Around this time of year, I always get in little tiffs with friends over "flat" taxes. Natch, the "fairness" club is hauled out early and often.
Kevin Drum's got it right: (in reference to this article in the National Review.)
But what really gets me is how they always present these things as if we need a flat tax because the tax code is too damn complex. Well, the tax code is too damn complex, but the least complex thing about it is the part where you look up your adjusted gross income in the tax table to figure out how much you owe. The complex part is figuring out your adjusted gross income in the first place, something that has nothing to do with whether the tax rate for millionaires is higher than the tax rate for those at the poverty line.
It is columns like this that cause me to lose patience with the tax jihadists on the right. It is dishonest to pretend that flattening tax rates has any connection to simplifying the tax code. It is dishonest to pretend that a flat income tax is "fair" while conveniently forgetting to suggest the same for Social Security taxes. It is dishonest to pretend that "income" is the same for everyone while failing to even mention capital gains, tax shelters, corporate perks, deferred compensation, pension contributions, stock options, or the thousand other options the wealthy have for making money that doesn't quite count as "income." It is dishonest not to mention that simple arithmetic guarantees that any flat income tax proposal would raise taxes for practically every middle class family in the country.
Semi-related: Back in December, this Plastic article really drove the point home with me about what's wrong with our current (er, uh, Republican) tax policies (which aren't flat, but getting there):
Posted by schmeeve at April 16, 2004 10:49 PM | TrackBack(I'm quoting a comment from "esmense" in it's entirity... it's worth the read)
The basic misunderstanding about taxes is that they are a transfer of money between individuals. From "the rich" to "the poor." From "the productive" to the "unproductive."
But, in reality, what taxes are is a transfer of resources between generations.
The reason this is misunderstood is because most people overlook one extremely important fact; in most societies, and most especially in broadly middle class societies (as ours once was, although it is becoming less so), the factor that most explains disparities in wealth is age.
Older people, in general, are richer than younger people. They earn more, and they possess more assets, including income producing assets.
The reason for this is obvious — it takes time and personal investment to create personal wealth; investments in education, training, investment in time to acquire valuable skills and experience, investment in establishing a home, raising a family, acquiring property, building a business, etc.
This is why the average income of male earners under the age of 30 is only a fraction of the average income of males in their early 50s — the peak earning years. It is also why about 85% of all asset wealth in this country is in the hands of people 55 and older.
So when you talk about "the rich" you are, in fact, mostly talking about mature earners; in their peak earning years, with — because they have already made their most important investments in acquiring personal assets, rearing their families, etc. — the most disposable income (income they can afford to further use for financial investment.)
And when you talk about "the poor" you are, in general, talking about the young. Those who have both lesser incomes, lesser disposable income, and, a greater need to expend their income on personal investments — the acquistion of eduation, tools, property, businesses, the establishment of a home and family, etc. — that can pay off for them and their dependents in the future.
Progressive taxation takes this basic, human reality into account in a way that notions like the flat tax do not.
In the normal course of events, progressive taxation allows young people — in the asset and wealth acquiring and personal investment stage of life — to DEFER their heaviest tax burden until the years when those investments have begun to pay off. While, at the same time, allowing the society as a whole to build, maintain and support the PUBLIC resources that contribute to, and are, in fact, necessary to, the accumulation of personal wealth; the educational, cultural, physical and social and commercial infra-structure of the society and the economy.
Conservatives argue that progressive taxation is "unfair" because it penalizes people who work hard and are successful. But, a flat tax system is equally "unfair." Because it must, inevitably, steal either public or personal resources, and most likely both, from the young — those in the wealth accumulation stage of life who have the least assets and resources for creating wealth, and yet, the most need to do so — in order to protect the wealth already acquired by their elders. (The word "fair" really has no place in a discussion of taxation. There is nothing fair about taxes and in reality no way to make taxes so. What benefits some must inevitably penalize some others. In discussing taxes, we need to talk about priorities, but, should leave "fairness" to the Girl Scouts. Unfortunately, we don't do so.)
This penalizing of the young becomes especially "unfair" when you consider that this generation of elders — those of the Silent and Boomer generation — enjoyed the benefits of both a highly progressive tax system, that gave them a very minimal tax burden, AND substantial, if not unprecedented, public investment, in their own youth.
But now that that THEIR bill is coming due, they are once again deferring it — only this time, through massive deficit — onto their children and grandchildren.
Is this what The Hall-Rabushka flat tax is?????
In the early 1980s, Robert Hall and Alvin Rabushka of the Hoover Institution developed a consumption tax system that achieves some of the administrative advantages of a value-added tax (VAT) relative to a sales tax, while also partially addressing concerns that consumption taxes impose a relatively heavier tax burden on lower-income taxpayers. The Hall-Rabushka system is often called the “flat tax”: It assesses a 19 percent tax on all businesses (corporate or otherwise)—identical to the VAT, except that wages, pension contributions, materials costs, and capital investments are deducted from the tax base. Individuals (or households) are assessed a 19 percent flat-rate tax on wages and pension benefits above an exemption of $25,500 for a family of four. No other income is taxable, and no other deductions are allowed.
