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My neighbor in the apartment across the way is a good-natured centerist who is very interested in issues of taxation.  He and I often get into discussions related to our tax system and he's brought up the idea of a Flat Tax.  It sure sounds like a good idea: everyone pays the same percentage of their income.  After all, he argues, why should someone making a lot of money pay a higher percentage?

The problem with this idea, of course, is that it's ultimately regressive, taking a more meaningful chunk of money from the least fortunate in our society.  The counter question being, why should someone making only a little money pay the same percentage of their income as someone making much more and is it fair to tax them at the same rate?

Follow me below the fold where I level the Flat Tax in my continuing series Deflating Conservative Arguments.

I've found that a lot of people don't understand how our current progressive income tax system works.  Many people think that the tax bracket you reach on your last dollar in income is the one you pay on all your income.  I've heard people say things like "I got a $2000 raise, but it bumps me into a higher tax bracket" with a disparaging tone in their voice that belies the fact that they'll be making more money.  Fortunately, they won't really be paying the higher rate on all their income.  For example, a single person pays 10% on their first $8500, 15% on their next $26,000, 25% on their next $49,100, and so on.  So if you make $34,000 and get a $2000 raise, you'll be in a new tax bracket, but you only pay the new tax rate (25%) on your last $1500, and your total tax liability will be $5125.  This computes to an effective tax rate of 14.23% ($5125/$36,000).

Okay, so now that that's all cleared up, what about the flat tax?  Even some of my more liberal leaning friends have been suckered in by this one.  The proposal is that everyone pays the same percentage in federal income tax on all of their income, though proposals vary as to what the percentage should be.  In 2008 Senator Lamar Alexander (R-Tenn.) proposed a 17% flat tax rate.  Let's use this as our example because there is simply no concrete proposed rate that flat taxers are rallying around.

As you can already see by looking up at the previous example, a 17% rate is higher than the 14.23% rate that someone making a modest $36,000 pays today.  The break even point is $48,438, meaning everyone making less than that gets a tax increase under a flat tax and everyone making more than that gets a tax break.  Let's look at the lower and upper end of the spectrum for greater relief.  Billionaire hedge fund manager John Paulson (unrelated to former Goldman Sachs CEO and Treasury Secretary Henry Paulson) raked in $4.9 Billion ($4,900,000,000) in 2010.  Though I know this is investment income and therefore subject to the capital gains rate, let's pretend that it was counted as regular income taxed at the normal income tax rates.  If this were the case, Mr. Paulson would be paying an effective rate of 35% under our current system or around $1.715 Billion.  If his taxes were slashed to 17%, he would be paying around $833 Million, a savings of around $882 Million.  On the other hand, a single person with no children living at the 2010 poverty threshold of $11,344 pays $1277 in federal income tax for an effective rate of 11.25%.  If we instate the 17% flat tax, that would raise their taxes to $1928, a hike of $651.

So the question of fairness arises.  What is fair?  Is it just to lower billionaires' taxes by half, but increase taxes on the poorest?  Is it just?  To me, the issue always come back to these simple questions.

So, what is a fair and just way to pay for our society?  I believe that those who make the most money have benefited from the system much more than those who make the least.  The poor tend to stay poor because they have the deck stacked against them from the get go.  If both parents are working and struggling to make ends meet, children are not as able to succeed.  If they live in an economically depressed area, they are likely going to schools that don't have the resources to hire the best teachers or have the equipment necessary to prepare children for college.  If you live somewhere where your life is in constant danger due to high crime (due to poverty), it makes it pretty darn hard to study.  Conversely, the well off tend to become richer because they have safe places to grow up and don't have the added stresses of poverty.  They go to the best schools with the best teachers and the top of the line equipment, live in the cleanest, safest neighborhoods, and have parents who have the resources to help them achieve.  The disproportionate amount of money spent on all of the services that our society provides such as schools and public safety go to the wealthier areas.  This is because their local tax base (or private donations) keep their areas nice because they, as anyone, care deeply for their children and want them to succeed.  The problem is that not everybody starts out at the same place, so to pretend that is the case is just fantasy.

The reality is that we're all in this together and we need each other to succeed.  Because the wealthy benefit more from our society, and the safety and security it affords them, they should pay more to keep our society (and the government that administers it) strong.  It's the only just thing to do.

Cross Posted on Progressive Ideas

Originally posted to Progressive Ideas on Sun May 15, 2011 at 01:31 PM PDT.

Also republished by ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement.

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Comment Preferences

  •  Tip Jar (7+ / 0-)

    "Freedom of the press belongs to the man who owns one." -- A.J. Liebling

    by Ross Lampert on Sun May 15, 2011 at 01:31:00 PM PDT

    •  Update diary to include individual credit (0+ / 0-)

      or income deductions in flat tax proposals.

      Under all of the various flat tax proposals, everyone gets the same tax credit or income deduction which makes a major reduction, or elimination in what lower income households pay in tax or even receive as a credit.

