Thursday, December 9, 2010

The Flat Tax: A Bad Idea Whose Time Will Never Come

When the Republicans assume control of the House next month, they will undoubtedly start talking about tax "reform." At least some Republicans will push for a flat tax, a notion embraced in its essence by the misbegotten Deficit Commission's recommendation of a greatly flattened tax. Sounds fair and sounds tantalizing doesn't it? Everyone regardless of income pays a the same rate -- the typical proposal is 15%, although one-time presidential candidate Steve Forbes pushed for 10%. Just about everyone's bracket drops, and we all live happily ever after. What could possibly be wrong with this picture?

Lots, as it turns out. For one thing, the flat taxers never take the deficit into account. We'll see why that's important in a minute. For another, just because your top rate is, say, 25%, doesn't mean that you pay 25% of your income in taxes. Remember that the current tax system still has vestiges of progressivity, so if you file singly and earn 50K -- which puts you in the 25% bracket -- your actual income tax paid is less than 10% before deductions. That's because only the income that exceeds 34K is taxed at 25%.

Consider these five taxpayers, all filing singly:

A: Earns 20K, pays $2,581 or 12.9% (.1% of all taxes paid)
B: Earns 50K, pays $4,681 or 9.4% (.2% of taxes)
C: Earns 100K, pays $13,609 or 13.6% (.7% of taxes)
D: Earns 500K, pays $139,616 or 27.9% (7.4% of taxes)
E: Earns 5M, pays $1,714,616 or 34.3% (91.4% of taxes)

The total tax revenue is 1.875M. Let's posit that by some miracle we have a balanced budget and that expenses equal revenue. And let's remember that in the real world, there are a lot more B's and C's than anyone else (millions more than E's), meaning that their share of the total tax burden is much higher.

Now, consider the effect of a flat tax of 15%

A: pays $3,000 (.4%)
B: pays $7,500 (.9%)
C: pays $15,000 (1.8%)
D: pays $75,000 (8.8%)
E: pays $750,000 (88.2%)

Notice what has happened here. Taxpayers A, B, and C are paying more, not less, taxes. Moreover, the tax burden lowers for only one of these taxpayers (if you think it's the one most like Steve Forbes, you get a gold star); it increases for everyone else. And don't forget: The actual distribution of taxpayers means that B and C -- the middle class, in other words -- will wind up absorbing the brunt of the shift in burden.

And, it gets worse. Under a progressive system, these taxpayers raised and spent 1.875M. Under a flat tax, they raised 850K, meaning that they have to cut expenditures by 1M or create deficit. And the deficit is apportioned equally. Thus, the low income taxpayer who makes 20K must shoulder 200K of the deficit, putting himself 183K in debt (including his 3K tax liability). But taxpayer E can absorb his share of the deficit easily: In fact, his share plus his 15% tax liability comes out to less than his tax bill under progressive taxation and a balanced budget. In this scenario, a balanced budget works against him.

Which is why Republicans talk big about a balanced budget and do little. The malefactors of great wealth that bankroll Republicans from the leadership to the teabaggers not only care little about a balanced budget, they don't want one. Balancing the budget inevitably means raising taxes progressively, and the Koch brothers, Jamie Dimon et. al. would rather have the middle class crash and burn than face the prospect of actually contributing to society. So they oppose government with one hand while seeking to master it with the other.

4 comments:

RealityZone said...

Come January they will want to start paying for the Obama tax cuts.
Social services will be first in line.
They will come after Soc. Sec. the first chance they get.
Austerity will come to America sooner than later.

Darlene said...

Great Research. I wish everyone who embraces the flat tax idea had to read it. Of course, the beneficiaries of the flat tax don't want anyone to know this information. They don't need to read it because they designed it.

Foxessa said...

http://www.rawstory.com/rs/2010/12/deal-raises-taxes-poorest-earners/

Obama-GOP deal raises taxes on poorest earners

By Daniel Tencer
Wednesday, December 8th, 2010 -- 5:50 pm

Obama GOP deal raises taxes on poorest earners

Quarter of tax savings will go to richest one percent

The plan to extend Bush-era tax cuts that President Barack Obama struck with
the Senate Republican leadership will result in lower taxes for wealthy and
middle-class Americans but will mean a tax hike for the very poorest
earners.

According to an analysis in the New York Times, the Obama-GOP deal will mean
that individuals earning less than $20,000 and families earning less than
$40,000 will see a small tax hike.

"It will come to a few dollars a week," Roberton Williams, an analyst at the
Tax Policy Center told the Times. "But it is an increase."

As part of the deal, Obama agreed to drop the Making Work Pay credit that
was created as part of the stimulus package, and replace it with a lower
payroll tax. That lost credit -- of $400 or $800 -- is greater than the
amount low-income earners will save from the lower payroll tax, meaning, in
total, they will pay more.

Of the estimated $900 billion in new and continued tax breaks in the deal,
about one-quarter -- $225 billion -- is expected to go to the top one
percent of earners.

TaraDharma said...

I'm just thoroughly disgusted at our fiscal policies at this point (well, and for a long time). Doesn't ANYBODY understand history? A flat tax would be a disaster.

As it is, with the tax cut extention, I hear we will be paying more on the interest on the national debt than we pay for military spending. Obscene.

I need a long vacation from all this really horrific news.