The Flat-Tax Fraud, and the Necessity of a Truly Progressive Tax
Herman Cain’s bizarre 9-9-9 plan would replace much of the current tax code with a 9 percent individual income tax and a 9 percent sales tax. He calls it a “flat tax.”
Next week Rick Perry is set to announce his own version of a flat tax. Former House majority leader Dick Armey – now chairman of Freedom Works, a major backer of the Tea Party funded by the Koch Brothers and other portly felines (I didn’t say “fat cats”) — predicts this will give Perry “a big boost.” Steve Forbes, one of America’s richest billionaires, who’s on the board of the Freedom Works foundation, is delighted. He’s been pushing the flat tax for years.
The flat tax is a fraud. It raises taxes on the poor and lowers them on the rich.
We don’t know exactly what Perry will propose, but the non-partisan Tax Policy Center estimates that Cain’s plan (the only one out there so far) would lower the after-tax incomes of poor households (incomes below $30,000) by 16 to 20 percent, while increasing the incomes of wealthier households (incomes above $200,000) by 5 to 22 percent, on average.
Under Cain’s plan, fully 95 percent of households with more than $1 million in income would get an average tax cut of $487,300. And capital gains (a major source of income for the very rich) would be tax free.
The details of flat-tax proposals vary, of course. But all of them end up benefitting the rich more than the poor for one simple reason: Today’s tax code is still at least moderately progressive. The rich usually pay a higher percent of their incomes in income taxes than do the poor. A flat tax would eliminate that slight progressivity.
Nowadays most low-income households pay no federal income tax at all – a fact that sends many regressives into spasms of indignation. They conveniently ignore the fact that poor households pay a much larger share of their incomes in payroll taxes, sales taxes, and property taxes (directly, if they own their homes; indirectly, if they rent) than do people with high incomes.
Flat-taxers pretend a flat tax is good public policy, for two reasons.
First, they say, it would simplify paying taxes. Baloney. Flat-tax proposals don’t eliminate popular deductions. (I’ll be surprised if Perry’s plan eliminates the popular mortgage-interest deduction, for example.) So most tax payers would still have to fill out lots of forms.
Second, they say a flat tax is fairer than the current system because, in Cain’s words, a flat tax “treats everyone the same.”
The truth is the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).
For example, no one pays any income taxes on the first $20,000 or so of their income (the exact amount depends on whether the person is married and eligible for tax credits like the Earned Income Tax Credit of the Family Tax Credit.)
People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.
So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion peoples’ incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.
Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They’d only have to pay the 39 percent rate on $1,000 – the portion of their incomes over $250,000.
Get it? We already have a flat tax – flat within each bracket.
The real problem is the top brackets are set too low relative to where the money is. The top-most bracket starts at $375,000 a year. People with incomes higher than that pay 35 percent – again, only on that portion of their incomes exceeding $375,000.
This is absurd. It means a professional who’s making, say, $380,000 a year pays the same income-tax rate as a plutocrat pulling in $2 billion or $20 billion.
Our current flat tax at the top is treating the nation’s professional class exactly the same as it treats super-rich plutocrats. My doctor pays the same rate as Steve Forbes.
Actually, it’s worse than that because the plutocrats get most of their income in the form of capital gains, which are taxed at only 15 percent. That’s why America’s 400 richest people – who earned an average of $300 million last year, and who have more wealth than the bottom 150 million Americans put together – now pay at a 17 percent rate (according to the IRS).
The Republicans’ push for a flat tax masks what’s really going on.
Remember: The top 1 percent is now raking in over 20 percent of the nation’s total income and owns over 35 percent of the nation’s wealth. Under almost anyone’s view of fairness, these are grotesque portions. They’re especially large relative to what they were as recently as thirty years ago, when the top 1 percent raked in under 10 percent. And these huge portions at the top continue to increase.
Meanwhile, the top tax bracket is now 35 percent — the lowest it’s been in three decades. Between the end of World War II and 1980 it never fell below 70 percent.
Simple fairness requires three things: More tax brackets at the top, higher rates in each bracket, and the treatment of all sources of income (capital gains included) exactly the same.
Not only fairness demands it, but also fiscal prudence. A truly progressive tax would bring in tens of billions of dollars a year from the people at the top who are in the best position to afford it.
Regressives are pushing the flat tax as a smokescreen. They’d rather not have anyone talk about the unfairness and fiscal absurdity of the current system.
Rather than merely oppose the flat tax, sensible people should push for a truly progressive tax – starting with a top rate of 70 percent on that portion of anyone’s income exceeding $5 million, from whatever source.
