Flat Tax?

[timmac]

I'm noticing a couple of things on this thread, most of which have been addressed in some manner or another, but I'll try to offer my thoughts here anyway.

First, there's the underlying question of what exactly are you looking to accomplish by changing the tax system, which I'd divide into two classes of answers, either to simplify things, or to make (whomever) pay their fair share. I'm not certain which of the two was the primary thrust of the OP, but it doesn't really change the discussion too much at the end of the day.

Now, there's some confusion of flat tax versus fair tax. I think it's been fairly well ironed out, but the basic idea is that flat tax = everyone pays a certain percentage of their income, and fair tax = everyone pays tax on what they buy (national sales tax). I'm oversimplifying these a bit, and there's a lot of massages to these basic ideas that have been proposed over time, but that's a decent approximation for now.

We need to keep in mind that we currently have a bracketed tax system; those who make more pay a proportionally larger share of taxes. Looking at flax tax for a moment, and going with the 17% figure, it's easy to figure out where the line in the sand is such that the income tax paid under the bracketed system equals what would be paid by flat tax. I'll leave out the math, and say that, for a married couple, that's a joint taxable income of $96,875. Note I said taxable income. Once you consider the standard deduction and personal exemptions available today, for a family with two children that's a gross income of $123k. (If we consider tax credits, and other possible deductions, it's higher still). Anyone making less than this currently would be paying more under flat tax... this is more than 85% of families in the U.S. Whenever I hear flat-tax mentioned, I have to wonder if people have actually done the math for themselves.

Of course, the other side of this is also true, those above the threshold would get a tax break compared to their (arguably unfair) tax burden of today.

I don't have a lot to add on the concept of fair tax, however, in theory it would reduce a lot of hidden income. Yes, purchasing overseas would still be an issue, though.

One of the most interesting things I've read on this thread, however, is the ripple effect any change to the tax system might have. It's not just as simple as change the tax code and all of a sudden someone who "isn't paying their fair share" now starts doing so, and life continues without anyone noticing otherwise. The side effects, on jobs, personal wealth, investment opportunity, price of consumer goods and services, etc, would all be affected in one way or another. Exactly what those effects would be are dauntingly complicated, and I'm certainly not expert enough in economics to speak much to the details.

A final thought I had, is all the media hype about companies that don't pay any tax, and the like. While I don't disagree there are plenty of individuals and companies that probably do get more than their fair share of tax breaks (through no fault of their own, either... taking advantage of every legal opportunity is only good business), I also think it's rather unfair to villify them. It may be great sensationalism, but it doesn't tell the whole story. Huge corporate profits mean high level execs making ridiculous bonuses, hareholders receiving bigger dividend payments, etc... all of which are subject to taxes of their own.

It's easy to see the issues we have currently, but I'm even more concerned that any "simple fix" is likely to be a cure worse than the disease after all is said and done.

 

[hopemax]

The thing is that several of the flat tax proposals still include a "personal exemption." Senator Shelby has been submitting his flat tax for years. It includes a $26,810 exemption for married filing jointly, plus $5780 for each dependent. Similarly, if you look at the plan that Steve Forbes had, it also included a generous personal exemption. So a family of 4 who makes less than $38,370 would still end up paying no Federal Income tax, as their taxable income would drop to zero. I found the numbers on the Forbes plan, and in 2005 the exemption for a family of 4 was $46,000.

As it is right now, the standard deduction + dependents for the family of 4 is $18,700. So there is a big chunk that would allow for people who are currently getting a mortgage deduction and some other deductions which currently drop their income to zero, to remain with a zero income. So will a flat tax mean the 45 million will "pay up?" No, it doesn't.

And as for why the rich end up paying the lion share of taxes...it's because THAT's where the money is. 100% of almost nothing CAN be bigger than 10% of a large number.

Take an example, where you have 1 guy making $1 million and 5 guys making $35,000. Tax the millionaire at 10% = $100,000. Tax the 5 guys 50% = 5*17,500 = $87,500. So even taxing the lower income people at 5 times the rate of the millionaire, the millionaire STILL ends up paying 53% of the total taxes. Let's try another. If the millionaire was making $10 million, and he was taxed at 10% = $1 million, and we taxed the other 5 guys 100% of their income = $175,000. Then the multi-millionaire will STILL be paying 85% of the total taxes.

