The Arguments Against a Flat Tax

Discussion in 'Politics & Current Events' started by Nutmeg, May 20, 2003.

  1. ElJefe

    ElJefe Moderator
    Staff Member

    Feb 16, 1999
    Colorful Colorado
    Club:
    FC Dallas
    Nat'l Team:
    United States
    Well, before I begin, let me give you my philosophy on taxation:

    Everyone should pay "their fair share." If the rich are paying X% of their income in all the various taxes that exist, the poor should pay the same X%. Now, that might mean that the rich might pay a greater percentage in income taxes, while the poor might pay a greater percentage in fees and sales taxes, but as long as it evens out in the end, that's a preferred result, in my book. I don't believe in taxing the rich to the bejesus belt as a means of redistributing income. So given that, I don't have a fundamental opposition to the current system other than the fact that it's a yearly pain in the ass.

    Now that we've got that out of the way, let me just say that I've got nothing against a flat federal income tax as long as you keep that "everyone pays their fair share" philosophy, once all the various taxes across the board are included, including all the various regressive fees and sales taxes. And really, the only way to do that effectively that I see is to exempt a relatively large amount of income from taxation.

    I have no idea what that number would be, but I imagine that the first words out of many conservatives' mouths upon seeing that number would be to complain that the poor were getting a "free ride."
     
  2. diablodelsol

    diablodelsol Member+

    Jan 10, 2001
    New Jersey
    Another reality. Given the uneven distribution of income in this country, a flat tax that keeps tax revenue from personal income taxes within the same ballpark (hell, even within the same league) will be at a rate much closer to the highest tax rate than the lowest. Which means damn near everyone on here and damn near everyone they know will pay more in taxes.
     
  3. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
    San Jose Earthquakes
    > Wasn’t it Einstein that said that the definition of
    > insanity was to keep doing the same thing and
    > expect different results?

    This statement implies that you think we have been raising the progressivity of tax rates over the last few decades, and that simply is not the case.

    > Didn’t the genius himself, superdave, say that
    > the Flat Tax is a regressive tax that places the
    > tax burden disproportionately on the low and
    > middle classes?

    It has to. If the rich people are paying less taxes, then someone has to be paying more. As far as I know, the only other options are the poor and middle classes.
     
  4. Nutmeg

    Nutmeg Member+

    Aug 24, 1999
    Back from a pitiful 9 holes...

    No, your misunderstanding of reality is what is blatantly obvious. I'll get to that in a bit.
     
  5. Nutmeg

    Nutmeg Member+

    Aug 24, 1999
    OK, so you're saying as long as everyone pays their fair share, then the taxation system works for you. I'll get to why the current system, even if it fairly balances out taxation, is a poor one and places a huge burden on our economy. It's not just a yearly pain in the ass, IMO.
     
  6. Nutmeg

    Nutmeg Member+

    Aug 24, 1999
    I'm taking a longer term view than "the last few decades," when graduated tax rates on the whole have absolutely increased. That's not even debatable.

    You're qualifying statement here is the key. It is absolutely essential in understanding the reality of current tax law. "If the rich people are paying less taxes" is the question. The answer for a variety of reasons under the Flat Tax, is that the rich will be paying more taxes, not less. History, over and over again, has proven that. More in a bit...
     
  7. Manolo

    Manolo Moderator
    Staff Member

    May 14, 1997
    Queens, NY
    So you're for a flat tax, because it's actually, in effect, progressive.

    OK, I guess that clears it up.

    ?????
     
  8. Nutmeg

    Nutmeg Member+

    Aug 24, 1999
    OK, so when I left off, I submitted, as have others on this thread, that the so-called progressive graduated tax scheme has not worked in effectively taxing people fairly, or even progressively. The question then becomes, why? Right now, we have 6 tax grades, the most in US history. Each grade taxes people at a higher percentage as their income progresses - the definition of a progressive tax (unless I am wrong and just don't understand it, superdave - feel free to enlighten me if I'm totally off). The rates start at 10% and progress to 38.6%. On paper, and in political sound bites, it sure sounds good. The rich pay more...

