(no subject)

[theweaselking]

James Nicoll explains his plans for the true Flat Tax.

You know, I'm not a guy with a crazy tax plan, but I have yet to have anyone explain to me why the plan of "Exempt the first X income from taxes, tax the rest at a Y flat rate" is unworkable.

And, honestly, I think I really must be missing something, here, because nobody *does* it.

Define your poverty-plus-a-bit level - pulling a number completely out of my ass, say $25,000/yr.
Define your tax rate - from a similar location, let's say 20%.

The first $25,000 you make in a year, from any source, is tax-free.
The rest, no matter how little or how much it is, is taxed at the flat rate.

Calculate exemptions however you want, but simply make all exemptions count as additional money you can claim tax-free over your initial $25,000. If you want education to be subsidised, deduct tuition at accredited institutions from your total earned income. Want to encourage children and make things easier for families? Add $10,000 per dependent child to the allowed "no-tax" amount.

Obviously, I'm pulling these numbers out of my ass. That's not the point. The point is, in PRINCIPLE, what am I missing? Why does this not actually work?

Comments

[flemco.livejournal.com]

I'll respond way more in-depth when I have a mo, but the essential flaw to any flat tax: It fucks the lower-middle class to death.

[anivair.livejournal.com]

I don't see how, though. The lower middle class is still pulling enough tax free money to get by and paying taxes on their excess. I'm not sure that i see how it fucks them. Granted, I know nothing about money, either, so take that with a grain of salt.

[theweaselking.livejournal.com]

Without the X$ exemption at the low end, I would see your point immediately.

With the $X exemption, I don't see how that's the case - low to low-middle are paying no taxes, or marginal taxes, and if you're worried about the lower class being stomped, then raise the tax-free limit and increase the tax rate to compensate. If the first $50,000 is tax-free and you pay 25% on the rest, I don't see how that's going to be fucking the middle class to death. I really don't.

And that's what I want someone to explain to me: why *doesn't* this work?

[matgb]

Bollox. The maths I've done is for UK, so double the numbers approximately.

Our proposals (and bear in mind I'm a bit tot he left of the average Brit, let alone your good self sir) are for first £12K to be completely tax free, then tax rate at about 40%, all in. Combine that with a land value tax on property and other unearned incomes (like broadcast spectrum rights) and we're pretty good.

Make the maths easier. Call it £10K and 50%. I earn £10K, just enough to pay the rent on a room and eat a basic meal each day under current system. I pay about 40% in various UK taxes, and the US has it about the same last I saw the gifures. NEw system, I pay nothing. Iearn £20K, I paay no tax on the first £10K, and 50% on the next £10K. ERgo I'm paying 25% tax. That's still lower than I currently pay. No one ever pays the full 50%, but the wealthier you are, the more you pay up to nearly 50% if oyu're on the extreme end.

If you earn

Of course, we'd be combining it with a Citizen's Basic Income, but even without that the lower end end up much better off, and you simplify, so you can get rid of a lot of bureacrats &c.

With a CBI, then it's even better, but that's not the direct comparison.

@John: I'm a bit busy, as always, but have a trawl around chris_dillow_fd if oyu're interested in reading the guy who converted me from a position almsot identical to J's to a position very in favour of a decent high threshold flat tax.

It doesn't 'work' because the west is very tied up on its bureacratic tax system, and expecially keen on its multiple income thresholds. Rent seeking; those in power like the current system. It's being tried in a few E-European countries, and there are many arguments going on in the UK about it. But no politician wants to take the risk of being the first to change.

[psyco-path.livejournal.com]

Because rich people want to keep their money.

[dranon.livejournal.com]

I haven't done the numbers myself, but to my understanding, the general reason is that, as is argued here (http://www.zompist.com/richtax.htm) and other places, the rich get more out of the government, so they should pay more into the government. I also have vague memories from my intro to economics class that the best taxes are progressive (i.e. the rate increases with a rise in income), but I don't recall the reasoning.

Now I'm curious. Not that your numbers are realistic, but let's try an example. Person A has an income of $50,000 per year, and person B $500,000 per year.

Person A's taxes: ($ 50,000 - 25,000) * 0.2 = $ 5,000
Person B's taxes: ($500,000 - 25,000) * 0.2 = $95,000

Subtracting taxes out, person A's earnings after taxes are $45,000 per year, and person B's $405,000 per year. Now out of each of those, both people still have to pay for housing, food, clothes, and other services. Even granting that people who have more money tend to buy more expensive things in general, I think it is safe to say that person A still has a tighter budget than person B, especially in areas that have a higher cost of living to begin with.

