(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

[anivair.livejournal.com]

It's not as if the wealthy don't have the funds to cover this.

[theweaselking.livejournal.com]

A small increase in income increases your taxation rate as a percentage of your total income rapidly, but:

A) you're starting at 0% and moving up
B) you're still paying the same rate on the later income no matter how much of it you earn
C) you're still paying a lower tax rate than the guy who makes $1 more than you, let alone $1M more. Not much lower, but, y'know, lower
D) revenues are still steadily increasing as income increases.

[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.)

[tyoko.livejournal.com]

I'm sorry, I misunderstood you. :)

[kjn]

Well, the second disagreement really needed another clause, that of the marginal value of money. That is, the value of each part of your income for personal means diminishes once a certain threshold has been reached (which is basic living expenses of a good standard). A 10% wage increase would be valuable to me, given my current modest wage - it'd immediately increase the standard of living and economic safety for me and my family. However, for the very rich, the only thing a 10% increase can do is either increase gratutious spending or put on the pile, doing no good whatsoever[1].

The same is true on basically every income level, and so it makes sense for the state to take that money just lying in a pile, doing no good whatsoever, and put it to actual use.

The next thing to consider is that the majority of the total taxes will be paid by the middle class. Each will not pay very much, but there're plenty of them (if you only have poor and very rich, then the poor get seriously screwed). You have to get them onto the tax system, and the best way to do that is to tax the rich - a lot.

[1] This is where the amazing expansion of the capitalist economy is hidden. The capitalists can use that extra money by investing it, and thus make even more money. But right now we're talking personal money only, not capital.

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"

[theweaselking.livejournal.com]

But you're not taxing them 10% of $1000. You're taxing them 0% of $1000, and 0% of $10,000, and 0% of $25,000.

At $50,000, you're taxing them $5000 - or 10%.
At $500,000, you're taxing them $45000 - or 19%.
At $5,000,000, you're taxing them $495,000 - or damn close to 20%.

You're not trying to tax the poor at the same rate as the wealthy.

Hell, set the minimum higher. Set the minimum to $50,000 and the tax rate to 40%. Do you still want to tell me that poor people are going to be screwed by that? 40% of the only 1000 that you have for spending money is more than 40% of the only million I have for spending money, in terms of remaining buying power, but you don't pay any taxes at all on the majority of your income.

And, pointedly, this hypothetical seems to me to decrease the taxes that the poor and middle class pay compared to the current system, and increases the taxes the wealthy pay compared to the current system. I honestly *don't understand* where the argument comes from that this would crush the middle class and enrich the wealthy. It clearly *could* do so - just set the minimum to zero - but it doesn't seem that it *must* do so.

[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.

[theweaselking.livejournal.com]

And what if Canada eliminated personal income tax entirely while the USA stays the way it is. Doesn't *that* make it harder and unequal for Americans?

I'm not sure what your point is. Joe and you are still paying the same theoretical flat FEDERAL tax, and if you were in the same state you'd be paying the same the same theoretical flat state tax. Flat or not, if states don't have the same tax structure, then they're not going to be equally friendly for taxes, and making things a flat tax isn't going to change that Maryland might have more tax than Florida.

[publius1.livejournal.com]

On what planet is $45,000 19% of $500,000? That's 9%.

Look, if you keep raising the bar so that the poor and middle class don't have to pay taxes, then you're going to make a lot of people very happy and have no money to show for it, and a very unhappy upper class that will simply move somwhere where they can be rich and not have to watch the poor and middle classes pay nothing at all.

and I am just utterly baffled at your math above. On no planet that I am aware of is $500,000 19% of 45,000...

But as Koz has constantly pointed out to me, the United States' current taxation system currently IS a flat tax. The first $50,000 for example, you pay 28%. Then the next 10,000 of income, you pay 32%. And so on and so forth. That's why we end up with tax tables.

[publius1.livejournal.com]

If you want to ignore the concept of "discretionary funds" versus "subsistence funds", then that's fine, but you won't win many people over to your argument. Ignoring Joe's 4 kids just because you're single is ignoring a rather large reason why the insanely complicated income tax system works for the most part in this country.

[theweaselking.livejournal.com]

The planet of me not doing the math right?

