economics and social class professionally. And they suggest that "rich" doesn't mean what you think it means.

Boo hoo.

Not relevant.

Rich people don't have both spouses working full time. If you have to do that to maintain your income you aren't rich yet.

And, again, that's no more a "middle class" wish than a herd of elephants or a ride on the space shuttle. Middle class people work for a living and don't have much free time; that's part of the definition. There's a reason that Thorsten Veblen called his mammoth work "The Theory of the Leisure Class[/i]," because the middle class didn't and doesn't have much leisure.

Which is exactly why $150k a year isn't rich. Could they get rich? Sure. But the income itself doesn't make you so. There is a *HUGE* gulf between someone that makes $150k a year and someone that has millions in assets.

 

[Tippit]

But how marginal is the utility of excess cash. This seems like a very squishy concept to me.

A good way to understand it is by watching an episode of the game show "Deal or No Deal". In this game a contestant selects one of twenty-five closed cases which hold amounts ranging from $.01 to $1,000,000. Once having chosen their case, the contestant removes one or more of the other cases from play, depending on the round. As the cases are opened, the monetary amount contained therein is removed from the board, and once the round ends there is a banker who makes the contestant an offer to purchase their case.

The expected value of the contestant's case is simply the arithmetic mean of the board, which includes the value that is inside their case. The bank almost always offers less than the expected value of the contestant's case, because it knows that there is more utility in the bank's certain offer than there is in the possibility that the contestant has a higher amount in their case. Occasionally when there is a board that highly favors the player, such as the $1M amount plus a few other large amounts, the bank's offer will exceed the expected value of the player's case, simply because there is more utility in paying them off than risking a $1m payout.

 

[Dancing David]

Meals are only a 50% deduction on income tax.

I pay payroll taxes for all employees.

I pay 1.5% of GROSS with no deductions to the state.

There are no special tax breaks available to me that I or my accountant is aware of (CPA, tax CPA and controller).

I understand that, and it is not probably your corporation that I am concerned about, but Exxon and GM, and those pesky television producers who make TV shows that are very successful and never have a profit.

Again I am not rabid about this pipe dream either.

 

[Dancing David]

The point of sale is indeed the determinant of income. If you buy a house and sit on it for 30 years, and it sells for the same amount in inflation adjusted dollars, you have made a nominal profit, but have made no real profit at all. Your purchasing power did not increase. Now, in the context of the Xerox stock, investing that money in Xerox carries risk that you will lose your initial investment.

As far as counting losses is concerned, why do gains count but not losses? If losses don't count as far as income is concerned, why should gains?

Because it is where we have companies buying bad companies and declaring a loss. Again I am not rabid about this, but if I sell my house at a loss, I do NOT get to write it off. At least that I am aware of.

 

[Dancing David]

How is that rich? How is that not rich? That's the top 5% of incomes. That's enough money to buy a nice house, a nice car, send your kids to nice schools, and have enough left over to enjoy yourself.

I think you have a seriously skewed definition of rich going on. The CEO of my (admittedly small) company isn't in that income bracket.

You socialist you!

 

[Dancing David]

Rich = smashing your ferrari and abandoning it on the side of the road.

Seriously though, there is a huge gulf between someone making a few $100K a year and someone that has $20M+ in assets. The first I would consider upper middle class, the latter is *rich*.

95th percentile is very very very upper middle class.

 

[quixotecoyote]

Really? We are in a global economy. I don't see how it's not relevant.

I hadn't pegged you for wanting a global tax system. Especially since once you include having to pay for all those impoverished people, your rates will probably go up.