Admittedly, I'm hand-waving a lot since I don't really know numbers for a lot of these things, so feel free to poke holes in my argument. A flat tax would, almost by definition, save the rich money. The argument that I'm making is not a Robin Hood steal from the rich point of view, but rather that the middle class is left picking up the slack which would make them poorer in the long run.

[theweaselking.livejournal.com]

I also have vague memories from my intro to economics class that the best taxes are progressive (i.e. the rate increases with a rise in income), but I don't recall the reasoning.

Except that this *is* a progressive tax. People who make $25k pay zero tax. People who make 50k pay 10% tax. People who make $500k pay 19% tax.

[ianhess.livejournal.com]

I wonder how you could organize a flat tax like this to not need the massive mechanism that is the irs, and use the savings from that organization to make up a functional tax decrease.

[drjamez.livejournal.com]

I'm not sure if you've had a chance to read the Wikipedia on Flat Taxes, but it does address both pros and cons. Hopefully, something there will answer your question.

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

- James -

[theweaselking.livejournal.com]

But every one of the suggested plans that they're arguing against has a blatant "screw the poor" component added, like Forbes' definition of what should be taxed as "income minus savings", leading to the poor being heavily taxed as a percentage of their income and the rich paying damn near nothing, or Armey's total exclusion of everything except wages paid from an employer as untaxable.

[theweaselking.livejournal.com]

Capital gains are income, and hence would be included in the calculation of your income, and subject to the same exclusions and the same tax as all other income. You paid X for something (regardless of when), sold it for Y, making Z profit? Add Z to your income, pay taxes on Z if you're above the cutoff margin.

And guaranteeing a minimum income is something different, entirely.

[kjn]

Works or works. It will obviously work, for some value of work. The question is how fair it is, and how well it serves the society.

Take eg your idea of deductions, and assume a poor family (ie with an income below your tax-exempt amount of insignificantly higher) with several children. They will not be helped at all by the child-encouragement tax-exemption, and, will in practice actually be hurt by it, since its existance will lower the perceived need for support to families with children.

Second, you have to consider disposable income after basic living expenses (food, housing, electricity, water, medical expenses, travel to/from work et c). The thing is, these things tend to go up rather linear, up until you reach the ultra-rich (where it often start decreasing since housing costs tends to diminish). This will not affect the poor, but it will screw the middle class (who as a group will pay the majority of the taxes). The higher expenses will eat up most of the tax-exempt income, and they will lose quite a bit of their disposable "free" income, compared to the rich.

Thus, the idea of the progressive tax is not so much to help the poor directly, but to keep the middle class happy that those who earn a lot more also has to pay a lot more in taxes (which is where things nowadays have started to break down in many countries).

[theweaselking.livejournal.com]

Couldn't your second disagreement be resolvable simply by setting the tax-free exemption bar higher, and increasing the tax rate above that?

Make it $100,000 and 20% taxes, just so that my example numbers are easier to crunch. THis means that a guy making 100k pays nothing, a guy making 150k pays 5%, a guy making 200k pays 10%, and a guy making a million pays 18%, and a buy making a billion pays pretty damn close to 20%.

20% of a billion isn't much when compared to the whole, but it's monumentally more than 5% of 150k or 0% of 100k.

(As for your first disgreement: The family is in the exact same situation it was last month, or last year. They just pay less tax, now, on their limited income. While it may not solve the problem, I do have difficulty in seeing how it will hurt them in real terms.)

[dreamshade.livejournal.com]

Because the upper tax brackets have easier access to deductibles, incentives, and shelters that allow them to reduce their rate below the standard? Or does a "flat tax" also imply a "simple tax?"

[theweaselking.livejournal.com]

I'm saying you define income as income from all sources, and you apply this tax to all income, regardless of source, with very few restrictions or deductions.

[mrbankies.livejournal.com]

I can't argue for or against the idea of a flat tax. Rather, I'll argue against the idea of accountants. No matter what sort of tax system you implement, some snotty-ass whip-smart accountant for a filthy rich bugger will find a way to screw with the system and get said filthy rich bugger out of paying his or her fair share just like they do now.

[ironphoenix.livejournal.com]

I have a really, really long answer to this that's been brewing in my head for months, but this isn't where I'm going to post it.

The short answer is that it screws the middle class by increasing their tax share relative to the upper class (and, to a lesser degree, the working poor, but they need the break.)

To explain all this, I'll need graphs. They'll be in the really, really long version that I'll post/publish sometime. Really I will! Maybe I'll even try for an economics degree instead of finishing my engineering thesis!

[tyoko.livejournal.com]

Let's try that again o.o;

We have something similar to the flat tax you're describing in the UK as our income tax, though the tax threshold is only about $10500 and there are 10%, 22% and 40% tax rate divisions of your earnings. Like mentioned above, the differences are mostly to remove the burden from the lower-middle classes.

The problem is that lots of people don't earn much but are not below the poverty line. The classic example is of the married parent who works part time while the kids are at school, but relies on their partner to pay the big things like the mortgage. You probably don't want to tax such people very much, but when they make up a very significant proportion of your population as they do here, letting them go free would raise the tax burden uncomfortably on those just over the threshold.

Most of the earnings of part-timers and other low wage earners are covered by the threshold and 10% tax level, which (according to the government) is low enough that these people still work, but not so low that it causes the standard rate of tax to go up.


Also: Back to your post, people who qualify for aid in things like tuition won't benefit from tax exemptions that much, as they may earn below the threshold $20000. You would probably have to pay benefits out anyway for the poorest people...

[ianhess.livejournal.com]

Do such people who "make up a large portion of the population" also make up a large portion of the income per year?

[atlasimpure.livejournal.com]

Because the Tax Code is written by the same people who write all our legislation.

And like every single other bill to cross the floor of Congress, lobbyists get their say.

[netdef.livejournal.com]

I would just be happy if the US abolished or raised the threshold on the AMT. That's severe punishment enough for breaking into the middle class these days.

[peristaltor.livejournal.com]

The percentage of wealth in flat tax states becomes incredibly top heavy. Take Hong Kong, with its 10% IIRC tax. It has the highest concentration of Rolls Royces, and one of the highest concentrations of beggers.

Essentially, though it sounds promising, those over a certain income just start amassing enormous wealth relative to the general economy, and there is very little way to redistribute it. The middle class disappears.

Sadly, stratified economies like these tend to be the most volatile, the most prone to both coups from the top and revolutions from the bottom of the economic strata (think much of South America).

By contrast, countries with progressive taxes that increase percentage-wise with income (like Scandinavia) tend to be the most stable and, perhaps more importantly, economically vibrant.

[pope-guilty.livejournal.com]

One reason is that it annihilates the government's ability to incentivise or disincentivise behaviors through taxation. Take charitable donations, for example- their tax-exempt status helps drive money into the coffers of charities, and this is because the government wishes to incentivise charitable giving. With a Flat Tax, you can't do stuff like that anymore.

(Of course, I don't have a pony in this race in any sense, so I may be wildly off.)

As I understand it....

[jackoutofthebox.livejournal.com]

..the flat tax doesn't work not because of the money generated, but from the sources it's generated from.

Lets say for instance you have a cross section of 100 people. The laws of averages basicly say, lower class is 25% of that population, middle class would be 50% of that population, and the upper class would be 25%.

Now the lower class, making less than 25k would immediately be exempt from any taxes. The Middle class, making say 50k - 25k, pays the greatest amount of the tax (450k-25k=25k, x 20%= 5,000, x 50= 250000 in taxes.

Upper class, says 100k-25k=75k, x 20%= 150000, x 25= 375000

These numbers support a flat tax obviously. What it doesn't take into effect is the shrinking middle class. More than likely, the middle class drops to lower class. Only a very small percentage of that group would become upper class.

Re: As I understand it....

[jackoutofthebox.livejournal.com]

Minor Mistake. on the middle class listing, the first number should be 50k not 450k...my mistake

[publius1.livejournal.com]

It's always seemed self-evident to me that 10% of $1000 -- leaving them $900 -- would hurt the average lower-middle-class person far more than 10% of $1,000,000 -- leaving them with a paltry $900,000 to deal with.

ADd to this that you can't tax the poor at an equal rate with the wealthy and get all the money you need to run a government as big as the United States' with all the entitlements the folks in the US seem to want.

[publius1.livejournal.com]

Missing antecedant there: "leaving them" should be "leaving the rich"

[jirel.livejournal.com]

I do see one thing that might make it difficult -

Joe makes $60,000, has 4 kids, lives in Baltimore and pays 12% state income tax

I make $60,000, live alone and in Florida with no state income tax.

Doesn't a flat tax make it unequal and harder on Joe? (I've actually always thought a flat tax would be great and give the feds more money, but now that I'm older I'm starting to wonder if it would be harder on the rest of the people.)

[jirel.livejournal.com]

NOTE - currently Joe can take deductions for each of the kids and that 12% state income tax while I of course can not.

[normanrafferty.livejournal.com]

The flaw in your plan:
"Calculate exemptions however you want, but simply make all exemptions count as additional money you can claim tax-free over your initial $25,000."

The exemptions are where the chicanery happens. Start with mega-churches.

[theweaselking.livejournal.com]

Religious income is income. Fuck you, pay taxes.

But that's not exactly a popular opinion, I know.