The top earners have such a large amount of money, compared to most people, that if someone wanted to make sure that they did not make up an "unfair" amount of money, you would have to tax THEM at a ridiculously low rate, and everyone else at a ridiculously high rate.

 

[timmac]

The thing is that several of the flat tax proposals still include a "personal exemption." Senator Shelby has been submitting his flat tax for years. It includes a $26,810 exemption for married filing jointly, plus $5780 for each dependent. Similarly, if you look at the plan that Steve Forbes had, it also included a generous personal exemption. So a family of 4 who makes less than $38,370 would still end up paying no Federal Income tax, as their taxable income would drop to zero. I found the numbers on the Forbes plan, and in 2005 the exemption for a family of 4 was $46,000.

As it is right now, the standard deduction + dependents for the family of 4 is $18,700. So there is a big chunk that would allow for people who are currently getting a mortgage deduction and some other deductions which currently drop their income to zero, to remain with a zero income. So will a flat tax mean the 45 million will "pay up?" No, it doesn't.

Careful, keep in mind under the current system, each adult is an exemption also, so the Std + exemptions is 26400 (for 2011). So under Shelby's plan, indeed, it's only the range of 86-97k who owe more under the flat tax plan.

For fun though, let's consider a common case where someone itemizes their deductions (early on in a mortgage with lots of interest paid, is the most common case I can think of) and the deductions are a little higher. Suppose the deductions + exemptions totaled 30000 instead. Then the "screwed by the flat tax" range is more like 59-109k. Add in a little college tuition that was paid, or any of a number of other things that count as adjustments, deductions, or credits today, and that gap widens more, and quickly.

And as for why the rich end up paying the lion share of taxes...it's because THAT's where the money is. 100% of almost nothing CAN be bigger than 10% of a large number.

Take an example, where you have 1 guy making $1 million and 5 guys making $35,000. Tax the millionaire at 10% = $100,000. Tax the 5 guys 50% = 5*17,500 = $87,500. So even taxing the lower income people at 5 times the rate of the millionaire, the millionaire STILL ends up paying 53% of the total taxes. Let's try another. If the millionaire was making $10 million, and he was taxed at 10% = $1 million, and we taxed the other 5 guys 100% of their income = $175,000. Then the multi-millionaire will STILL be paying 85% of the total taxes.

This totally ignores the reality though... which is that the way things are now, the millionaire pays something north of 25% of his income while the other 5 guys pay more like 10% of their income.

Taking a small step back, I could simplify the entire discussion to point out that any change to the tax system is inevitably going to mean some people pay more tax, and others pay less. To assume that it's going to be a system whereby the little guy makes out paying less and the deeper pockets pay out even more seems a bit unlikely, given the latter already pays a disproportionately large share.

 

[HHSTigerFan]

Only in America could a guy paying $170K in taxes be considered to be getting an undeserved tax cut and the guy paying $3K is getting treated unfairly...

 

[hopemax]

I wasn't trying to make a correlation to the current system other than to address a couple limited issues.

Would a flat tax mean that the 45 million who currently don't pay taxes, would start paying? My answer, probably not, because of the personal exemptions. That part of the tax system isn't going to change. Poor people still won't have to pay.

Second, can we develop a tax where the rich don't end up paying a large percentage of the total tax? My answer, again, probably not, because the numbers are too big on one end, and too small on the other. Someone earlier said it was unfair that the top 5% pay 45% of taxes. My point is that you probably can't tax the lower income brackets enough to make that much of a difference in that number.

 

[HHSTigerFan]

Earlier someone mentioned that perhaps only people paying income taxes should be allowed to vote, maybe thats not such a crazy idea.. let those paying the bills make the decisions..

 

[eliza61]

Earlier someone mentioned that perhaps only people paying income taxes should be allowed to vote, maybe thats not such a crazy idea.. let those paying the bills make the decisions..

LOL. I think we tried that already. there was a time when the only people who could vote were white males. country was still a mess.

 

[lisalis]

I was surprised to find that my husband and I were within the top 10% of household incomes that pay something like 70% of the tax load. It is not difficult for dual income households to reach this number (I think it was something like $108,000), especially if you have worked in your field awhile and have expanded your education. I feel that we are middle class and do not live an extravagant lifestyle at all

I don't mind people below a certain income not paying tax in. I do feel however, that people should not be getting money back over the amount of taxes they have paid in. Our country does not have money to be giving refunds to people above what they paid in to the government. That would be a true redistribution of wealth by the government.