    ...Or do they? Before I go on, if you don't understand the difference between the "average tax rate" and the "marginal tax rate" then you should look it up and make sure you understand it. Most Americans don't, and they allow themselves to be penalized heavily because of it. To keep it simple, the marginal tax rate is that rate that applies to the last dollar earned. In the US tax system, the marginal tax rate is higher than the average tax rate, as it is in most tax systems.

    The reason marginal tax rates are so important is that it is this rate that predominantly sets the incentives and affects human behavior towards taxation. Most people (and corporations) will do what they can to legally avoid (and in many cases illegally evade) higher taxes to the extent of their, or their accountant's, knowledge of tax law. Fact. Law. Indisputable.

    Here is where so many people are confused. I can't say it better, so I'll quote from my copy of the Flat Tax:

    "It is important not to equate graduated rates with progressivity. A tax system is progressive when it takes an increasing share of a taxpayer’s income as that person’s income rises or, as we can now say, if the average tax rate rises with income. To illustrate, consider three families with incomes of $10,000, $20,000, and $30,000. Suppose the three families paid taxes of $500, $2,500, and $4,500, respectively. The first family thus pays 5 percent of its income in taxes, the second, 10 percent, and the third, 15 percent. Such payments would satisfy the definition of progressivity because families with larger incomes paid a higher share of their income in taxes than those with smaller incomes. But the tax rate is not graduated in this example—the marginal tax rate is 20 percent for all three families."

    So the wheels are starting to come off the argument that the only way to force people who earn a higher income to pay a larger share of the taxes is through graduated tax rates. But it gets worse.

    It is important to understand what is, and more importantly, what is not being taxed in present reality. These numbers have held true for "the last few decades" and AFAIK, continue to be true today.

    Two key terms:
    Gross Domestic Product (GDP) - A comprehensive measure of the goods and services produced by a nation.

    Tax Base - The portion of GDP that remains after all allowable deductions and exemptions have been removed.
    • So what are these deductions and exemptions, and more importantly, who benefits from them???
    • Exemption - An allowance for each tax paying member of the household.
    • Deductions - "Tax deductions are expenses the IRS allows you to subtract from your taxable income. If you have taxable income of $30,000 and deductions of $3,000, then you would figure how much tax you owe on the difference -- $27,000." Most common are mortgage interest and charitable contributions
    • Exclusions - "Income that tax law specifically allows a taxpapyer to not count when computing adjusted gross income." retirement contributions, moving expenses
    • Credits - "Tax credits are much like credits you get from a store. You use the credit to reduce the amount of the tax you owe. Tax credits are more valuable than deductions because they directly reduce the amount of tax you owe, rather than reducing the amount of income that is taxed."

    These 4 together are commonly referred to as loopholes. People use loopholes to avoid and reduce taxes. To what extent are loopholes in play? How much personal income is sheltered by these loopholes in the US today, and has been for "the last few decades?"

    About 50% of personal income earned in the US is protected from any federal taxation.

    Who do you think enjoys the overwhelming majority of that tax protection? "The poor." Are you kidding? "Minorities." Are you trying to be funny?

    OK, my wife says I'm done for tonight. Later.
     
  9. ElJefe

    ElJefe Moderator
    Staff Member

    Feb 16, 1999
    Colorful Colorado
    Club:
    FC Dallas
    Nat'l Team:
    United States
    Right. I'm not particularly fond of any particular system -- and by "system," I'm referring to all the various taxes and fees paid to federal, state, and local authorites -- as long as everyone is getting hit to the same percentage when all is said and done.
    It's also a yearly economic stimulus package to accountants and tax preparation services everywhere!
     
  10. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
    San Jose Earthquakes
    What date are you using? We've seen top tax rates of 73% in the 1920's, 90% in the 1950's to 70% in the 1960's. In 2002 it was 40%. It looks worse in the long term than it does in the short term.
    I assure you that rich people would not be for a proposal that would have them paying more in taxes without them getting some other benefit, such as much greater concentration of wealth. Reducing taxes on the rich has no relation to increasing wealth of most people or increasing the GNP.
     
