Taxes
A Flat Tax vs. a Progressive Tax (the current U.S. Tax code):
I will try to keep this as short and simple as possible:
1. Lets say the U.S. government setup a flat tax rate of 20%. This would mean that someone that made 100 times more than someone else would basically pay 100 times more in taxes. Sounds fair doesn’t it. We could include a “Living Expense” deduction that would allow a person to deduct a standard amount that could be calculated based upon an average living expense. This would protect lower income households (many wouldn’t pay any taxes), it would give the true middle class a break since a higher percentage of their income goes toward paying for regular living expenses, and wealthy households wouldn’t need deductions since the tax rate would not be progressive.
FLAT TAX EXAMPLE: (all values are theoretical and are used for demonstration only)
Lets compare someone making $50,000 to someone who makes 100 times more ($5,000,000)
$50,000 - $25,000 living expense deduction = $25,000 of taxable income.
$25,000 x 20% = $5,000 owed in taxes
100 times $50,000 = $5,000,000 - $25,000 living expense deduction = $4,975,000 of taxable income.
$4,980,000 x 20% = $995,000 owed in taxes (199 times what the person making $50,000 paid)
That is a big difference isn’t it and it is pretty straight forward.
You might notice that the person making 100 times more actually pays more than 100 times more in taxes. This is due to the living expense deduction. As a person moves higher up the scale the less impact the living expense deduction has on his taxable income so this single deduction helps the people who need it the most, those at the bottom of the income scale . The wealthy end up paying a slightly higher percentage of their income but it progresses gradually and doesn’t balloon at a particular amount. So people do not get punished for making more money and do not get rewarded for hiding their income either.
Under the current tax code (without accounting for potential deductions). Someone that makes 100 times more than someone else is taxed at a higher percentage rate so without deductions they wouldn’t pay 100 times more in taxes, they could end up paying several hundred times more which is unfair.
2007 TAX CODE EXAMPLE: (using the same income values: Married filing jointly)
$50,000 taxable income (2007 tax code for this amount: $1,565.00 plus 15% of the amount over $15,650)
$50,000 - $15,650 = $34,350
$34,650 x 15% = $5,197.50
$1,565 + $5,197.50 = $6,762.50 in taxes ($1,762 more than the flat tax at 20%)
Now lets look at someone who made $5,000,000:
$5,000,000 Taxable income (2007 tax code: $94,601.00 plus 35% of the amount over 349,700)
$5,000,000 - $349,000 = $4,651,000
$4,651,000 x 35% = $1,627,850
$94,601 + $1,627,850 = $1,722,451 in taxes (255% more in taxes than someone who makes $50,000)
That is a big difference. Both groups pay more in taxes but the progressive rate really hits the person that makes 5 million dollars pretty hard. But that probably wouldn’t bother you unless you were the one making 5 million.
There are 2 problems with this system. The first problem is obvious, it is unfair to the person making 5 million dollars. They are paying significantly more than their fair share. They are actually being punished for working hard, taking risks, setting up businesses and providing jobs to other tax payers (I know there are some rich people who earn money without creating jobs for other people but that is a extremely small segment of the total. Besides, what I am about to explain makes this argument irrelevant because the current system doesn’t actually “punish” someone for being rich.) The 2nd problem is a result of the first. The equation doesn’t represent what a person making 5 million dollars actually pays because they solve the first problem by lobbying congress (which is full of rich people or those who are beholding to rich people to get elected) and asking for some relief. Congress is more than happy to provide it since they stand to benefit directly or indirectly. They do this by writing deductions and incentives into the tax code to lessen the tax burden on the wealthy (themselves or their benefactors). They throw the rest of us a bone or two by providing a few small deductions but nothing very significant. The end result is a system that looks like the rich pay a higher percentage of their income but it gives them a way out through loop holes and incentives so that in many cases they actually pay a lower percentage. Neat little trick isn’t it.
Finally, besides being unfair a progressive tax code always ends up being very complicated and it gives everyone a headache. Which brings up another benefit of a flat tax. You wouldn’t have to pay a tax preparer to do your taxes and you wouldn’t have to keep up with all your receipts. You could do your own taxes in 15 minutes and April 15th would be just another beautiful spring day.
(For those of you out there that are thinking “What about the deficit?”. The deficit is as much a result of how much the government spends as it is how much the government takes in. So if spending is managed properly the deficit can be managed regardless of what tax system is in place. If fact, the particular tax system used doesn’t impact the deficit one way or the other. The tax rate can be set at a level that will provide enough revenue but still be FLAT!)
Flat Tax Links:
http://www.ncpa.org/pi/taxes/tax71.html#1
http://www.heritage.org/Research/Taxes/bg1866.cfm
http://www.freedomworks.org/informed/key_template.php?issue_it=17
http://www.cse.org/flattax/index.php
Current Tax code links: