The Flat Tax

[Guest Julius Quasar]

Good thing?  Or bad?

For those of you who don't know/recall what a flat tax is:

http://en.wikipedia.org/wiki/Flat_tax

Some say it's a good thing, claiming it "is more simple, and saves costs..."

Others say it favors the rich. 

Your thoughts?

[Sabre]

I'm against tax breaks for the rich, but I also feel if you have earned alot of money, you shouldn't have to pay for more then your share. A flat tax imo is good because it's fair and is harder to fiddle.

...I seem to have uncharactaristicly went into the land of dreams. Much like legalised drugs, it will never happen, and if it did, it likely wouldn't work to well. Tax and law are like the wires at the back of your TV/PC. They start off fine and simple and neat, but a little change here, plug a loophole there, and before you know it you're back to an ungodly mess. Even if you don't touch it it will be tangled somehow.

[Konchaski]

I'm absolutely against tax breaks for the rich, simply because after a certain amount it doesn't matter how much money you have in America. The sad thing is the billionaires giving 50% of their own wealth still doesn't put a dent in their bank account which is extremely crazy if you do the math. Warren Buffett is a pretty cool philanthropist, having pledged to give away 99 percent of his fortune to philanthropic causes. Even then though? That's crazy to have that amount of money. I'm just glad he's not going to give any of his children a significant portion of his wealth.

Raising the taxes even to 30% on them won't even put a dent into it, if you do the math. They have that much money and a lot of the top ones actually didn't earn their money to the top and are a part of the lucky sperm club. A lot of them didn't so much 'earn' it as they had the privilege to be born into a rich family. Now, I'm not saying to raise the taxes on all the rich, but after a while when you reach into the higher pay raise? It really doesn't matter how high you put it, because they will still have more than you'd probably ever see in your lifetime.

[Guest Julius Quasar]

In my opinion, ALL tax codes favor the rich, assuming those bastards even PAY taxes.  But at least with the flat tax, it's more efficient. 

["User"]

This would never fly.

People who are poor would be complaining about the % rate being too high while people who have a lot of money would end up paying far less in taxes.  Furthermore, the government would gain less tax revenue because of it.  Given the current fiscal situation America is in.....yeeeeaaahh that's not happening. :/

[Guest Julius Quasar]

Definitely not during a double dip recession, or ANY financial hardship...if it were, like "1980's" financial situations, then maybe flat tax might be feasible, but...nah.  Plus, I think a lot of the countries that did utilize it, like Romania, are kinda..."poor".

"Looks good on paper, but in practice it's not so great" (Where have we heard that before? )

[DZComposer]

Let's say for sake of argument we have a flat tax of 10%.

Let's define our hypothetical poverty line at $24,000, our hypothetical median income at $50,000 (NEVER use mean [average] for income! Income distributions have a huge skew that makes the mean useless for most things), and our hypothetical "rich" mark at $250,000. (roughly close to actual US numbers)

Let's now take the taxable income of 10 people.

Joe is poor. He makes $20,000/yr as a janitor.

Tim is just at the poverty line. He's a shift leader at a fast food joint making $24,000/yr.

Sally works retail, and makes around $26,000.

Sam works for the local welding shop and brings home $32,000.

Sarah makes $44,000 /yr as an administrative assistant.

Tyrone has a good union job at the railroad. He gets the median at $50,000.

Luke is an entry-level sysadmin for a datacenter company. He brings $66,000.

Kelly is a mid-range sales associate for a large firm. She brings home $100,000

Tom owns a chain of very successful restaurants. He brings home $250,000, the "rich" line.

Moe is the CEO of a large oil company. He brings home $6,000,000.

I will use this first to explain why you don't use mean for income. The mean (average) of our sample here is $661,200!!! Well over the "rich" line! The problem? There are only two "rich" people in the sample, and Moe's 7-figures are making up the bulk of it. The median of this group is $47,000, not too far from the national median. 47,000 is a lot closer to most of the incomes than 661,200. Now do you see the skew?

It's tax day! What would they pay? How much do they have left? Remember: 10% pure flat tax, no other taxes for sake of argument.

Joe - $2,000 tax - $18,000 left over

Tim - $2,400 tax - $21,600 left

Sally - $2,600 - $23,400

Sam - $3,200 - $28,800

Sarah - $4,400 - $39,600

Tyrone - $5,000 - $45,000

Luke - $6,600 - $59,400

Kelly - $10,000 - $90,000

Tom - $25,000 - $225,000

Moe - $600,000 - $5,400,000

If you look at just these numbers, it looks pretty fair, right? Everyone's paying 10%!

But, let's look deeper. To Joe, Tim, and Sally that 10% is a big burden. If you only make $24,000 a year, $2,400 is quite a chunk of change. It makes life that much harder for them. Tom and Moe, however, are still living large. Tom still has a comfortable six-figure take-home salary, and Moe is still a millionaire this year five times over.