Rick Perry's Not-so-simple Flat-Tax Plan
news.yahoo.com…plan would shift burden toward poorer Americans, experts say.
Robert Reich on the Flat Tax Fraud and Need for a Truly Progressive Income Tax
Currently, we have a slightly progressive income tax. It should be more progressive than it is (and it used to be better) but the tax brackets of today are still far fairer than a “flat tax” would be.
One (simple) thing about taxes that the vast majority of Americans appear not to understand is that our tax rates are marginal. You only pay the higher rate on incomes over a certain level.
Robert Reich explains this pretty simply in his latest post:
People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.
The truth is the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).
For example, no one pays any income taxes on the first $20,000 or so of their income (the exact amount depends on whether the person is married and eligible for tax credits like the Earned Income Tax Credit of the Family Tax Credit.)
So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion of people’s incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.
Somebody Call 911 on Cain's 9-9-9 Plan
“When you take the 9-9-9 plan and turn it upside down, I think the devil is in the details,” Michele Bachmann said in Tuesday night’s Bloomberg/The Washington Post debate in at Darmouth College, New Hampshire.
This plan’s been kicking about for a while now, but only in Andover did it really come into the light. Cain’s solution to America — and thus the world’s — economic misfortune is as follows. First, the entire existing tax code is scraped, in toto: the progressive rates of income tax; corporate income tax; the estate tax; capital gains tax; the payroll tax (and, though he didn’t mention it, you’d have to assume FICA, too).
In its place comes just three new taxes. One, a flat 9pc personal income tax levied on all individuals regardless of wealth or paucity, with room for charitable deductions. Two, a flat 9pc on all business income, save “all investments, all purchases from other businesses and all dividends paid to shareholders”. Three, and most controversially, a flat 9pc national sales tax, better known perhaps to European readers as Value Added Tax.
The problems with this scheme are numerous. Initially, I do not believe this could ever become law in the United States — as such, it reads like the Liberal Democrat manifestos of old, a pie-in-the-sky notion that sounds good when articulated, safe in the knowledge that it’ll never be implemented.
But more than this, nobody has any idea (or at least the Cain campaign is not saying) how much money this would raise. Last fiscal year, the federal government took in $2.2 trillion in tax revenue from individuals and corporations, in a system where the current highest rate for persons earning over $250,000 is 35pc (a rate never paid in full due to the rote of deductions available). Cutting the tax rates on the top 2pc and big corporations dramatically could only have a negative impact on the Treasury.
Whichever way you spin it, 9-9-9 constitutes a colossal tax break from the wealthiest in America, and a huge tax hike for the working poor. At this time, 47pc of Americans pay zero income tax, since they do not meet the minimum requirement. Under a Cain presidency, not only would they now lose 9pc of their income to the federal government, but they would suffer via the introduction of the 9pc VAT rate, raising the cost even of life’s essentials like bread, milk, and potatoes.
Not only is 9-9-9 anti-progressive, in its curtailment of the staggered tax code, it is also anti-conservative, since it constitutes a tax increase on nearly half of Americans in their income, and all Americans due to the sales tax. And, it is anti-American: by burdening the most destitute with such a crippling tithe, it kills whatever slims chance they had remaining of upward social mobility.
Worse still, 9-9-9 is just the beginning. Just wait until you hear about the Fair Tax…
Simply a taxing issue for the 2012 election
Early in the 2012 campaign (it’s still 2011, right?), the major focus issue of the campaign among the GOP candidates for president is the idea of simplifying the US tax code. Regardless of who is elected, can we really count on the Washington establishment to make significant changes in the way the IRS operates? || http://bit.ly/qubOEJ
Amplify’d from 91701mywatch.blogspot.com
See this Amp at http://bit.ly/p6tJ3b
TaxProf Blog: Progressive Taxation Makes People Happier Than the Flat Tax
taxprof.typepad.comWho knew? The survey is from 54 nations (roughly 1/4 of the nations on the planet). This is similar to how people in heavily taxed nations are happier too.
Why I Don't Support a Flat Tax for Corporations
I have heard this argument over and over. Simplify the tax code to ~20% and not only will it create jobs but it also will boost the economy and boost revenue.
Well, I dont support this view. Here is why.
OK, lets say we get a flat tax system @ ~20% with no exemptions/write-offs/loopholes (for corporations of course). You dont think Corporations will do EVERYTHING in their power to get all those exemptions/loopholes/write-offs back in eventually? YES THEY WILL. They are corporations, not humans (oh wait, they are humans I forgot). They want to keep every single dime they could. They (most,generalizing here) dont care about the US revenue or economy. As long as their stock goes up and they are making record profits (which both happened last quarter), they could care less about what happens to America. But I digress.
