Inspired by flat tax thread - how much is enough?

[bicker]

This is a misnomer that I hear quite often with the current tax code.

You're correct. However, I wasn't addressing the current tax code. I was addressing the earlier poster's suggested alternative.

 

[Professor Mouse]

I am amazed that people keep bringing up flat tax plans given that these plans are nothing but a mechanism to shift the tax burden from the highest tax payers to the middle class. The Forbes and Armey plan each used fraudulent tax rates that would have resulted in massive reductions in tax receipts to the Federal government, i.e. massive tax cuts going almost exclusively to the richest tax payers. A realistic flat tax plan that brought in the same revenue as the current tax scheme would require a higher rate that would cause all lower income and most of the middle class to pay higher taxes to fund tax cuts to the rich.

The concept that the middle class should pay more so that the upper tax brackets should have a large tax cut is just wrong. Progressive taxation is a good thing. The concept that every one else should pay higher taxes to benefit the rich is wrong from an economic standpoint. Trickle down economics do not work.

 

[caitycaity]

blah blah blah forbes and armey blah blah blah... did someone hear something?

IMO, the burden should be spread out more evenly. I'm in favor of a flat tax set up such that families in at or below the poverty level pay nothing, with everyone else paying a flat % of their income in federal taxes.

ita.

But would you purposely decline a pay raise knowing that it would move you into a higher bracket (under the current system) or push you into the tax base under the flat tax system?

no way! this actually happened to dh and i a few years ago. believe me, we did not turn down the raises. it was only "a problem" for a year, and without that raise, we wouldn't have been able to continue making more money. i find it very hard to take anyone seriously when they say they would turn down a pay raise for this reason. that's just crazy.

For the proposal to be successful, people already have to act that other way naturally.

if that was a requirement for every law passed...we'd have a lot fewer laws. setting that bar for any law is just silly.

 

[AllyandJack]

Maybe we need more brackets.

Keep it the way it is, but add brackets to increase the taxes on people making $1 million-$5 million, $5 million-$10 million and so on.

Raising taxes in the brackets the way they are will lump in a lot of middle class people. Increasing the taxes on the people making over $1 million will put more revenue into the system and, hopefully, they will use that money to avoid raising federal taxes on the middle class people (and by middle class, I am including people making up to $250,000 because in some parts of the country, that's middle class), as well as state and local taxes. So, even though the $1 million person is paying more in federal income taxes, it may be off set by lower property taxes because the federal government is sending more money to the states.

Then again - I said HOPE. The chances of them using the money for that and not something else are great.

 

[Professor Mouse]

Here is a very basic explanation of the economic theory why progressive taxation is good and why flat tax and regressive taxation is bad. Flat Wrong: New Tax Schemes Can't Top Old Progressive Truths

The economic case for progressivity begins by noting that people work and save in order to satisfy their own needs and desires, not to pay taxes. Taxes don't change those needs and desires, so they shouldn't discourage anyone from working or saving. Progressivity advocates also argue that economic efficiency requires that everyone bear not an equal tax but an equal sacrifice. From this optic, tax rates should rise with income until an additional dollar of tax entails the same sacrifice from the highest and lowest income taxpayers.

Economic theory cannot settle the issue; but the evidence provides a bit more support for progressivity. As near as we can tell, tax rates do affect people's work efforts and saving, but only when the rate is very high and then only to a modest degree. In short, high income people don't work or save less when progressivity increases their tax rate; they find ways to avoid it or live with it. Even worse for flat tax advocates, people don't save much more when the tax on their savings is cut sharply. In 1995, for example, the personal net saving rate remained less than 5 percent despite more than $120 billion in direct tax incentives for personal saving. ....

In fact, fairness under these flat tax plans would be more nearly regressive than truly proportional, because they would shift part of the burden from capital to labor. Under both, capital would be taxed once – under the business tax – while wages and salaries would be taxed twice – under the income and payroll taxes. Since the top 10 percent of families derive 30 to 48 percent of their incomes from capital, as compared to 6 to 10 percent for everyone else, these plans necessarily mean higher taxes on middle-class people and lower taxes on the wealthy.

Under these flat tax schemes, for the first time in our history, the tax system would redistribute income towards higher-income people. Those at the top would claim a larger share of national income after paying their taxes than they did before paying them, and taxation would reinforce the income inequalities produced by free markets. And that would flunk any test of fairness yet proposed.

This is a realtively simplistic explanation of the issue. I can provide much more involved analysis if need be.

 

[jrydberg]

IMO, the vast majority in this country ought to shoulder the tax burden -- not a small minority.