This is where the flat tax stops looking so fair. Joe, Tim, and Sally spend all of their money just to get by. Kelly, Tom and Moe have plenty of money to invest. Kelly buys some money market funds and CDs (that's Certificate of Deposit, not music ). Tom buys some CDs, bonds, and somewhat-risky mutual funds, while Moe finds some expensive bonds and fat hedge funds to park his money in.  The rest of the field has some savings accounts and maybe a mutual fund or two, but not much in the way of investments. Moe and Tom are probably making up for the tax in interest.

Let's now look at a more progressive tax table.

Income	Marginal Tax Rate
<$24,000	0%
$24,001-$30,000	2%
$30,001-$40,000	7%
$40,001-$50,000	10%
$50,001-$60,000	15%
$60,001-$90,000	20%
$90,001-$150,000	25%
$150,001-$225,000	27%
$225,001-$500,000	30%
$500,001-$1,000,000	35%
$1,000,001-$3,000,000	50%
>$3,000,000	75%

I pulled these rates out of my ass. In the real world, careful research would be put into these rates. In fact, most of my rates may be too low.

Notice the word "Marginal." What that means is that you pay the same rate for the same amount as everyone else, but as you make more, you pay the tax in the bracket you fall in. For example, Sally falls in the second bracket. She pays no tax on the first $24,000. But, she pays 2% tax on the remaining $2000, IE her total tax is $40 NOT $520. So, you pay each bracket until you reach your salary. The government is NOT taking 3/4 of Moe's salary, for instance.

This is more fair because it allows the lower income people to keep more of their money, thus be more able to put food on their tables and roofs over their heads and patronize businesses to keep the economy rolling. Yes, the rich have to take up the slack, but they use more of the commons anyway and that money would have just gone into interest-earning accounts instead of to businesses anyway.

So, here is the Tax/Let-over list again, this time with the progressive tax:

Joe - $0 tax - $20,000 left over

Tim - $0 tax - $24,000 left

Sally - $40 - $25,960

Sam - $260 - $31,740

Sarah - $1,220 - $42,780

Tyrone - $1,820 - $48,180

Luke - $4,520 - $61,480

Kelly - $11,820 - $88,120

Tom - $59,570 - $190,430

Moe - $2,052,070 -  $3,947,930

Notice now Moe is much more heavily taxed, but still takes home almost $4,000,000. I'll elaborate when I get home.

[Sabre]

I get that, but the issue there is

Tyrone has a good union job at the railroad. He gets the median at $50,000.

Luke is an entry-level sysadmin for a datacenter company. He brings $66,000.

Kelly is a mid-range sales associate for a large firm. She brings home $100,000

are still working 9-5 jobs that are arguably harder then fast food guy, but have to pay a disproportionate amount of tax. Like you, I don't have the numbers, but it doesn't seem fair to me. Theres already the argument that an education won't pay for itself so youre better off in 'crap' work then 'good'. Progressive tax adds to the problem.

[DZComposer]

"Hard" is subjective. Also, Tyrone is not working 9-5. In the US, railroad workers work at least 10 hour shifts, and are pretty much always on call. $50,000 is probably a bit of a high figure for rail workers anyway. At least ones without seniority.

I know that when you look at just the numbers, a progressive tax looks less fair. But, you have to look deeper. The people in the bottom brackets don't have much extra money, in fact they're likely struggling to get by.

This question then arises: Is it more fair to take 10% of someone who is struggling's money along with only taking 10% from those who can afford it, or is it more fair to take ~35% from the top earner while giving people who do need more of their money a break?

The lower brackets spend their money on goods and services, mainly necessities. The upper brackets invest most of their money.

Look at the flat tax distribution again. $2000 to Joe is a lot of money. He can barely feed his family on $20,000. $600,000 to Moe is not as much money because Moe is not relying on that $600,000 to feed him and his family. He'd just put it in a hedge fund. Billionaires investing in Hedge Funds doesn't drive the economy like consumers buying meat and potatoes do.

Here is a graph of the income distribution:

Here are the tax distributions:

Both of these charts have a logarithmic Y scale to better show overall shape, as the extremes make a linear scale look too straight.

The flat tax curve, as expected, has the same shape as the income curve. The progressive tax curve is much more linear.

The tax curves also should tell a story to anyone who wants to move from a Progressive Tax to a Flat tax.

Let's say my fictional country, like the US, is using the progressive tax. Now let's say the neo-conservatives take power and institute a 10% flat tax. Everyone to the left of the intersection (Joe through Luke) get a tax increase, bigger the farther away, while everyone to the right (Tom and Moe) get a tax cut. Those at the intersection (Kelly) see no real difference. Also, total tax revenue drops considerably. Food for thought....

[Guest Julius Quasar]

Guess a flat tax really doesn't work, thanks for the proof DZ.

I think in school once there's a way to use a progressive AND a regressive tax at the same time, but I'm, not 100% sure how that would work out. 

THEY say it could work, but I'm not so sure anymore..."they" told us a lotta things, but not everything.

