Fat Facts About Flat Tax

Perhaps the best thing about Herman Cain's 9-9-9 is that he could use the Beatle's White Album in a campaign commercial. The second best thing is that it has Republicans talking about a flat tax.

The flat tax is so obviously a good idea that one can assume that it can never be enacted. A marginal flat tax would replace the entire U.S. tax code with a simple calculation. Taxpayers at every level would be entitled to some simple deductions and/or exceptions. Beyond that all income would be taxed at the same rate. Below a certain level of income, there would be no tax liability. 

The proposal is obviously a good idea for two big reasons. One is simplicity. Rick Perry advertized the idea when he said that your tax form could be no bigger than a post card. Put in your total income, subtract the deductions and exemptions, and then calculate the rate. Not only would that be shockingly easy, but it would relieve the economy of a great burden. Individuals and corporations spend billions every year just to pay their taxes. They employ a vast army of lawyers cum accountants to do it. A genuine flat tax would release the wealth and time consumed to be used for other purposes.

The second great advantage would be transparency. Under the current, Rube Goldberg tax regime, it is difficult to tell what percentage of income an individual or corporation really pays. Thus we spend a lot of time arguing about rich guys and corporations that pay no taxes, with little idea of who really pays what. Under a genuine flax tax, we would know that, after deductions, if one fellow makes a hundred times what another fellow does, the former pays a hundred times as much in taxes.

Another, perhaps more important kind of transparency would come from the fact that everyone who actually pays taxes would know exactly how much the federal government is costing him or her. She and he would share a proportional part of the burden for it. Knowledge is power, or so I have been told.

If it is such a good idea, then why isn't everyone for it? The most honest objection to the flat tax is that it is not progressive. Progressive taxation is designed to take progressively bigger bites out of the income of richer people. This is intended to reduce inequality between the very rich and the rest of us. Does it in fact do this?

It is true that under the current system, the wealthiest 5% pay more than half the income taxes. However, as the recent, celebrated CBO report on income equality demonstrates, that has done little if anything to stop growing income inequality. Perhaps a genuinely punitive rate of taxation would make a genuine difference, but experience suggests otherwise. At a certain point, wealth flees or hides and becomes unavailable for any useful purpose. Whatever progressive taxation accomplishes, it does not and probably cannot reduce income inequality.

A flat tax would save billions and make the tax system transparent to everyone. There is very little chance that it will ever be enacted. The reason is that the billions wasted on the current system represent very large vested interests. All the countless tax lawyers would have to earn an honest living. Charitable foundations would have to depend on charity, instead of greed disguised as charity. Congress would no longer be able to fundraise by manipulating the Byzantine tax code.

The Left will pull out all stops to prevent it because they will never give up the idea of progressive taxation. In this way, the Left serves the interests of the 1% while it cries about unfairness and inequality.

Still, it is good to raise the question. One can never know for sure what is possible. We can thank Herman Cain for thinking large.

Comments

[Matt S]

Could be the best ten paragraphs you have ever written.

[Donald Pay]

I am tempted to say that the flat tax would just about be the last nail in the coffin of the lower and middle classes, but it probably would bring on the revolution that would end up redistributing all the wealth at the top. So maybe I could support it on that ground alone.

Anyway, I don't like to waste my time debating an issue that has absolutely no chance of ever passing. I haven't noticed the Republicans in Congress rushing to hold hearings on any sort of flat tax, so this is just another circle jerk discussion that gets the right all hot and bothered. There's enough information about the devastating effects of a flat tax. That's about the only thing that's transparent about it.

[caheidelberger]

As Ken notes, when that "vast army of lawyers cum accountants" read Ken's "release the wealth and time consumed to be used for other purposes," they hear "unemployment."

Curious: does the Blanchard Equitable Flat Tax include taxing all that capital income that I thought I heard Cain's proposal would exclude and which contributes significantly the wealthy's ability to concentrate wealth?

[Stan Gibilisco]

"A flat tax would save billions and make the tax system transparent to everyone ... All the countless tax lawyers would have to earn an honest living ... Congress would no longer be able to fundraise by manipulating the Byzantine tax code."

Ken, I disagree. I believe that the vested interests would eventually get all the weird loopholes and knots put in a new flat tax system, as now exists in the progressive system.

Why can't we strive for a progressive system with a tiered structure similar to the one we now have, but tirelessly chisel away at the loopholes and knots? It's not too hard to figure out one's tax bracket on the return; nobody really needs an accountant for that. If I'm not mistaken, Mitt Romney takes that view, more or less. Leave the main structure the same; tweak the corners. I think Romney knows that that's the only solution that really has a chance of passing into law.

