What Happened to the Flat Tax Proposal?

[tkingdoll]

I'm glad you started this thread because I now finally get a joke in the Family Guy movie.

 

[Dancing David]

There is no income tax exemption for churches, or 501c employees.

Well, devil that I am, I feel that the government would want to double dip, take the flat tax at the donation level and at the pay level.

So when people give money to a 501c, 403b or a church then the organization would have to pay the tax. It is income for that organization after all.

 

[Dancing David]

I really don't trust my memory at my age, but I thought the flat tax proposal went away when someone actually say down and determined what the flat percentage had to be if the government expected to collect the same amount of money that it collects now.

I though that proposal was a flat tax for private citizens only, not corporations. But my memory is sort of shaky.

 

[Dancing David]

Seems to me all a flat tax proposal will do is simplify your returns. Congress is not going to pass any law that reduces the total take it gets on April 15.

Frankly, I think a flat tax has less chance of passage than of Sylvia Browne winning the JREF million. It would mean a tax cut for the wealthy, who now have the highest tax rate and pay the most taxes, and a tax increase for the poor. If someone were to introduce it to Congress tomorrow, the Dems would demagogue it to death before the ink was dry on the bill.

The loop holes would close as well, so no more depriciation (speeling?) and business expense deductions, no break on capital gains, or for companies that gather money for charity. Tax all income, no matter where it comes from.

I know that taxes might go up for the poor, but closing the loopholes would do a lot of good, besides some of us liberal happen to believe in a balanced budget.(Really I do, honest, despite my very tough, not so bleeding heart.)

 

[Dancing David]

There are a whole bunch of issues with the flat tax that rich conservative economists hope you don’t notice.

Does it apply to payroll taxes (Medicare, Social Security) or just income taxes? A lot of Americans pay more in payroll taxes than they pay in income taxes. The thing to remember is that payroll taxes are regressive, with the rich paying an ever smaller portion of their income on it while they gain more and more money. Combine that with progressive income taxes, and you find that we already have a surprisingly flat tax rate as is. But couple our currently existing payroll taxes with a flat tax, and suddenly the rich are paying less as a percentage of income than the poor and middle class. That’s a tough pill to swallow politically. Conservative economists get around this by avoiding all talk of payroll taxes, even if they have to twist themselves into knots doing it.

Is it revenue neutral? A flat tax that remains revenue neutral will, by its very nature, have to raise taxes for people currently paying less than the flat rate, while reducing taxes on those paying more than the flat rate. Since there are a lot more people who would not benefit from a flat tax, it’s a bit of a non-starter in a functioning democracy.

If it’s not revenue neutral, where is the extra money going to come from? If people are paying less in taxes, there are going to be cuts in services.

What is the rate anyway? Conservatives who push this line are always trying telling us how great everything would be with a flat tax. “Fits on a postcard”, “saves time”, “better for environment” and all that. But when you try to get them to reveal what the rate they want is, they run away screaming. They either come up with a number that is way too small to be revenue neutral, or they have a number that screws over a majority of Americans. Either way, not something people with future political aspirations will want to support.

The flat tax goes down with term limits, school vouchers, and free trade. Simplistic, cookie cutter answers to extremely complex questions.

I think the cookie cutter would end up looking like some Rube Goldberg mousetrap before it passed Congress.

How about 5%, or less?

 

[Dancing David]

I like the flat tax. I just think it has a snowballs chance in hell of passing. Remember the Bush welfa- errr taxcut? It resulted in low income working families being able to get more in refund than they _payed_ in taxes. When the GOP tried to amend the tax cut bill before it passed to fix this, the Dems said they were trying to screw the poor and the GOP ran away from the amendment.

Given the kind of honesty and courage displayed there, do you think a fair tax system would ever have a shot?

No, but I can dream, sometimes. And yes, I think that a fair system that had fiscal responsibility and a reduction is all government spending, and led to an overall tax reduction for most people would be popular with most people.

But heck, most people don't vote or read, unless it's some commercial on the tube.

