Tuesday, October 09, 2007

Flat Tax II

This post is the promised (and long-awaited) follow-up to the post called "Flat Tax" that I made a while ago (July 5, 2007, to be exact). This one could be entitled, "We Already Have a Flat Tax (More or Less)." (For this post, I'm indebted to Kevin Drum who collected the data here that I've been meaning to find to make the argument. Actually a lot of it came from this NY Times source page and this article, too.)

Here is exhibit A:

Blog_Federal_Tax_Rates

This graph (more information here) shows that our income taxes combined with payroll taxes produce rates that are moderately progressive until you reach the top two tiers, which comprise the highest 5000 earners or so. Then the rate becomes regressive.

Here is exhibit B:

Blog_Tax_All_Income

This one combines all of the taxes we pay into one composite rate: income and payroll taxes, plus sales taxes, property taxes, and excise taxes. Notice that the final rates are pretty flat--18%, 14%, 16%, 18%, and 19% per quintile. The wealthiest pay one percent more of their income in taxes compared to the poorest.

Those who argue for a "flat tax" really mean that they want a flat rate for income tax (and no estate taxes). The effect of such a policy would be to make the full picture of all the taxes a regressive rate. The wealthy would end up paying a much smaller percentage in taxes as compared those of low or middle incomes.

Furthermore, it would bankrupt our government so that we would have to make major cuts in either (a) defense, (b) Medicare and Medicaid, or (c) Social Security. Finally, the evidence suggests that such cuts will not be made, and so such attempts in the past have only led to skyrocketing national debt, i.e., increases in the national debt as a share of the GDP (see graph below for evidence of this).

National Debt

14 Comments:

Blogger Brandon said...

How would the fair tax change anything? It would just make the tax law alot simpler. If someone makes and spends 10 million or 10,000 they would pay the same percentage. Right?

5/20/2009 1:05 AM  
Anonymous Anonymous said...

It would make the total taxes paid by individuals regressive. The poor would pay more as a percentage of their incomes because of the payroll taxes (and other things). Also, the trick is to find the acceptable level for everyone to pay. Too high and it's unreasonable for the lower incomes; too low and we have to adjust the budget to billions and billions less than we have. Usually, that's the real goal of a flat tax proposals: reduce government spending. But how? The big parts of government spending are 1. entitlement programs, 2. defense, and 3. servicing the debt. You can't cut #3. Really cutting #1 is not politically feasible. So defense? How about it?

5/20/2009 9:16 AM  
Blogger Brandon said...

How is it regressive? What would rich people do with their income that wouldnt be taxed at the same rate as everyone else? The only things that would be tax exempt would be food. Most people can't eat their way thru a six figure income.
There are more areas to cut government spending then the 3 you outlined and if you cut spending then #3 wouldnt exist. #1 is a joke and does need to be cut almost to nothing. People have this idea that the government needs to take care of them so well that they dont have to suffer. Here in Washington, people get money for everything from tobacco to gas money to cell phones.

5/21/2009 10:04 PM  
Anonymous Anonymous said...

You misunderstand what is meant by "regressive." It just means lower-income taxpayers pay at a higher rate than their higher-income counterparts. This is already true when you add up all the taxes we pay, as when Warren Buffett's total tax rate is 17.7% as compared to his secretary who pays at about 30% (http://www.timesonline.co.uk/tol/money/tax/article1996735.ece).

As for your views of entitlement programs, good luck convincing 25%, let alone a majority, of the country to give them up.

As for my three parts of the budget, they amount to at least 75% of the total budget and probably more than 80% when you include related costs. There just isn't much else to cut that would make much difference.

5/22/2009 10:06 AM  
Blogger Brandon said...

With the fair tax everyone would pay the same percent on all their purchases, except food. So how would the low income families pay a higher percent?

5/22/2009 8:39 PM  
Anonymous Anonymous said...

No, they would pay the same rate on their federal income tax. But income tax is only one part of the larger tax picture. There are payroll taxes, property taxes, state taxes, municipal taxes, etc. The big one for lower-income taxpayers is the payroll tax. It amounts to 7.65% of their income. For the wealthy, it amounts to almost nothing as a percent of their income. If you tax the wealthy on their full income for the payroll tax, then we might have a deal. But that will never happen.