  11. diablodelsol

    diablodelsol Member+

    Jan 10, 2001
    New Jersey
    I'll take a shot...

    The higher tax bracket rate does not apply to money earned within the previous tax bracket.

    There is no penalty for going into a higher tax bracket. You are still better off earning the extra dollar that bumps you to a higher tax bracket.

    For example, let's say a tax stratta is up to $39,999 and is at 30%, $40,000-$49,000 is taxed at 40%.

    Person A earns $39,999, person B makes $40,000. Are you trying to say that taxes for person A are .30*39,999 and person B are .40*$40,000? 'Cause that's sure what it looks like. Reality, taxes for person B are calculated as
    .30*$39,999 plus .40*$1. They're still 60cents and change ahead of person A.

    Your average tax rate is always lower than your marginal rate, although the difference gets significanly smaller the when you make a shitload of money, because a larger percentage of your income falls into the higher bracket.
     
  12. superdave

    superdave Member+

    Jul 14, 1999
    VB, VA
    Club:
    DC United
    Nat'l Team:
    United States
    Yes there is. If a majority of congress (which is an objective number) votes a certain way in the name of fairness, that's fairness.

    OK, I'm just playing with the gimp. There are a million and one political questions that you can't "objectively" measure, but we gotta pass laws. Besides, we objectively had a great period of economic growth in the 50s and 60s when income tax rates were confiscatory. So put that in your Laffer Curve and smoke it.

    You're making a philosophical argument. By nature my side and your side will be making subjective arguments. Now, if you want to talk about how tax rates affect economic growth or voter turnout or what have you, start a different thread.

    There are two different issues. One is the various loopholes and punishments in the tax code. That's not germane to this issue. What is germane is a graduated income tax. By definition, that's impartial. Maybe I'm wrong, but it seems like you're confusing two different things.

    Your history is charmingly mistaken. And so is your continued ridiculous assertion that the progressive income tax means we have a progressive tax system. The income tax merely is a counterweight to other elements of our tax system that are regressive. Here's a hint...if you stop banging your head against the wall, it will stop hurting.

    Are you trying to tell me that income distribution and wealth distribution haven't changed since the Depression? You're digging your own hole deeper.

    Um, you're glossing over the fairly critical fact that the highest marginal rates have dropped in sync with an increase in the maldistribution of wealth.

    No, he said you can't simultaneously work for peace and prepare for war.

    If I said this, I'm sure you can easily find the quote.

    You're really a special kind of retarded. I'll try this one more time, but really, since it hasn't sunk in yet, I doubt this'll do the trick. Here goes.

    There are many, many ways the various levels of government raise taxes. The income tax is but one. You've got to start paying attention to the difference between the overall tax burden, and the burden from the federal income tax. You're not doing this, rendering your arguments hopelessly confused. If you try this crap on a college paper, I promise you, you'll get a D+ or something.
     
  13. superdave

    superdave Member+

    Jul 14, 1999
    VB, VA
    Club:
    DC United
    Nat'l Team:
    United States
    Who the hell has ever made that argument?

    Does this book really call these loopholes? If so, the best use for the book is as kindling.
     
  14. Colin Grabow

    Colin Grabow New Member

    Jul 22, 1999
    Washington, DC
    Then you admit the Microsoft example doesn't really work.
    But according to you the current system is a failure since companies like Microsoft -- and guys like Bill Gates -- wield too much influence, something a progressive tax system is supposed to stop. So which is it, is the progressive tax system working or not?

    You're incredibly naive if you don't think that the rich are already able to shield tons of money from taxation. After all the rich are the only ones who can afford to pay the accountants who actually understand the Byzantine tax code. One of the best reasons for instituting a flat tax is that it would remove all of the nonsensical deductions that currently exist and would close loopholes.

    But according to you this isn't the case, with Bill Gates already exerting undue influence. So if this is a key reason for progressive taxation it would seem to be a failure.