The trouble comes in when we get to a situation like mine will be in the tax year 2011. I have a rental property on which I have made improvements. I might sell it before the end of the year to the current tenants on a contract for deed. In early 2012 I'll have to go to an accountant and say, "I have no clue as to how to figure out this part of my return. Everything else I can do. This I can not only not do, not solve, but I don't even know if a single clear-cut solution exists."

In regards to all the current tax-reform debate, I fear that by opening up the can of cooties known as the "national sales tax," Cain has begun to survey the route that will ultimately lead to a 15- or 20-percent, job-killing, incentive-crushing value-added tax (VAT) on top of, not instead of, the nighmare we already have. Even Bill O'Reilly has fallen victim to the "small national sales tax that will never go up" idea.

I place some hope in the possibility that by opening up the discussion of a flat tax and particularly of a "national sales tax," we can bring all their ugliness and all their unfairness out into the light of day, where the sunshine of truth will wither them up, and the storms of scrutiny will blow them away.

[duggersd]

Part of Cain's plan on the national sales tax includes requiring I believe a 2/3 vote in order to raise it. I am not saying it cannot happen, but it would be very difficult. You make a good point about the special interest loopholes. The biggest problem we have is in order to get something like this going, someone is going to have to give up power. The ability to tax/punish someone is very tempting indeed. Interestingly, on the one hand you say that we should just "tweek" the current system and get rid of loopholes, but then make the argument that loopholes would show up in a flat tax.

[Stan Gibilisco]

Dugger,

You caught my contradiction -- or apparent contradiction.

When I say that loopholes would likely creep into a flat tax, I express cynicism in my believe that special interests will prevail. When I say that we should tweak the existing system, I express hope that it can in fact be done.

I would have done better to say that we should +try+ to tweak the present system.

Ken says:

"If it [the flat tax] is such a good idea, then why isn't everyone for it? The most honest objection to the flat tax is that it is not progressive. Progressive taxation is designed to take progressively bigger bites out of the income of richer people. This is intended to reduce inequality between the very rich and the rest of us. Does it in fact do this?"

Let me completely twist that around into an argument against a progressive tax structure:

"If it [the progressive tax] is such a bad idea, then why isn't everyone against it? The most honest argument in favor of the progressive tax is that it is less regressive than a flat tax would be. Regressive taxation tends to take proportionally bigger bites out of the income of poorer people. A regressive taxation system is believed by many to exaggerate inequality between the very rich and the rest of us. Would it in fact do this?"

I believe that it would.

[Stan Gibilisco]

Ach! I meant to say, "Let me completely twist that around into an argument +for+ a proressive tax structure."

[Ken Blanchard]

Cory: income is income.

[Ken Blanchard]

Matt S.: I hope not, but thanks.

[duggersd]

Stan, the reason everybody is not against the progressive tax is because someone who is not paying 35% in taxes does not have a problem with someone else paying 35% in taxes. Considering the fact that 1/2 of the people in this country do not pay anything in taxes, why would they want to see a change? Even with the flat tax as proposed by Perry, many of those people would not pay anything in taxes with the exemptions allowed.
Personally, I believe one of the reasons for the problem is there are too many people who do not pay anything in taxes (payroll taxes are not truly taxes). If even the smallest wage earner had to pay a portion of income into taxes, I suspect some of those people would be more concerned with how all of their money is being spent.

[Stan Gibilisco]

"Personally, I believe one of the reasons for the problem is there are too many people who do not pay anything in taxes (payroll taxes are not truly taxes). If even the smallest wage earner had to pay a portion of income into taxes, I suspect some of those people would be more concerned with how all of their money is being spent."

I agree completely.

Unfortunately, there seems to be an increasing interest in a "cure that's worse than the disease" for this situation: a new "national sales tax" on top of all the other taxes we have now. The argument seems to go like this: People could not escape a "national sales tax" (although they could evade it, which is why it would quickly evolve into a VAT). No matter what loophoes, exemptions, and deductions might creep into the income tax code, a VAT, if applied to everything, would ensure that everyone pays something.

It would also cause an entirely new bureaucracy to spring up, with a whole new bunch of paperwork for every business in the country, and would get rid of any incentive for simplifying the rest of the tax code. The result: a horrible mess, considerably worse than the mess we already have, and some marginal tax rates well over 50%.

