Is a Flat Tax Regressive?

[Tony]

I argued on facebook that a Flat Tax is regressive because it disproportionally affects the budgets of lower earners. Lets assume, for the sake of argument, that there is a flat 50% tax on income.

Say family-of-4 "A" makes $5,000 a month which translates to $2,500 after taxes. They spend $500 a month on food and a remaining $1,500 on other essential bills. After taxes they have $500 left over.

Now, say family-of-4 "B" makes $10,000 a month which translates to $5,000 after taxes. They spend $500 a month on food and a remaining $1,500 on other essential bills. After taxes they have $3,000 left over. All things being equal (aside from income) a flat tax has Family "A" with a tax burden 6 times that of family B.

 

[Ziggurat]

I argued on facebook that a Flat Tax is regressive because it disproportionally affects the budgets of lower earners.

That is a non-standard definition for whether a tax is progressive or regressive.

 

[FlamingMoe]

A flat tax is one that takes an equal percentage from every taxed person. It is, by definition, not regressive.

 

[TraneWreck]

It's not "regressive" by definition, but it's deeply flawed for the reason you mention.

I will point out, however, that we effectively have a flat tax in the United States:

The bottom 99 percent of taxpayers pay 29.4 percent of their income in local, state, and federal taxes. The top 1 percent pay an average total tax rate of 30.9 percent...

http://www.tnr.com/article/books-and-arts/wealthcare-0

 

[FlamingMoe]

I don't think comparing the average tax rate of the bottom 99% with the top 1% is really a good indicator of tax rate spread.

 

[TraneWreck]

I don't think comparing the average tax rate of the bottom 99% with the top 1% is really a good indicator of tax rate spread.

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%.

 

[Ziggurat]

A flat tax is one that takes an equal percentage from every taxed person. It is, by definition, not regressive.

Actually, many flat tax plans are progressive. That's because they are not flat tax rates on all income, they are flat marginal rates on all income above some minimum. Which means that your total tax rate will asymptotically approach the flat tax rate from below as you increase income.

 

[Tsukasa Buddha]

I think a better argument centers around the fact that the higher you go, the more a person's gross earnings come less from salaried income and more from capital gains, etc.

 

[Newtons Bit]

Actually, many flat tax plans are progressive. That's because they are not flat tax rates on all income, they are flat marginal rates on all income above some minimum. Which means that your total tax rate will asymptotically approach the flat tax rate from below as you increase income.

And this system, which is the absolute most progressive and fair that you can gt will never happen because of the tax lawyers. Do any of us really think that Congress (which is mostly lawyers) would pass laws that hurt the bottom line of their profession?

 

[Tony]

That is a non-standard definition for whether a tax is progressive or regressive.

http://en.wikipedia.org/wiki/Regressive_tax

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. In simpler terms, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income.

http://en.wikipedia.org/wiki/Flat_tax

Some taxes other than the income tax (for example, taxes on sales and payrolls) tend to be regressive. Hence, making the income tax flat could result in a regressive overall tax structure. Under such a structure, those with lower incomes tend to pay a higher proportion of their income in total taxes than the affluent do. The fraction of household income that is a return to capital (dividends, interest, royalties, profits of unincorporated businesses) is positively correlated with total household income.[citation needed] Hence a flat tax limited to wages would seem to leave the wealthy better off. Modifying the tax base can change the effects. A flat tax could be targeted at income (rather than wages), which could place the tax burden equally on all earners, including those who earn income primarily from returns on investment. Tax systems could utilize a flat sales tax to target all consumption, which can be modified with rebates or exemptions to remove regressive effects (such as the proposed FairTax in the U.S.[8]).

It doesn't seem to be too far outside the standard definition.

 

[Ziggurat]

It doesn't seem to be too far outside the standard definition.

That may be (though what counts as "too far" sounds pretty subjective), but it still doesn't match the standard definition.

 

[Tony]

That may be (though what counts as "too far" sounds pretty subjective), but it still doesn't match the standard definition.

Ok. How do you see it?

 

[Ziggurat]

Ok. How do you see it?

I see it as you've come up with a new criteria for evaluating taxation which has some merit in its own right, but since it doesn't match the standard definition of "progressive" it should be called something else. How about "Tonyish"?

 

[KoihimeNakamura]

.... A flat tax is quite regressive, thank you.

 

[Tony]

I see it as you've come up with a new criteria for evaluating taxation which has some merit in its own right, but since it doesn't match the standard definition of "progressive" it should be called something else. How about "Tonyish"?

Ha! I wish I could claim credit. I actually saw someone on this forum demonstrate how the Flat Tax was regressive using a similar calculus. This was years ago, I forgot who it was but I thought it was pretty convincing.

I concede that a flat tax doesn't match the standard definition per se, but in practice, it has the result of disproportionally burdening lower earners. In this case, it's not the tax rate that decreases as the amount subject to taxation increases, its the aggregate effect of tax burden that decreases.

 

[shivas67]

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.

 

[The Painter]

I argued on facebook that a Flat Tax is regressive because it disproportionally affects the budgets of lower earners. Lets assume, for the sake of argument, that there is a flat 50% tax on income.

Say family-of-4 "A" makes $5,000 a month which translates to $2,500 after taxes. They spend $500 a month on food and a remaining $1,500 on other essential bills. After taxes they have $500 left over.

Now, say family-of-4 "B" makes $10,000 a month which translates to $5,000 after taxes. They spend $500 a month on food and a remaining $1,500 on other essential bills. After taxes they have $3,000 left over. All things being equal (aside from income) a flat tax has Family "A" with a tax burden 6 times that of family B.

So you're saying that the family that makes more money, has more money. Brilliant!


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.

 

[Dancing David]

I argued on facebook that a Flat Tax is regressive because it disproportionally affects the budgets of lower earners. Lets assume, for the sake of argument, that there is a flat 50% tax on income.

Say family-of-4 "A" makes $5,000 a month which translates to $2,500 after taxes. They spend $500 a month on food and a remaining $1,500 on other essential bills. After taxes they have $500 left over.

Now, say family-of-4 "B" makes $10,000 a month which translates to $5,000 after taxes. They spend $500 a month on food and a remaining $1,500 on other essential bills. After taxes they have $3,000 left over. All things being equal (aside from income) a flat tax has Family "A" with a tax burden 6 times that of family B.

Um, no.

It is by defintion not a regressive tax.

Tax burden is based upon gross income, which is equal in both cases.

 

[Dancing David]

So you're saying that the family that makes more money, has more money. Brilliant!


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.

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.

 

[Dancing David]

.... A flat tax is quite regressive, thank you.

depends tax rate and tax burden are seperate defintions.
http://en.wikipedia.org/wiki/Regressive_taxation