    I would also like to point out that Iceland has a flat tax system, and would be curious to know if you view that country as a place where the middle and lower classes are exploited by the rich to a greater extent than other countries. (As an interesting aside Iceland also taxes dividend income at a lower rate than wage income and has a corporate income tax rate almost half that of personal income -- plainly the tax structure isn't all about helping the little guy)
     
  15. Nutmeg

    Nutmeg Member+

    Aug 24, 1999
    I'll just ignore the rest of superdave's drivel since the point of his crap still comes down to this: superdave still believes that the federal income tax in any way shape or form helps to "balance out" the regressive taxes in place for local and state governments. That's why he will continue to sound like a "special kind of retarded."

    They don't, and if you believe that they presently do, then go check the facts, and then come back when you can add something intelligent to the discussion.
     
  16. superdave

    superdave Member+

    Jul 14, 1999
    VB, VA
    Club:
    DC United
    Nat'l Team:
    United States
    Nutmeg...are you saying that the federal income tax does NOT act as a counterweight to other aspects of tax receipts in this country that are regressive? That's what it sounds like, but that's like saying the sun doesn't counter the effects of the freezing void of most of the rest of the universe.
    Iceland? The land of Bjork and elves? ;)

    I wonder how useful it is to compare the US to other nations, because of the federalism here. I'm just raising the question, because I don't really know, but states and cities and counties spend aLOT of money here. I don't know how many other places in the world that is such a big factor.
     
  17. monop_poly

    monop_poly Member

    May 17, 2002
    Chicago
    We who work in Byzantium would like you to know that a simple tax code would, almost by definition, mean a greater amount of flexibility in defining taxable income and would open loopholes like a can-opener.


    Iceland also has a VAT rate of 24.5%, among the world's highest, if not right at the top.

    http://www.deloitte.com/vc/0,1639,sid%3D2959%26cid%3D5042,00.html

    This funds a whole panoply of public social services that benefit all members of society and likely benefits the bottom (who might not otherwise have access to quality health care and public education) more than the top. Without looking, I daresay that Iceland has wealth taxes as well that skew your representation of its individual income tax system as flat.

    The arguments presented for/against a flat tax so far have only looked at the revenue side of the equation and not the distribution of governmental services funded by its revenues.

    But please, feel free to oversimplify the case and include Iceland's scheme for fiscal and social welfare policy as the next American model. I doubt you'll like the decidedly non-Republican result.
     
  18. monop_poly

    monop_poly Member

    May 17, 2002
    Chicago
    This is not correct. A publicly traded C corp is regulated by the SEC while your average LLC is subject to very little regulation. It is the highly regulated environment (Enron case notwithstanding) that enables corporations and other publicly traded entities (REITs / master limited partnerships) to raise money from numerous and widely divergent investors and maintain some *cough* integrity in the financial system.

    But this is an aside. I was just answering your question about the taxation of pass-through entities like partnerships and LLCs.
     
  19. edcrocker

    edcrocker Member+

    May 11, 1999
    Given present circumstances, we definitely should have a highly progressive federal income tax. There are many projects and programs that should be funded with federal tax dollars. (Some examples: health care, education, infrastructure, science and technology, environmental protection, Social Security, welfare, food stamps, transportation, housing, foreign aid, UN dues, and perhaps farm subsidies.) Let's take education.

    If we use federal dollars to fund education (e.g. increase teacher-salaries in low-income neighborhoods and engage in new school construction), then it probably would be, in general, significantly easier for people to be educated than it would be if we do not use federal dollars to fund education. It is important that everyone has a good education. Second, although the consequences of deficits (even longer-term) are often not nearly as bad as many politicians are making them out to be, it’s important not to have a huge long-term federal budget deficit. For one, we, as a country, have an obligation to pay back (with appropriate interest) those people who buy US treasury bonds. Those who buy treasury bonds do so with the understanding that they will be paid back in full -- plus interest. Moreover, the amount of money the federal government would generate with a 15% flat income tax probably would be much less than with a progressive income tax.