      You do your readers a disservice not including these deductions and credits, as readers relying on this diary will come across as especially misinformed if they repeat what is in this diary.

      Flat taxes can also be progressive, and even more progressive that our current taxes, as this depends upon the rates used, does it also include Medicare and Social Security taxes, what is the size of individual deductions and credits and how individual taxation integrates with corporate taxation and capital gains.

      The most important way to protect the environment is not to have more than one child.

      by nextstep on Sun May 15, 2011 at 02:33:25 PM PDT

      [ Parent ]

      •  I didn't find anything resembling (1+ / 0-)
        Recommended by:
        x

        a unified voice on this issue.  I just found a few things like Freedom Works saying that we need a flat tax and going no further with it.  There really isn't much specific detail on the idea that any group is pushing (at least that I found).  I would've liked to have included the "Fair Tax" proposal in this diary, but I had to wrap it up so I could get to some commitments I had.

        "Freedom of the press belongs to the man who owns one." -- A.J. Liebling

        by Ross Lampert on Sun May 15, 2011 at 07:40:41 PM PDT

        [ Parent ]

        •  Most notable Flat Tax is from (0+ / 0-)

          Stanford Professors Robert E. Hall and Alvin Rabushka.  There book is available as PDF at:

          http://www.hoover.org/...

          Several former Soviet states have used them as consultants in forming their tax policy.

          Fair tax is different from the Flat Income Tax proposals.

          The most important way to protect the environment is not to have more than one child.

          by nextstep on Sun May 15, 2011 at 10:42:24 PM PDT

          [ Parent ]

  •  Doesn't Matter Once We Abandon Protective Taxes (1+ / 0-)
    Recommended by:
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    All the fairness in the world can't save the middle class.

    As long as the highest incomes are allowed to mostly be taken home, no matter how great or how fast they come, the very rich will straightforwardly acquire most of the wealth of society and the middle class becomes mostly working poor.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Sun May 15, 2011 at 01:51:10 PM PDT

  •  Mr. Paulson does not pay a 35% tax rate. The (1+ / 0-)
    Recommended by:
    x

    majority of his income is classified as "carried interest" and subject to a 15% tax rate.  

    "Because I am a river to my people."

    by lordcopper on Sun May 15, 2011 at 02:08:56 PM PDT

  •  The rate doesn't matter if people don't pay it. (0+ / 0-)

    The best argument in favor of a flat tax with no deductions is that it's the only way the wealthy and the corporate types will pay anything. Under the current system they  just hire  someone to find loopholes and pay zero. The middle and lower income earners end up with a theoretically lower burden but actually pay more. Sorry if that sounds cynical, but that seems to be the way things really work.
    In addition, a flat tax with no deductions could make it so that every citizen could fill out their tax return themselves, removing the burden of record keeping and of paying a professional to do your  taxes. (To say nothing of the burden of being audited by the IRS.) Removing deductions would save a great deal of time and stress and remove the perverse incentives to spend money on things that minimize taxes instead of what is actually good for your family or business.  
    Our  current system has been manipulated so that the wealthiest people in the country pay nothing because they have made their pet projects tax deductible, and if  we don't stop that, tinkering with the rates won't change a thing.  

    •  You don't need a flat tax to eliminate (2+ / 0-)
      Recommended by:
      x, Ross Lampert

      the deductions. This can also be done with a graduated tax.  But a graduated tax is also progressive and counters the other taxes (sales, excise, property, payroll etc.) that are regressive.

      •  So has anybody suggested that? (0+ / 0-)

        If anyone has suggested ending deductions outside the flat tax proposals, I haven't heard about it. And if anyone has, I unequivocally support them, whoever they are. I would love to see an end to signing a tax form every year and by doing so swearing that it is correct when in fact I don't understand it. My friends in Britain find or system baffling. Come to think of it, so do I.  

        •  Regular people have suggested this... (1+ / 0-)
          Recommended by:
          x

          but you hardly ever hear this kind of talk from congress critters.  They're too dependent on donations from wealthy individuals to contemplate closing the tax loopholes that keep their patrons wealthy.  I would highly recommend the book "Take the Rich off Welfare".  It goes into great detail about the some of the ways that the wealthy and corporations avoid and evade taxes.  The authors make conservative estimates on how much it would save to close certain loopholes and eliminate waste...as I recall, it was in the billions of dollars back in 2004 (when the book was published) and it's probably much more than that now.

          "Freedom of the press belongs to the man who owns one." -- A.J. Liebling

          by Ross Lampert on Sun May 15, 2011 at 07:51:15 PM PDT

          [ Parent ]

  •  For me, it's quite simple: (0+ / 0-)

    Taxes pay for government services, such as national defense.  That's as far as I need to go for proof that the wealthy benefit more from each tax dollar than the poor.
    It's very simple:  If and when the barbarians DO break down the gates, they won't be heading for the ghettos.

    Kick apart the structures - Seth

    by ceebee7 on Mon May 16, 2011 at 01:10:43 PM PDT

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