My point here is, dont make a flat tax system. It WILL, I guarantee it, get perverted. A nip here, a tuck there and wallah, next thing you see most corporations are paying 7%. Its already at the lowest levels it has been since the 1940s (http://visualecon.wpengine.netdna-cdn.com/wp-content/uploads/Income_Corp_CapitalGains_Rates-650x603.png).
Oh BTW, a lot of companies already pay NO or little taxes already below 20%. Why would they agree to boost it? —>
1) http://www.businessinsider.com/companies-pay-lowest-tax-loopholes-2011-2#16-red-hat-inc-rht-1
2) http://www.businesspundit.com/25-corporations-that-pay-less-taxes-than-you-do/
OK, now onto the “repatriation issue”. You know, that plan that the GOP wants to pass to allow overseas money (probably $ bypassed through loopholes) to be brought back in at a low 5.5% rate? Well, this is a major failure. Last time we had one, 92% of the $312 billion brought back in went to SHAREHOLDERS. Meaning stock buybacks (which stats prove are a horrible use of corporate cash) and dividends. And GUESS who owns majority of stocks. Yes, you guessed it right! The rich! Nothing wrong with that. But you can’t sit there and argue me with a straight face that the money went to hiring people, expanding projects,etc. Oh btw, there was actually layoffs the following 2 years by the major companies who repatriated cash.
Check this video out, explains it CLEARLY. Main points start around 1:00
And check these stats out before you argue that less taxes=more revenue. It doesnt. Proven by my post a few weeks back.
http://thearmotrader.tumblr.com/post/6431522019/tax-revenue-stats
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So whats my solution? Leave the rate as is (or ill be fine with ~30%), and CUT loopholes. Leave the non-corrupt exemptions and write-offs in (like when they lose $ or like when they hire somebody). This encourages companies to do everything in their power to NOT pay the taxes. So whats their best alternative? Hiring. Expanding. R&D. Stuff that ill be MORE than fine with them using a write-off for. Because THAT is what creates jobs,economic activity, and progress. Not letting them have more of their profits for nothing in return for. And btw, they are not going to “leave” America. I’d like to see them try. Where are they going to go? Swaziland? Go ahead. And if they do leave, you TAX the living shit out of them for doing business in America. Your’e not going to help America by paying your fair share? Well then I couldnt care LESS about your company. F off. The Free market will sprout new companies/leaders in their place.
As for the repatriation of overseas money, Im fine with 20% rate it if they bring it back in with the promise that the $ will go towards hiring, R&D, expanding,etc. You write that into the BILL, do not take their word for it.
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If you DISAGREE or have any differing thoughts, I would LOVE to hear it. But please, give me facts, reasons, stats. Dont bring a theory up or just tell me im wrong. That doesnt prove anything. I would love to hear why im “wrong”.
BTW, this is ONLY for the corporate tax rate/system. The personal/income tax is a whole ‘nother argument.
UPDATE (July 8)
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Here’s my thoughts on Small Businesses. Not sure what qualifies a company as such, but lets lower their rates to 25 ish %. The ones that are fully domestic and do not outsource jobs entirely. Why is this so? Because these are not corporations that can do major write-offs or find loopholes that can get themselves out of paying taxes. These are HARD-working americans (albeit some rich, but thats ok as long as they pay their fair share of taxes) that create jobs here in America.
Ive seen stats like 50-80% of jobs are created by Small Businesses. This Is HUGE.
Giving them more money to expand/hire will be good for the economy. Especially since small business lending has surged 26%, which is VERY bullish.
A Logical Tax. A Logarithmic Tax.
As an alternative to both regressive flat taxes and bracket-driven progressive taxes, I propose a tax structure based on a logarithmic curve.
Here is the current proposed equation (after incorporating some feedback):
Where…
The equation to calculate the tax on a given dollar of income would take the form…
Therefore, a total tax bill would take the form of:
The integrated function would take involve a logarithmic curve, but it is easier to comprehend how the mechanics work in this form.
In English, it means that the most that any person would pay is the top marginal tax rate, because as x gets larger, the number you’re subtracting from the initial number gets smaller. You can also set where the curve starts — which presumably is the level where society defines “poverty” by agreeing on the variable “P.”
There’s also a mechanism in the form of the “Constant of Acceleration” to control how slowly or quickly the curve climbs. (In my mind, this would be set by agreeing how much a median income earner should pay in total taxes, and then solving backwards from there to make sure the curve passes through the right point.)