5/22/2009 8:59 PM  
Blogger Brandon said...

I guess I am confused on what the payroll tax is. My pay check has federal withholding, medicare, L&I, and Social Security withheld.
As for property tax: its all based on what your property is worth. Rich people have more valuable property and are taxed more.
If you have a simple state and federal fair tax, then everyone would be treated equally and no more tax fraud or complicated tax laws.
Since you seem to be against the fair tax. What would you purpose instead?

5/22/2009 11:19 PM  
Anonymous Anonymous said...

Yes, you're still not quite getting the point. You pay medicare and social security on your earnings up to $102,000 (as of 2008). If you make more than that, you don't pay those taxes on that money. Thus, if you make $10 million per year, you only pay these taxes on approximately 1% of your earnings, whereas someone making $50,000 per year pays the tax on 100% of his earnings. That's the difference. And that's why Warren Buffett can pay so much less total tax as a percentage of his income than his secretary.

As for what I favor, I think there are lots of complex issues to fix. I certainly don't think the "fair tax" idea is fair at all. I think a progressive tax structure is fair. As for the nitty-gritty, there are just too many things to discuss. Clearly, some of our tax-code was written by lobbyists with various special interests in mind. Some of that needs to be changed.

5/26/2009 9:26 PM  
Blogger Brandon said...

Why do you think a progressive tax is more fair than the fair tax? Why should you be punished for working harder that someone else? Yes, the harder you work the more money you make!

I still dont understand why Warren Buffet Pays so little on his taxes. Lets asume he made $500,000 in one year, that would put him in the 35% tax bracket and he would have to pay 30.54% of his income in federal taxes alone, then add state and other taxes. That is already more than his secretary pays.

5/26/2009 9:48 PM  
Anonymous Anonymous said...

I can't tell if you're being intentionally dense, but you clearly aren't paying attention to what I have said. Warren Buffett pays payroll taxes on only $102,000 of his income, which is probably about 1% of his income (I'll assume he makes $10 million a year). Thus, he pays about $8000 in payroll taxes. Now let's suppose his secretary makes $100,000 per year. She also then pays about $8000 in payroll taxes. That's what is not fair.

If you're willing to propose paying payroll taxes on ALL income, then we might have a deal with the "fair tax" for income tax. But no one is proposing that because wealthy people would not like it. They like the loophole as it is.

5/27/2009 3:56 PM  
Blogger Brandon said...

So what your saying is that you dont want to count federal withholding into your equation? Why do democrats think it is fair to keep increasing federal withholding on wealthy when it is already unfair for the highest earners? Didnt Obama increase the highest tax bracket to about 40% now? As for your complaint about the other taxs, do you think we should also make people pay more for their car tabs because they make more? The fair tax should eliminate all federal taxes and replace it with a simple flat rate sales tax.

5/27/2009 9:18 PM  
Blogger Brandon said...

If your willing to have the wealthy paying payroll taxes on all of their income then wouldnt it be fair to make everyone pay the same percent on federal taxes?

6/01/2009 1:35 AM  
Anonymous Anonymous said...

Yes, that's what I've said for the past two comments. You could do practically anything you want with the income tax rates if you'd concede the payroll tax reform I suggested.

My opinion, however, is not what matters. There is NO WAY the "fair tax" supporters would go for such a huge concession.

The payroll taxes (along with all of the corporate loopholes and subsidies) are what keep the tax code weighted in the direction of the wealthy and connected. (For example, hedge fund managers can count their earnings as dividends rather than wages like everyone else, which saves them enormous amounts of money.) The problem with the "fair tax" proposal is that it does not address all of the other aspects of the tax code that make it unfair to the lower and middle classes.

So, again, I would support a flat rate on income tax as long as the other aspects of the tax code got reformed at the same time.

6/02/2009 10:56 PM  
Blogger Brandon said...

I would agree with you on a flat rate income tax and reform on all other taxes along with it. The problem is that everytime congress thinks there is a loop hole somewhere they just increase the federal income rate to compensate. My employer has a nice income, but he works alot and doesnt qualify for any loop holes your mentioning. So he would be punished in Obama's tax reform. Keep in mind he works really hard and has employed me and a few other employees.

6/02/2009 11:01 PM  

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