    So, what kind of progressive income tax should we have? I’ll sketch some initial ideas. First, just for clarification, here is a quote from Eric Tyson’s Personal Finance for Dummies: “Your marginal tax rate is the rate of tax that you pay on your last or so-called highest dollars of income.” For example, if you make $ 1 million dollars per year, your first dollar is going to be taxed a lower percentage than each dollar you make over $271,050.

    Here were the marginal income tax rates in this country prior to the Bush tax cut (The Tax Relief Act of 2001):

    Single Taxable Income (Rate)
    Less than $24,650 (15%)
    $24,650 to $59,750 (28%)
    $59,750 to $124,650 (31%)
    $124,650 to $271,050 (36%)
    Over $271,050 (39.6%)

    Married-Filling-Jointly (Rate)
    Less than $41,200 (15%)
    $41,200 to $99,600 (28%)
    $99,600 to $151,750 (31%)
    $151,750 to $271,050 (36%)
    Over $271,050 (39.6%)

    All other things being equal, our federal government would generate much more revenue with a highly progressive income tax than it would with a 15% flat tax.

    But the libertarian responds: “But not all other things are equal! The 15% flat tax will cause so much more employment, productivity and innovation than the kind of income tax that I am proposing that the federal government would actually generate more revenue with the 15% flat tax.”

    However, that is highly unlikely. I cannot try to show why at the moment.

    On a different note, there was at least one good thing (and maybe only one good thing) about the Bush tax cut, namely it created a new tax rate, 10% for the first 12,000 of taxable income on a joint return, $6,000 for singles, $10,000 for heads of household, and $6,000 for married persons filing separate returns (www.taxplanet.com). People who earn $20,000 per year shouldn’t pay much, if anything, in taxes. Each dollar they earn is important in terms of their ability to have a good human life. In contrast, people who earn, say, 100 million dollars per year should pay a high percentage of each dollar he earns over, say, $500,000. At least 60%. At least to see what would happen, I probably would put their highest rate up to 90%. Maybe even higher. Why? If they are taxed that much, they still have ample opportunity to live a good life. An extravagant life, even.

    Moreover, the money they are being taxed should be used on some of the initiatives that I mentioned. If, however, the money were to be used to put golden toilets in restrooms off of Interstate-70, then, obviously, they shouldn’t be taxed that much. So I’m making two key claims. First, we should have a highly progressive income tax. Second, we should use that money on important initiatives such as health care and education.

    So, when politicians debate whether taxes should be increased or decreased, we should try to change the debate. That is, taxes should be increased for some people and decreased for others. When Ronald Reagan debated Walter Mondale, Reagan was adamant that he would not raise taxes. Mondale said he would raise taxes. Working people saw this and said, "I'm voting for Reagan. I don't want my taxes raised." This was one of the causes of the phenomenon known as "Reagan Democrats" -- working people who were registered Democrats who voted for Reagan. Future Democrats should try a different approach than the one used by Mondale. They should say, "I'm going to raise taxes for some people, those who are high income-earners. And I'm either going to cut -- or at least not raise -- the taxes of other people."

    For an illuminating discussion of taxes and justice, I recommend the book The Myth of Ownership: Taxes and Justice by Liam Murphy and Thomas Nagel. Although the philosophical justification they offer for their proposals is problematic (I cannot explain why at the moment), the book is interesting, clear and reasonable.
     
  20. edcrocker

    edcrocker Member+

    May 11, 1999
    It does seem like some acts clearly are unfair. For instance, it was unfair for Hitler to gas the Jews. It would be unfair if a person who makes $15,000 per year were taxed 100% of his income, especially if a person who makes 1 billion per year were taxed 0% of hers. So, the premise that a flat tax would be unfair should not be immediately rejected as an unreasonable premise.

    I didn't know that Rawls wrote that. Interesting. Where did Rawls write this? Obviously, that Rawls wrote this is not important to whether we are justified in inferring that we should have a flat tax. Rawls didn't know much about the mechanics of taxation. Also, all humans sometimes present inadequate ideas. For example, although Newton was a great scientist, we are not justified in believing his assertion that the universe is about 6,000 years old.
     