 

[Dancing David]

Which flat tax proposal?

That's part of the problem. There's no single "flat tax" proposal, but dozens if not thousands of them, and they all differ in detail.

Even just a flat "income tax" -- as the proposals are usually written -- would plug some loopholes. For example, I can deduct expenses from my consultancy income but not from my salary; I can deduct mortgage interest but not credit card interest, and I can't deduct anything from apartment rental. This is obviously biased towards property owners and the self-employed, a loophole that I shamefully try to take advantage of but that would be plugged by Forbes' proposal.

No deductions, no loopholes, no exemptions, no limits on taxation, you make a buck you pay a nickel. No poor exemptions, no rich exemptions, no children exemtions,no mortage or business deductions, no nothing.

Everybidy pays, everybody wins.

(Just like the lotto.)

 

[drkitten]

No, but I can dream, sometimes. And yes, I think that a fair system that had fiscal responsibility and a reduction is all government spending, and led to an overall tax reduction for most people would be popular with most people.

.... and here's part of the reason why flat-tax proposals never get off the drawing board.

Nothing about "flat tax" magically guarantees either "fiscal responsibility" or "a reduction in all goverment spending."

One might even argue that a flat tax is fiscally irresponsible, since one of the things that the current system does is promote actions that are considered to be fiscally responsible by governments and/or people. For example,.capital gains are taxed at a lower rate to encourage investment. Municipal and state bonds are tax-free to make it easier for the government to finance needed infrastructure without having to raise taxes. Charitable contribution deductions help support private charity. Mortgage interest deductions encourage home ownership, and education tax credits encourage education and therefore increase workforce competitiveness.

 

[drkitten]

No deductions, no loopholes, no exemptions, no limits on taxation, you make a buck you pay a nickel.

Wouldn't raise enough money, and would cripple US industry.

In particular -- I don't think there's a single retail store in the United States that has a 5% profit margin. "You make a buck, you pay a nickel" would bankrupt every retail store in the United States within weeks.

Oh, you meant "you make a buck after expenses, you pay a nickel?" Well, there's a deduction, then.

 

[BPSCG]

They just did:

President Bush signed $70 billion in renewed tax cuts yesterday, calling the legislation the centerpiece of an economic expansion that Republicans hope to ride to re-election in November. The bill Mr. Bush signed yesterday extends the dividend and capital gains tax cuts that Congress first enacted in 2003, which set the maximum rate for both at 15 percent.

Note these are "renewed tax cuts." What was the effect of these tax cuts when they first went through? (Wall Street Journal link requires paid subscription.)

Tax collections have increased by $521 billion in the last two fiscal years, the largest two-year revenue increase -- even after adjusting for inflation -- in American history. If you're surprised to hear that, it's probably because inside Washington this is treated as the only secret no one wants to print. On the few occasions when the media pay attention to the rise in tax collections, they scratch their heads and wonder where this "surprising" and "unexpected windfall" came from.

One place it has come from are corporations, whose tax collections have climbed by 76% over the past two years thanks to greater profitability. Personal income tax payments are up by 30.3% since 2004 too, despite the fact that the highest tax rate is down to 35% from 39.6%. The IRS tax-return data just released last month indicates that a near-record 37% of those income tax payments are received from the top 1% of earners -- "the rich," who are derided regularly in Washington for not paying their "fair share."

 

[BPSCG]

In particular -- I don't think there's a single retail store in the United States that has a 5% profit margin. "You make a buck, you pay a nickel" would bankrupt every retail store in the United States within weeks.

Well, I think most pawn shops would survive, seeing as how they charge something like 25% interest per month on their loans.

Beyond that...

 

[Tailgater]

Note these are "renewed tax cuts." What was the effect of these tax cuts when they first went through? (Wall Street Journal link requires paid subscription.)

Thanks for that post. You saved me the trouble. I was just going to point out that reducing taxes at X amount does not mean they bring in X less in revenue.

 

[Random]

Thanks for that post. You saved me the trouble. I was just going to point out that reducing taxes at X amount does not mean they bring in X less in revenue.