 

[leahjade]

That simply encourages millionaires to consume outside the U.S. They can afford it - they do a lot of it now. The Bahamas are a lovely place to live to avoid taxes currently - and if you tax consumption, you'll find more millionaires spending more time than ever in places that don't tax them on consumption.

Well said! Donald Trump just said recently that he'll move out of the country if Obama raises the tax rate as he promised when the Bush tax cuts expire. The wealthy have the resources to do just that if they are being taxed to death, so then who will be paying their share - not the 47% who pay nothing at all -that's for sure!

 

[leahjade]

I do feel however, that people should not be getting money back over the amount of taxes they have paid in.

There are millions of Americans who pay no taxes but get a refund anyway.

Newsmax reported on this socialist feature to the US tax code in 2005.

" A married couple with three children and $40,000 in income can take a $9,700 standard deduction and $15,500 in personal exemptions, bringing their taxable income down to $14,800. They would owe $1,505 in taxes.

But with three children, they would get $3,000 in child credits, leaving them with no taxes owed – and a $1,495 refund check.

There are millions of Americans who pay no taxes but get a refund anyway.
So in today’s America you can actually receive more back from the government than you paid in during the year. That’s socialism."

 

[eliza61]

Well said! Donald Trump just said recently that he'll move out of the country if Obama raises the tax rate as he promised when the Bush tax cuts expire. The wealthy have the resources to do just that if they are being taxed to death, so then who will be paying their share - not the 47% who pay nothing at all -that's for sure!

Millionaires will always find a way to skirt paying. they are doing it now. so really don't see what would be different. What you think all those bank accounts in Switzerland are owned by poor people. Gimme a break.


According to the IRS the highest earners are paying 9% less tax.
http://news.yahoo.com/s/ap/20110417/ap_on_bi_ge/us_no_taxes

I'm not saying that they don't pay alot but sorry I'm not buying the "the rich are being taxed into the projects" song and dance.


Donald trump has been threatening to move out of NY, United states and move his casinos for the last 25 years. Unfortunately we seem to be stuck with him.

 

[HHSTigerFan]

LOL. I think we tried that already. there was a time when the only people who could vote were white males. country was still a mess.

But the finances of the country were in much better shape.. no country will last when 47% of the people are freeloading off the other 53%..

 

[eliza61]

But the finances of the country were in much better shape.. no country will last when 47% of the people are freeloading off the other 53%..

I agree but wouldnt it the better solution to get the remaining 53% to pay instead of taking away 1/2 of the country's constitutional rights? A country with great finances but all hell breaking loose among it's citizenry is not one I want to live in either.

 

[HHSTigerFan]

I agree but wouldnt it the better solution to get the remaining 53% to pay instead of taking away 1/2 of the country's constitutional rights? A country with great finances but all hell breaking loose among it's citizenry is not one I want to live in either.

Do you really think we will ever have a system where all people pay income taxes? When 47% of the people don't, anyone that proposes such a system is committing political suicide.. We have created a society where people now expect the govt to take care of them on the backs of the wealthy, reversing that mentality will be nearly impossible, a few posts here make that obvious..

 

[Charade]

That's a misleading statistic, though, because so much of the discussion about it assumes that 47% is a constant segment of the population that votes according to that specific issue.

In reality it is a shifting window; we paid quite a bit in income taxes as a dual income couple with no kids even though we were just starting out, pay almost none now as a single income family with 3 children, and will be paying more than ever in a few years when the kids start reaching adulthood. That is the pattern for most working and middle class families with children. Add to that figure the older generation living solely on social security and you get a pretty big number of people who aren't paying taxes at a given point in time, but most paid in the past or will in the future.

I don't this matters all that much nor is it misleading. People have always moved in and out of income brackets. The fact remains that a group of earners, which is creeping upward in percentage, does not pay any federal income taxes. In addition to not paying any federal income tax a portion (not sure how large) of them actual pay a negative tax rate because of direct payments to them such as EITC and "Make work pay" tax credit.