The Hall-Rabushka proposal has served as the blueprint for several proposals to reform the federal tax system, including a proposal introduced by Representative Richard Armey (R-Texas) and Senator Richard Shelby (R-Alabama) and one offered by presidential candidate Steve Forbes (R) in the 1996 presidential primaries. In comparison to the Hall-Rabushka proposal, the personal income tax in 1994 provided exemptions of $9,800 for a family of four, an earned income tax credit (EITC), and the choice of a $6,350 standard deduction or itemized deductions for mortgage interest, state and local income and property taxes, charity, and large health expenditures. Estimates indicate that in 1996, a family of four taking the standard deduction and the EITC, with all income from wages, would pay no federal income taxes on the first $23,700 of income, 15 percent on the next $31,000 or so, 28 percent on the next $53,000, and higher rates on additional income, reaching 39.6 percent on taxable income above $250,000. Without the personal exemptions, the flat tax would be equivalent to a VAT, but with taxes on wages remitted by households rather than business.
That is, the flat tax would be a consumption tax, even though it would look like a wage tax to households and a variant of a VAT to most businesses. Therefore, other than the exemptions, the economic effects of the flat tax should be essentially the same as those of a VAT or a sales tax. The family exemptions make the flat tax progressive for low-income households. But at the high end of the income distribution, the tax is regressive, just like sales taxes and VATs. The Hall-Rabushka proposal could be amended in several ways.
Princeton economist David Bradford has proposed an X-tax similar to Hall-Rabushka but with graduated tax rates on household wage income to raise progressivity. (The business tax would be set equal to the highest tax rate on wage income.) The flat tax could also be modified to retain the EITC, allow a deduction for charitable contributions, and provide a tax credit (a one-to-one reduction in taxes paid under the flat tax) for payroll taxes paid. The credit would be a huge boon to lower- and middle-income households, because most now pay more in payroll taxes than in income taxes. These changes would, of course, require higher rates. But a tax system with these features might be able to retain the progressivity of the current tax system while also reaping most of the gains of the Hall-Rabushka proposal’s broader base, generally lower rates, and simplified compliance. The question remains, though, of how large these gains would be.
Nitish Tewary
How is X Tax theory different from that of Hall-Rabushka proposal of Flat Tax.
Can anyone please provide me with a detail of Dr. Bradford's proposal and the difference of the proposal from flat tax rate.
NITISH TEWARY
Posted by: Nitish Tewary at September 28, 2004 4:26 AMI haven't read all of them, no. But I will tell you this much -- anything that exempts capital gains and interest income is utter bullshit.
If I'm a rich dude, I'm gonna take all my compensation in stocks, bonds, and corporate perks and end up owing less tax than that $80,000-a-year household of 4 "across the tracks." Thinking Bill Gates is going to pay $212M in taxes a year under a flat tax is ludicrous. He's simply going to shift to "non-income" compensation, as will everyone else in a position to do so -- the super rich, in other words.
Even Robert Hall and Alvin Rubushka, the two professors at Stanford whose proposal you're referencing, have admitted that lower taxes for the rich will have to be made up by higher taxes on upper-middle income folks. Those making $80,000 to $200,000. This lack of focus on the middle is disingenuous.
I'm no tax expert, but I ain't talking outta my ass either. :-)
Posted by: schmeeve at April 19, 2004 10:55 AMThere is only one problem for you. A flat rate tax with a deduction is a progressive tax in that the effective tax rate increases with income.
Also, all taxes impose distortions on the economy (well okay with lump sum transfers you can sometimes avoid distortions, but such transfers tend to be hugely unpopular). The question is how much do these distortions "cost" and will a system that isn't as progressive be better when you take such distortions into account.
What you are ignoring is that most flat rate tax proposals have very large standard deductions (e.g., the Hall and Rabushka proposal had a $25,500 deduction for a family of four). For young people with lower incomes this could very well mean a reduction in taxes, espcially since such people typically do not own homes and get that sizable known as mortgage interest.
Your entire post strongly hints that you have not read flat rate tax proposals. I think before you criticize something you should familiarize yourself with it first.
Posted by: Steve at April 19, 2004 9:58 AMUgh, that NR article..I feel like the GOP has touched me inappropriately, again. Blah blah blah, pat catchphrases, blah blah, specious comparison, blah blah blah, sneak helping of bullshit statistics, blah blah blah, broken simile, blah blah, don't be like the FRENCH!
Heritage Foundation expert, feh.
I still say the problem is not that the tax system is broken, I suspect it'd work fine..if everybody got the same rulebook.
Posted by: michael at April 17, 2004 10:11 AM