$500,000 - $25,000 * .2 = 95,000 = 19%
$5,000,000 - $25,000 *.2 = 995,000 = 19.9%

Look, if you keep raising the bar so that the poor and middle class don't have to pay taxes, then you're going to make a lot of people very happy and have no money to show for it, and a very unhappy upper class that will simply move somwhere where they can be rich and not have to watch the poor and middle classes pay nothing at all.

See, *that* is an argument that makes sense for why to not do this: because rich people can afford to move to a country that *doesn't* do this, where they can avoid paying taxes totally the way they do in the USA, now.

Of course, this can be fixed by taxing the money based on where it's earned - if Wal-mart moves their official headquarters to Geneva, they would sitll need to pay taxes on profits made in the USA, for example - but it leads to all kinds of other headaches.

(And that's not a flat tax, because the taxation rate changes. On any give section of income, the tax rate is flat, but the rate *does* change.)

[theweaselking.livejournal.com]

I'm not trying to be obtuse, here, Ken, I honestly *do not understand*.

If Florida and Maryland have different state tax structures *now*, how is it *more* unfair for them to have different state tax structues *in the future*? Flat or not, progressive or not, they're not the same tax structure at all, and arguing that it *would be* unfair under a flat system as an argument for why flat systems are bad ignores that it's transparently equally as unfair *now*.

I'd understand if the example was "Joe has 4 kids and makes 60K. I have no kids and make 60K. We pay the exact same taxes. How is that fair?" - because THAT is a question that makes sense, and leads into the discussions on how to define and incentivise desirable behaviour from a government perspective. And you're right when you point out that, at and near (within a multiple of) the tax cutoff line, it doesn't do you much good to get a $10,000 tax-free bonus per kid if you aren't making any of that 10K.... but you're already paying more tax, now, than you would be in my hypothetical, and we're changing nothing except how your income tax is calculated, so how can "you pay less tax, nothing else has changed" be *worse* for you than the current system?

[publius1.livejournal.com]

Isn't this the thing though? You've just started to describe a rudimentary progressive tax, the more you try to make your flat tax fair. "Ok -- flat percentage of 10%. That's unfair to the poor, though, and a boon to the rich, so we'll give an exemption for a set amount -- let's say, the first $45,000 of wealth. Hrm. Got kids? Well, we have to take that into account, so we'll set up deductions that they can take on the current system. That's just the stuff we're talking about in this very simplified debate of what tax codes are good and bad.

I think that my main point is: any tax system is onerous. There's no way to make it fair...you just have to make it as fair as possible while still pulling in revenue.


I am actually not a fan of the income tax system, period. I'm much more a fan of the consumption tax. And yes, I am aware that makes me a far-right-wing nutjob of the top order.

[theweaselking.livejournal.com]

Not a far right nutjob, just far more interested in punishing the poor than I ever was.

(And I *started* from the position of "exempt $X, charge y% of what you earn above that, exemptions should be few and all of the sort "$Z more are tax-free".)

[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.

[jirel.livejournal.com]

Well, currently Joe gets to deduct his state tax from his federal tax. That's a deduction I'm assuming would go away. (There's only about 4 or 5 states that are income tax free). And in most cases where you live (especially for those that don't make tons of money) is determined by your job. Ie - even though I make good money, I live in Florida because I work for a very, very good company and I'm not well, (Lupus) making it very hard for me to get work elsewhere. I HATE Florida. But I work for a great company and won't leave it.

If your job is in auto manufacturing, you don't have a choice about where you work, you have state income tax. Anyway, I was mostly curious about how you felt about the matter. I'm one of those apathetic Americans that don't argue because they think it's useless - and everytime I vote, the person I vote for loses.

[publius1.livejournal.com]

But if the poor can't afford it, with a consumption tax they pay nothing at all. And you can choose to tax some goods more than others (yachts vs. nursery cribs) or not at all.

My preferred tax has some major problems, though. Currently, welfare still exists in the form of the Earned Income Tax Credit and other incentives for the poor that can give them a bigger refund than the taxes they paid out. A consumption tax would make any attempts to actually give money to the poor have to be separate from our taxation system, which would maybe be more honest, but would be far less likely to exist. Not to mention, a consumption tax suffers the same problem as a pure "Flat" tax -- no way to get the public to do what you want through tax incentives.