I say stick with the progressive tax but get rid of most of the deductions, exemptions, and loopholes. I thought the Simpson-Bowles plan got it pretty close to the bull's eye in terms of what would do the least harm to the smallest number.

A couple of years I actually did get up into the 35 percent bracket, but did not have to pay Social Security self-employment tax on that extra income, and that cut the effective rate by 15 percent, down to 20 percent of every additional dollar. If we have to raise revenues, I'd suggest getting rid of the cap on the Social Security tax, lowering its rate somewhat, and then getting rid of the personal exemption in the income tax. There's gotta be a way; it's not that people can't do it, it's that too many people don't want to do it.

As long as we remain a country largely made up of folks who won't budge from their positions, won't compromise, we'll be like a big population of rats so stupid that they don't even know enough to jump off the Titanic before they all drown.

[Donald Pay]

Yeah, the talking point of the right is that 46 percent of people don't pay federal income tax, but when you might want to drill down into the data and the link below will help. Just to summarize:

(1) 22% of people who don't pay federal income taxes are citizens with only untaxed social security payments as income. Is it the position of conservatives to tax Social Security benefits? Has any conservative in Congress introduced that bill?

(2) 15% of people who don't pay federal income taxes are low-income families taking the earned income tax credit, the child credit, and the childcare credit.
Generally these credits go to low-income families with children to encourage work. The earned income tax credit was a Republican initiative. Which of these tax credits have been targeted for elimination by conservatives? Please provide bills.

(3) about 50% of people who don't pay federal income taxes because the standard deduction and personal exemptions zero them out.
Are conservatives putting in a bill to eliminate the standard deduction and personal exemption?

(4)that leave a little under 10 percent of people who don't pay federal income taxes who can use other credits and loopholes to get out of federal taxes (these people are usually well-to-do)
Since these exemptions are usually on what the conservatives like to call "the job creators," I assume they do not want to eliminate these credits and loopholes.

http://www.taxpolicycenter.org/UploadedPDF/1001547-Why-No-Income-Tax.pdf

I lived in a low-income neighborhood in Rapid City and knew plenty of social conservatives who were low-income. Many believed very strongly in pro-life issues, followed their beliefs about "going out and multiplying," and who were not wealthy. They used many of the tax credits you look down your nose at. You might want to think about the implications of your tax policies on the families you still have in your base, because if they really understood how anti-family you are, they might reconsider which party they identify with.

[Stan Gibilisco]

Well, Donald, I will concede a certain bias.

I get the personal exemption and the standard deduction, as everyone does. Other than that, I get almost no deductions.

I've paid off my mortgage, so I can't deduct any interest on that.

I'm a confirmed "lone wolf" bachelor -- no dependents other than myself -- so I can't take any deduction of that sort.

I don't have any disabilities and (so far) no medical bills, so I can't deduct any of that stuff either.

The only deductions I get come on my Schedule C which I file as a self-employed writer; but with the ascendency of computers and the Internet and my co-mingling of work and leisure, those deductions amount to only a small percentage of my gross income.

I do pay both the employer's and employee's portions of the Social Security tax, along with Medicare taxes for a total of something like 15.3%, which clobbers me from the first penny.

I don't think I have ever had a year that I paid no tax, except 1982 which was my first year as a writer, and for which I sustained a loss, not income.

Maybe all of the foregoing factors explain why plans such as Simpson-Bowles appeal to me. You know, the best tax is the one that somebody else pays! Under the Simpson-Bowles plan, I wouldn't get hit by the elimination of deductions that I can't claim now. And the lower rates would in fact increase my net take. Yes, I do have some selfish bias, after all. Shame on me.

One thing that a lot of folks overlook about the flat tax is the fact that in most plans, there's a pretty large exemption, in some cases upwards of $15,000 a year. Yet, the flat tax still does favor the rich, IMHO, and would, I suspect, widen the wealth gap. That's the main reason I'm against it.

Donald, I've never really thought of myself as "anti-family," but I do know enough about myself to realize that I ain't the papa type. Maybe I should get a dog. though. Them critters, for the most part, really love me. But first I have to find a way to get at least 40 acres for old Draco to run around on ... could I deduct him as a dependent?

[Dave]

Talk about hiding in plain sight...

"Put in your total income, subtract the deductions and exemptions, and then calculate the rate."

Not quite so flat anymore...

I can't help but think about all those extraordinary high earners with all their extraordinary "deductions and exemptions"... Like that'd be a change...