  21. Nutmeg

    Nutmeg Member+

    Aug 24, 1999
    Thanks for the tip. I'll have to check this one out.
     
  22. Manolo

    Manolo Moderator
    Staff Member

    May 14, 1997
    Queens, NY
    No. In fact, my example strongly supports my conclusions, because you can clearly see the effort by Microsoft to avoid a breakup by its pattern of increasing political contributions over the past few years.

    However, at the same time, it's important to recognize that the extremely wealthy don't always agree on political issues, so there can be a counterbalancing effect of the various special interests that support opposing sides of an issue.


    If the progressive tax system had been a complete failure, then companies like Microsoft, GE, and Citigroup would wield MUCH more power than they already do. The progressive tax system has worked to curb these conglomerates political influence somewhat, but not enough in my opinion, and ever since Bush came to office, their hold has steadily increased and promises to keep increasing.

    My solution would be to strengthen the progressive tax system, enforce campaign finance reform, and other measures to curb the power the owners of these corporations wield. For all of Nutmeg's theorizing, I don't see how scrapping the progressive system with a flat tax would accomplish this.


    You're obviously not reading my posts. I keep saying that the very wealthy use a number of mechanisms to shield income from taxation, and the complexity of the tax code has necessarily resulted from this. How are you going to simplify the tax code by enacting a flat tax, and simultaneously expect that legal maneuvers for avoiding income will somehow disappear? Legal maneuvers to shield income will exist regardless of the tax system that is in place, so what magical element does a flat tax
    propose that will somehow eradicate the ability of lawyers and financial gurus to escape it?
     
  23. Dan Loney

    Dan Loney BigSoccer Supporter

    Mar 10, 2000
    Cincilluminati
    Club:
    Los Angeles Sol
    Nat'l Team:
    Philippines
    I'll be holding my breath.

    If not mine, then someone else's.
     
  24. Gamblor

    Gamblor New Member

    May 17, 1999
    http://mason.gmu.edu/~tlidderd/104/ch25Lect.html

    Tax Structures
    Regressive Tax - tax that, as a percentage of income, declines with increases in income (Lump sum tax, Social Security)

    Proportional Tax - tax that is a fixed percentage of income for all levels of income ("Flat" tax)

    Progressive Tax - tax that, as a percentage of income, increases as income increases (U.S. personal income tax)

    -----------------------Regressive Tax--------------Proportional Tax--------------Progressive Tax
    Income----------|--$1,000-----$10,000--------|---$1,000-----$10,000 ----------|----$1,000-----$10,000
    Tax Paid--------|-----$100---------$100 -------|------$100------$1,000 -----------|------$100-------$2,000
    Avg Tax Rate--|------10%----------1% -------|-------10%---------10%------------|--------10%--------20%-

    Marginal Tax Rate - the tax rate that applies to each additional dollar of taxable income ( = change in taxes paid / change in income).

    Regressive tax system: marginal tax rate < average tax rate
    Proportional taxes: marginal tax rate = average tax rate
    Progressive taxes: marginal tax rate > average tax rate
     
  25. Colin Grabow

    Colin Grabow New Member

    Jul 22, 1999
    Washington, DC
    This is nonsense. Even the left realizes this, which is why Bill Bradley was one of the chief proponents of the 1986 Tax Reform Act that reduced marginal rates in exchange for the closing of loopholes that are are inefficent and promote rent-seeking.

    It's always amusing when I see tax preparers railing against the flat tax. When H&R Block was passing out anti-flat tax literature at their offices several years ago when the issue was more prominent I figured it was some of the best evidence that a flat tax is needed.

    Thank you for pointing this out. Not only does Iceland not use a progressive tax system, but it relies heavily upon a VAT -- a tax that is inherently regressive as a tax on consumption.

    After all, that was the topic at hand -- the usefulness of progressive taxation in thwarting domination of the public interest by the rich. You have helpfully pointed out that Iceland is even more non-progressive that I had originally stated.
     

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