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.