Like the current progressive tax, the curve reflects what you pay on each incremental dollar earned. To determine your tax bill, you add up the y values on the curve for each dollar x earned. (This requires some basic integral calculus.) The summation would start wherever x=P & y=0, so my apologies to any unemployed folks hoping to pay -∞ in taxes. Yes, you could move the x-intercept and amplify the curve — but it would still fundamentally hold this form as a continuous curve.
I like a continuous natural logarithmic curve for three reasons:
- As a picture for the public, it’s every bit as easy to draw and explain in a graph as a flat tax - and I think the math can be satisfactorily explained visually. (If the largest hurdle in persuasion is that the general public will need to develop a better grasp of the fundamentals of calculus, then that will be a wonderful and generally beneficial hurdle to overcome!)
- It greatly limits maneuvers where people try to do otherwise unadvisable things just to get into a lower tax bracket.
- The curve can be adjusted with coefficients and constants to deal with changing economic circumstances — but the fundamental structure doesn’t need to change. The basic contours of fiscal policy will be more accessible since people can talk about “the coefficient changing” and that affects EVERYONE.
It allows those the poor to not have to lose money that would otherwise be spent on food and shelter, and it’s continuous — the line is literally unbroken, making it more equitable as you move up the income spectrum.
I submit the idea for your collective consideration.
Please explain
Dear Liberal reader, and I know there are some of you who might read this post. Please explain to me why democrats will not pass a flat tax, or a fair tax? If the true goal is to make sure everyone pays their “fair share”, then why not implement either of these two policies? No more “unfair” deductions for the rich, everyone pays the same. Why will you not support this?
I will tell you why, because its not about “fairness”. It never has been and it never will be. Its about finding someone to pay for over the top spending, currently the rich, and consolidating a voter block. This is the United States of America and I believe no american should have an less of a right to keep their money than any other american. What is it you believe?
“So let’s say there were a 20 percent tax on income. A married-filing-separately taxpayer who makes around $74,000 right now pays 20 percent. So under Perry’s plan, people above that figure would be getting a tax cut. And obviously, the farther away from $74,000 you go, the larger, in real and percentage terms, your cut. And I hope the obverse has already occurred to you: yes, the lower earners would be in for sizable tax increases under the 20 percent plan. For example, a $25,000 earner would go from paying 13.3 percent to 20 percent, which is about a 35 percent increase, while our $1 million earner gets around a 46 percent decrease. And Kim Kardashian, forget about it. She’d pay a fraction of her current rates.”
—Rick Perry unveiled a flat tax plan of his own today. We’ve got an overview of what we know so far and a take on the plan from our Michael Tomasky (quoted above).
The Flat Tax Ruse
huffingtonpost.comThis is very helpful in understanding how a flat tax does not create a more equitable system of taxation. While it seems obvious on the face of it, the reality is that it is really just another way of putting the poorest in our society at a greater disadvantage while advantaging the very wealthiest in our country even more. It’s terribly sad that advantaging the already advantaged is what we so often end up supporting without even knowing it. Flat tax is yet another pop-philosophy that seems to be doing more of the same.
Flat Tax
How would a flat tax work for individual taxpayers?
Compared to traditional tax systems, a flat tax is extremely simple. Households get only one exemption -a generous allowance based on family size - and then pay a low rate on any income above that amount.
They do not need to worry about reporting dividends, interest and other forms of business/capital income. Those forms of income are taxed at the business level, thus obviating any need to tax them at the individual level since that would violate the principle of no double taxation.
How would a flat tax work for businesses? All businesses, from the largest multinational to a corner pub, would play by the same rules. Companies would add up their receipts (how much revenue came in) and then subtract their costs (salaries, cost of raw materials, and expenses for new tools and machinery).
This would give them their taxable income, which would be taxed at the low rate.
What are the advantages of a flat tax?
There are two principal arguments for a flat tax- growth and fairness. Many economists are attracted to the idea because current tax systems, with high rates and discriminatory taxation of saving and investment, reduce growth, destroy jobs and lower income. A flat tax would not eliminate the damaging impact of taxes altogether, but by dramatically lowering rates and ending the tax bias against saving and investment, it would boost an economy’s performance.
However, the most persuasive feature of a flat tax for many people is its fairness.
The complicated documents, instruction manuals and numerous forms that taxpayers struggle to decipher would be replaced by a brief set of instructions. The entire tax code could be based on two simple postcard-sized forms.
This radical reform appeals to citizens who not only resent the time and expense consumed by filing their own tax forms, but also suspect that the existing maze of credits, deductions and exemptions gives a special advantage to those who wield political power and can afford expert tax advisers.