[DZComposer]

I'm going to get a little more realistic for a moment. My example ended up being rather extreme, so I remade my chart. I included 10%, 15%, and 20% flat rates, as most flat-taxers call for rates in that area, compared to the 2009 IRS marginal tax rates for single filers:

2009 IRS Marginal Rates (Single):

Income	Marginal Tax Rate
<$8,350	10%
$8,350-$33950	15%
$33950-$82,250	25%
$82,250-$171,550	28%
$171,550-$372,950	33%
>$372,950	35%

The IRS rates come from here: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

Interestingly, the rates are a lot closer to the income curve than my progressive tax.

But the analysis still stands. While a 10% flat rate would give everyone a tax cut, some quick research shows the vocal flat-taxers want the 15%-20% range. The Heritage Foundation claims that anyone under $30,000 would not have to pay income tax, but that sounds a little progressive to me. I think it is mainly to cover up that at 15%, anyone making less than $40,000 would actually get a tax increase.

Sadly, if you look here, the IRS rates are not that progressive. I will see if I can dig-up the rates for the 1970s. US taxes were more progressive pre-Reagan.

[Sabre]

Fair enough, I get that. My issue isnt with the lower end guys, rather the guys in the middle.

Lets say your on 100 made up money. 10 of that goes on tax. One day you do 10 times the work and thus get 1000, but 500 of that is taken away. Again, made up numbers for example. Would that not encourage you to cheat the system or keep you away from 1000 money job because it's easier to stay low enough to be comfortable, but not high enough to be taxed?

Again, Im not talk perverty vs the idle rich, I'm talking the close margin in the middle.

In the numbers you posted for example

$8,350-$33950 15%

$33950-$82,250 25%

wouldnt you avoid going from a 33900 to a 34000 job because it works out better that way? This is a stupid example of course, but I think you get my point.

[Guest Julius Quasar]

Mmm-hm!

You see, this is the sorta stuff they should've taught us more in depth, in school. 

[DZComposer]

Fair enough, I get that. My issue isnt with the lower end guys, rather the guys in the middle.

Lets say your on 100 made up money. 10 of that goes on tax. One day you do 10 times the work and thus get 1000, but 500 of that is taken away. Again, made up numbers for example. Would that not encourage you to cheat the system or keep you away from 1000 money job because it's easier to stay low enough to be comfortable, but not high enough to be taxed?

Again, Im not talk perverty vs the idle rich, I'm talking the close margin in the middle.

In the numbers you posted for example

$8,350-$33950 15%

$33950-$82,250 25%

wouldnt you avoid going from a 33900 to a 34000 job because it works out better that way? This is a stupid example of course, but I think you get my point.

These are MARGINAL tax rates. You only pay 25% tax on the $50 in the 25% bracket. You pay 15% on $39950 and 10% on $8350. If you look at the link I posted, the IRS was nice enough to provide a table with all the taxes calculated for each dollar of income up to $100,000. At $33900, you pay $4671. At $34000, you pay $4681. $10 difference. Yeah, that's $2 short of the 25% on $50, but the IRS does some funky rounding in their math.

Progressive taxation does not slide full income up and down the scale. That IS unfair. The reason for the marginal rates in progressive taxation is to try to compensate for the income distribution skew.

The problem with your first example is that you are assuming the scale slides up on the whole income. 10% at $100. In a progressive system, you'd still only pay 10% for the first $100. The 50% at the top would only apply to how much OVER the previous bracket, NOT the full income.

Another fallacy you have is that you assume wages are directly tied to how hard one works. Go find a field of fruit pickers that are getting paid $7/Hr. and tell them they don't work hard. You'd get your ass kicked. That is NOT easy work. It is back-breaking manual labor. It may not be skilled work, but it is hard work nonetheless. If hardness of work were really tied to wage, these people would be bankrolling.

[Sabre]

Fair enough. You seem to have a better grasp of this then me. I've pretty much hit my level of knowlage on the subject. esp on the american system.

Although not related at this point as it doesn't counter your argument, you seem to be confusing the difference between hard and physical work. By harder work, I mean more demanding, more training, greater expecation and arguably tougher. I'm compairing a burger flipper to a chef who runs his own resturaunt.

For the last few years in Britian there has been a worry about this as the amount of debt needed for skilled work is getting to the point to where it's not worth doing any more. Given that Doctors and teachers ect are already in short supply, taxing them more would surly make the issue worse.

[Sabre]

Playing Sim City 4. I'm trying to run with a flat tax, but it's so tempting to tax either the rich (a small % increase nets lots of cash) or the poor (so many of them) but I will stick at it.

However, one thing I never considered was business taxes. Currently my city is overrun with 'dirty' industry, but if they are making adult entertainment, they are causing alot of pollution. I'm guessing they are desperate, and it's so tempting to tax those too and make room for better, higher paying jobs. Again, I will stick to the flat tax and let you know if things have to change.