 

[bicker]

this actually happened to dh and i a few years ago. believe me, we did not turn down the raises.

Well, to be precise, the ramifications of what was mentioned didn't actually happen to your DH, because with our progressive tax system it isn't possible. It's really one of the main supports for the progressive tax system over the earlier poster's DMZ idea.

 

[caitycaity]

Well, to be precise, the ramifications of what was mentioned didn't actually happen to your DH, because with our progressive tax system it isn't possible. It's really one of the main supports for the progressive tax system over the earlier poster's DMZ idea.

first of all, it wasn't just my dh. it was both of us that got raises.

second of all, while the exact thing that we were talking about obviously did not happen, we did end up with less take home pay at the end of the day because of the extra we had to withhold to make sure we wouldn't owe a lot the next year. it wasn't as dramatic a difference, perhaps, given our current tax system, but it did happen.

 

[bicker]

But you got the excess withholding back, correct? In the end, our system won't allow someone as a result of earning a higher gross and taking home a smaller net.

 

[ford family]

I think maybe the consumption tax would be the best bet. Then, it doesn't matter how much you earn. Rather, it is how much you consume. With bare necessities, taxes would be waived. Business taxes fall by the wayside. Prices of products would fall because businesses wouldn't have to front the cost of taxes that they pass on to the consumer. The tax is inherently progressive but it is still fair because the rich are only taxed more if they spend more. If you avoid consumption and save your money, then you have more when you retire reducing the burden on social security.

I'm sure there are some cons to counter my pros, but it is an interesting idea.

One problem generated by a consumption tax is that it would decimate the tourism industry. Visitors from a country where their income is taxed would have a hard time affording stuff in a country where consumption is taxed.

ford family

 

[caitycaity]

But you got the excess withholding back, correct? In the end, our system won't allow someone as a result of earning a higher gross and taking home a smaller net.

of course we got the excess back, but that didn't really help us much during the year (for a variety of reasons we could not adjust our withholdings).

 

[bicker]

Well, I had thought that, as a general rule, international tourists are able to get consumption taxes rebated on exiting a country. I'm not sure where I got that impression, though.

 

[caitycaity]

One problem generated by a consumption tax is that it would decimate the tourism industry. Visitors from a country where their income is taxed would have a hard time affording stuff in a country where consumption is taxed.

although i am opposed to it for other reasons, i do not believe this is such a big deal. vat taxes in europe are a consumption tax and when i was in paris last summer they didn't seem to have a problem with tourism.

 

[bicker]

Interesting, interesting discussion. Thanks for chatting folks!

 

[caitycaity]

Well, I had thought that, as a general rule, international tourists are able to get consumption taxes rebated on exiting a country. I'm not sure where I got that impression, though.

in france at least, you can only get the refund of you buy a certain amount (i don't remember what but it was not insignificant - like $200 or something) at that particular store.

 

[ford family]

although i am opposed to it for other reasons, i do not believe this is such a big deal. vat taxes in europe are a consumption tax and when i was in paris last summer they didn't seem to have a problem with tourism.

Because every one has the same income tax/indirect tax set up.
treesinger was talking about a set up with just consumption tax so you would receive all of your salary but pay a very high Federal sales tax (maybe 15 - 25%) PLUS any State sales tax.
Ergo, if I have paid 40 % tax on my marginal income then I would hesitate to visit a country where goods and services were suddenly 20% more expensive and I had no offsetting benefit.

ford family

 

[caitycaity]

Ergo, if I have paid 40 % tax on my marginal income then I would hesitate to visit a country where goods and services were suddenly 20% more expensive and I had no offsetting benefit.

assuming there was a refund, i guess i just don't see the big deal. in france, we ended up just paying the vat and not getting a refund because we didn't buy anything eligible for a refund. we paid 17% on most things in france. in other countries we have paid in the 20's.

i understand that this kind of thing might affect some tourists, but i just don't see it as that big of a deal. however, as i mentioned, i am against consumption taxes anyways, so, it is probably a moot point.

 

[BuckNaked]

IMO, the vast majority in this country ought to shoulder the tax burden -- not a small minority.

This to me is the crux of it - the tax burden should be shared, not one small group forever carrying the other large group.

 

[Charade]

This to me is the crux of it - the tax burden should be shared, not one small group forever carrying the other large group.

It is shared, just not equally. Except for those that bring home more than they make via the EITC.

 

[BuckNaked]

It is shared, just not equally. Except for those that bring home more than they make via the EITC.

You know my feelings on the EITC...