If enacted, a flat tax would yield major benefits, including:
Faster economic growth. A flat tax would spur increased work, saving and investment.
By increasing incentives to engage in productive economic behavior, it would also boost the economy’s long-term growth rate.
Instant wealth creation. All income-producing assets would rise in value since the flat tax would increase the after-tax stream of income that they generate.
Simplicity. Complexity is a hidden tax that requires record-keeping, form preparation, lawyers, accountants and other resources to comply with the current system.
Fairness. A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes.
No longer would the tax code penalize success and discriminate against citizens on the basis of income.
An end to micromanaging and political favoritism. A flat tax gets rid of all deductions, loopholes, credits and exemptions.
Politicians would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy.
Increased civil liberties. A flat tax would eliminate almost all sources of conflict between taxpayers and the government.
Moreover, infringements on freedom and privacy would fall dramatically, since the government would no longer need to know the intimate details of each taxpayer’s financial assets.
Global competitiveness. In a remarkable development, former communist nations are leading a global tax reform revolution. Estonia was the first to adopt a flat tax, implementing a 26 per cent rate in 1994, just a few years after the collapse of the Soviet Union. The other two Baltic republics of the former Soviet Union enacted flat taxes in the mid-1990s, with Latvia choosing a 25 per cent rate and Lithuania picking 33 per cent. Along with other free-market reforms, the flat tax significantly improved economic growth, and the ‘Baltic Tigers’ became role models for the region. Learning from its neighbors, Russia stunned the world by adopting a 13 per cent flat tax, which went into effect in 2001.
The Russian flat tax quickly yielded positive results: the economy prospered and revenues poured into government coffers since tax evasion and avoidance became much less profitable. The flat tax then spread to Serbia, which in 2003 chose a 14 per cent rate. Slovakia hopped on the bandwagon the following year with a 19 per cent flat tax, as did Ukraine, which chose a 13per cent rate. Earlier this year, Romania joined the flat tax revolution with a 16 per cent tax rate, and Georgia adopted a 12per cent rate. This year, Kyrgyzstan adopted a 10 per cent flat tax, giving it the honor, at least temporarily, of having the lowest rate in the world.
The flat tax revolution has been so successful that Estonia is lowering its rate to keep pace with other nations: it is now down to 24 per cent and will drop to 20 per cent by 2007.Lithuania is in the process of lowering its 33 per cent flat tax to a more reasonable 24 per cent, and the Latvian government wants to reduce its tax rate from 25 per cent to 15 per cent.
Lawmakers in Croatia, Slovenia, Bulgaria and Hungary are also considering tax reform. Last but not least, the opposition parties in the Czech Republic have promised to implement a 15 per cent flat tax regime if they win the upcoming elections.
No discussion of the flat tax is complete without a mention of Hong Kong. After World War II, Hong Kong was one of the poorest places on the planet. But a flat tax was adopted in 1947, and this system - combined with other free-market policies - led to dramatic increases in economic performance. Today, Hong Kong’s optional flat tax (taxpayers can choose to participate in a so-called progressive scheme) should serve as a role model for other jurisdictions.
Traditional income tax systems punish the economy, impose heavy compliance costs on taxpayers, reward special interests and make a nation less competitive. A flat tax would dramatically reduce these ill effects.
More importantly, it would reduce government power over the lives of taxpayers and get it out of the business of trying to micromanage the economy.
There will never be a tax that is good for the economy. But the flat tax moves the system much closer to where it should be - raising the revenues that government demands, but in the least destructive and least intrusive way possible.
Regarding taxation and economic equality, if you pull up a list of countries currently utilizing a flat tax system and then separately pull up a list of countries by their Gini coefficient (the standard measure of income equality), you’ll find that— except in the cases of countries with corrupt or otherwise unstable governments such as Russia under Putin— many of the countries with flat taxes actually have *less* income inequality than the United States and our ‘progressive’ tax system. This also holds true if you measure economic inequality by the wealth ratio of the richest 10% to the poorest 10% of a country: Estonia, for instance, has a ratio of 10.8 compared to the United States’ 15.9 ratio— and Russia, even with widespread governmental corruption and wealth allocation to the rich, has a ratio of 12.7. While at first the data may seem counterintuitive, recognizing the impact of the various loopholes and deductions in our tax code that make it possible for the wealthy to avoid paying the marginal rate goes towards explaining how it’s possible to, in this case, have your cake and eat it too.
Again, to repeat: we can decrease our country’s economic inequality by eliminating tax loopholes and deductions exploited by the wealthy and simplifying the code to one low tax rate for everyone.