Right, we should just perfect the system and drop the tax rate to 0%. That's sure to increase revenue!

 

[Huntster]

Seems to me all a flat tax proposal will do is simplify your returns. Congress is not going to pass any law that reduces the total take it gets on April 15.

I agree.

Frankly, I think a flat tax has less chance of passage than of Sylvia Browne winning the JREF million. It would mean a tax cut for the wealthy, who now have the highest tax rate and pay the most taxes, and a tax increase for the poor. If someone were to introduce it to Congress tomorrow, the Dems would demagogue it to death before the ink was dry on the bill.

Which is why such a proposal wouldn't simplify taxes very long. They'd start right away creating exemptions, incentives, credits, etc, ad nauseum, until the "flat tax" system was a flocked up as the present "progressive" tax system is.

 

[Crossbow]

Of course tax receipts have increased over 100% in the past two years (from the year 2003 to 2005)!

However, if one were take a look at the actual tax receipts, then will readily see that the tax receipts for the year 2003 were the lowest they had been for the last ten years! Therefore the large percentage increase is simply due to the value going from a low value to a higher value.

Bush and his tax cuts are not responsible for these increases, they are simply driven by the growing economy.

Graphic from Fiscal Fact No. 57 of the Tax Foundation (www.taxfoundation.org).

 

[Cain]

As pointed out earlier, by "Random I believe, if you count all taxes everyone pays, many at the lower end of the economic spectrum pay the same percentage as the upper end (see the NYT's excellent tax reporter David Johnson's book _Perfectly Legal_).

Most flat tax proposals, as I have pointed out on numerous occasions, are actually progressive if one factors in the exemption. For the Forbes plan I think the exemption is a family's first 32,000 dollars. So, do the math. Assume a 50% flat tax for the sake of simplicity.

Person making 32,000 pays 0
64,000 pays 16,000 (25%)
132,000 pays 50,000 (~38%)
Individuals with very incomes will pay nearly 50%.
(Omigod, socialism)

If you get rid of the exemption then people at the lower end of the spectrum will end up getting raped. Also, the "simplicity" argument, touted here by the usual fools, is a canard. A progressive income tax is not intrinsically complex.

ETA: I wrote the following elsewhere (finally found it):

As I've said in the past, why should conservatives agitate for a consumption tax or a flat (percentage) tax? When they say flat tax they should mean flat tax. They ought to argue in favor of a flat fee. So a person making 10 million dollars a year gets taxed 50 grand. A person making 25,000 dollars a year gets taxed 50,000 dollars (or whatever fee is chosen by our highly representative, democratically elected legislators). Those who can't pay 50,000 dollars can sell themselves to the rich as serfs or something. I dunno, let the market decide. This is fair.

 

[BPSCG]

Bush and his tax cuts are not responsible for these increases, they are simply driven by the growing economy.

And what has caused the growing economy?

The Bush tax cuts. Keep on committing the classic error of confusing cause with effect, Crossbow. It makes my work easier.

 

[WildCat]

I used to be a big supporter of the flat tax. Then I bought a 2-flat. I live I one unit and rent out the other, and I have tax deductions up the wahoo. So many, in fact, that I pay almost nothing in income tax any more, and am building wealth like I wasn't able to before!

So I am now against the flat tax, but for purely selfish reasons.

 

[BPSCG]

I used to be a big supporter of the flat tax. Then I bought a 2-flat. I live I one unit and rent out the other, and I have tax deductions up the wahoo. So many, in fact, that I pay almost nothing in income tax any more, and am building wealth like I wasn't able to before!

So I am now against the flat tax, but for purely selfish reasons.

Don't let The Atheist hear you say that. He'll think you're selfish scum.

I, on the other hand, consider you my hero.

 

[shecky]

And what has caused the growing economy?

The Bush tax cuts. Keep on committing the classic error of confusing cause with effect, Crossbow. It makes my work easier.

Just imagine how much growth the US would have if taxes were eliminated completely!