 

[eliza61]

Do you really think we will ever have a system where all people pay income taxes? When 47% of the people don't, anyone that proposes such a system is committing political suicide.. We have created a society where people now expect the govt to take care of them on the backs of the wealthy, reversing that mentality will be nearly impossible, a few posts here make that obvious..

sure. You're making an assumption that the 47% are all unemployed or on some type of assistance. that's false. A large portion of the 47% don't expect anyone to take care of them. most of them work very hard, they simply take advantage of alll the credits the congress has made available. Why shouldn't they? Heck, if you give me a tax credit for owning a dog, you better believe it I'm taking that credit. a large portion of the 47 are very wealthy, they take advantage of tax breaks.

So first get rid of all the deductions. The way the tax code reads now there are millions of deductions. What, some one is going on welfare because they don't get a tax credit for energy efficient windows? that's silly. But like I said, if I can deduct 5000 legally for a certain type of air conditioner, I'd be stupid not to take it. That doesn't mean I expect the govt to do any thing.

No one I know is sitting around, living la vida loco waiting happily for a monthly check.

And as far as the "backs of wealthy". We created that monster, not the government.

Everyone agrees that the deficiet needs to be reduce but when you ask them how many will accept a cut in their ss or medicade. whooo hold up. put the breaks on....

report after report shows middle class working americans do not have enough money saved for their retirement. We brought the song and dance of free and easy credit, lock stock and barrel. Before this recession hit, the savings rate was negative. We see it here on the dis all the time. I can't afford a disney trip, how can I go? Baby that ain't the government. that's our own "I want it now, I deserve it now". So now we've got a whole bunch of people who are about to retire with no money and who say they deserve ss so don't you dare cut it. When that's not what the system was ever designed for.

As far as the wealthy is concerned, don't waste your tears. they've got great accountents and attorneys that keep them from paying taxes. I've yet to see this mass exodus of the rich. Besides the weathiest americans saw their income increase by 33% while middle american wages stay stagnant. why would they gripe about that.

http://money.cnn.com/2011/04/13/news/international/imf_income_inequality/index.htm?asid=eba9277a

 

[Jeff_G]

Why not fix the problem from the other end, congress needs to quit spending money they don’t have! Cut ALL government agencies by 25%, make them all balance their budget. Yes this would be VERY painful but what other choice do we have…
After that we can evaluate where and what we need to be tax.

 

[eliza61]

Why not fix the problem from the other end, congress needs to quit spending money they don’t have! Cut ALL government agencies by 25%, make them all balance their budget. Yes this would be VERY painful but what other choice do we have…
After that we can evaluate where and what we need to be tax.

thats the problem Jeff, every one wants it done, just as long as it doesn't effect me. and most economist agree, that budget cuts alone will not do it, we need to increase revenue.

 

[Charade]

No way on a flat tax, the rich need to pay more and the loopholes in the system just need to be removed especially for corporations. How the heck does GE make a profit of over $14 billion and not pay a single dime in taxes?? Don't believe me google it and see for yourself. All a flat tax will do is stick it to the middle class even more imo.

Don't mean to turn this into "class warfare" argument but I'd like to know, since you said the rich need to pay more, how much more do you think the rich should pay in taxes?

Consider this.

In 2007 (or 08) the top 400 earners had an average income of $345 million and paid an average of 17 percent in federal income taxes.

Nearly half of all earners paid zero in federal income taxes. Of those, some portion (not sure how many) actually paid negative income tax meaning even though (through deductions and credits) they owed nothing, they got a check (not a refund because they had nothing to "refund") from the IRS for EITC, "Make Work Pay" and child credits. That totaled about $70 billion. They say that the wealth in the US is (too) concentrated in the uber wealthy. Just one of those top 400 paid more in taxes than nearly half of the earners.

 

[Planogirl]

The same uninformed voices who want our corporations to be taxed so heavily are the same people who scream when businesses go overseas where they can actually make a profit. Do these people think that companies can stay in business if they are not making any money? When did success and profit become dirty words in this country? When companies are profitable, they can hire more people, give raises etc. It's not really rocket science!

Guess what, my company gives virtually no raises and also has outsourced everything they can think of to South America. They do however pay their management handsomely and have plenty of ways to pay less tax though. This includes giving "bonuses" to employees which are nothing but money amounts to be donated to certain specified charities, all in the name of the company of course.

I guess that the profit they make doesn't do much for the employees in at least one company's case.