American Vet

Why should one be opposed to a flat tax rate for all Americans?

slatten49 Loc: Lake Whitney, Texas

The flat tax's system’s simplicity hides the further shifting of the tax burden to the poor and middle class.

Holley Ulbrich, Economics professor emeritus and senior fellow at the Strom Thurmond Institute at Clemson University.

Albert Einstein said that "Everything should be made as simple as possible, but not one bit simpler." Good advice for people who want to redesign tax systems. It's true that there are now 24 countries with a flat tax, but none of them got there by scrapping an established progressive income tax system nearly 100 years old. Fifteen of these countries are formerly Communist countries of Eastern and Central Europe. The others are very small, ranging from Montenegro to Iceland. No major industrial nation has made that choice. There are good reasons for going slowly.

The attraction of simplicity hides a big change in the distribution of tax obligations among the poor, the middle class, and the rich. When think tanks like Cato and Heritage support changes that redistribute the tax burden in that way, they usually warn us of the evils of class warfare. But the proposed flat tax is, in fact, class warfare—yet another attempt to reduce the tax obligations of higher-income households in exchange for the unenforceable hope or promise that they might use the money to invest and create jobs, maybe even jobs in the United States.

Two considerations should give us pause before jumping on the flat-tax bandwagon. The first is the disruptive effect of eliminating deductions, credits and exclusions that benefit the middle class as well as the rich and that play important roles in our lives—pension contributions, employer-provided healthcare, and deductions for mortgage interest, property taxes, and charitable contributions that support everything from soup kitchens to education to the arts. Second is the role of our mildly progressive federal income tax in offsetting regressive taxes elsewhere in the system.

The first argument against the flat tax, one that resonates with homeowners, charitable organizations, and anyone with employer-provided health insurance or a pension plan, is the disruption that would come from trashing the current income tax system in favor of something untested and untried. We have all made decisions on the basis of the existing and long-standing tax rules. It's hard to get people to save for their retirement, but the tax treatment of employee pensions, IRAs, and 401(k)'s has played an important role. Would we have bought a house if we knew that we were going to lose our home-related deductions? Will charitable organizations that serve those who fall through the holes in the safety net and also enrich communities with education, religion, and culture lose financial support when charitable contributions are no longer deductible? And will we have to declare our employer-provided health insurance as taxable income?

Second, there's no concealing that the flat tax would radically redistribute the tax burden. Adam Smith, to whom economists always turn to for economic wisdom, observed, "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." The current U.S. tax system consists mainly of taxes on income (personal and corporate), payroll (Social Security), sales, and property. In 2007, these taxes provided 92 percent of federal income and 51 percent of state and local government income. Sales taxes are regressive—they take a higher share of low incomes than higher incomes. State and local income taxes range from flat to mildly progressive. Payroll taxes are moderately regressive because they fall on only wages and salaries and only up to a maximum of $106,800 in earnings. The distribution of the property tax burden is not clear, but the family home is the primary financial asset for most middle-income households. Property taxes are levied on homes, but rarely on other kinds of financial assets. State and local governments also depend on fees and charges for services, which fall heavily on lower-income households, for 44 percent of their revenue. So a moderately progressive federal income tax, with rates ranging from 15 percent to 35 percent, helps to offset regressive taxes elsewhere.

The rhetoric about ending double taxation ignores the fact that under a flat tax, wages would still be taxed twice, but dividends only once. Wage earners pay both payroll and income taxes. They've paid double taxes since 1935. Why should income from owning financial assets be treated differently—especially since most of that income goes to upper-income households?

A flat tax would shift tax obligations from the rich to the poor, and especially the middle class, and eliminate desirable tax incentives for retirement savings, home ownership, and charitable contributions. Simple? Yes. Efficient and equitable? Not so much.

Also: https://www.dontmesswithtaxes.com/2016/01/6-reasons-why-a-flat-tax-is-not-a-good-idea.html

buffalo Loc: Texas

Because a flat tax would hit poorer people harder. The US average federal and state tax on a gallon of gas is 48.18 cents per gallon. Who does that hit hardest?

Incomes from .01 to $132,4000 (for 2019) are taxed a flat rate of 12.4% for Social Security. Why aren't incomes above that taxed for Social security?

Nope a flat tax is unfair to poor people.

slatten49 Loc: Lake Whitney, Texas

Short and sweet, Buffalo. I like it

sisboombaa

I've always opposed the income tax program. When it went into effect it was a temporary tax to pay off the debt incurred by world war one and then the average worker paid diddly squat per year. With inflation over the years it is now a very large sum. A flat tax rate would be a good step in the right direction; but no income tax would be the more correct approach. Remember, it was created to be temporary. One would think the debt of WW1 has been paid off by now. But then again what do we lowly citizens know.

MatthewlovesAyn Loc: Ohio

Here's why there SHOULD be a flat tax. The way the taxes are structured now, 44% of people pay no federal income tax. They have no "skin in the game." They can go ahead and vote themselves largess. It's why the founders made land owning a prerequisite to voting. Now I'm not saying to go back to that (because I couldn't get the votes) but as soon as 51% of the people are on the government dole, I truly believe the country is finished. I've seen arguments for a negative income tax (think Milton Friedman) and a tax that doesn't start until a certain income level is attained. I personally don't think those proposals hold water as the poorest among us would still vote their own largess instead of voting to decrease the size and scope of government (in order to pay less tax).

The income tax as it stands now now is a chance for scummy politicians to cheat money from their enemies, reward their friends, and pad their own pockets (think Nancy Pelosi being worth $16 million). A flat tax takes the power of the IRS away from Congress. As it should. They're our employees, not our rulers.

buffalo Loc: Texas

But your conveniently forgetting all those flat taxes (Social Security, excise taxes, sales taxes and fuel taxes) that those whose incomes are to low for "INCOME TAXES" do pay. Which causes lower income earners pay a higher percentafge of their incomes in TAXES, especially state and local taxes.

According the Institute on Taxation and Economic Policy, the lower one’s income, the higher the effective state and local tax rate. Combining all state and local income, property, sales and excise taxes that Americans pay, the nationwide average effective state and local tax rates by income group are 10.9 percent for the poorest 20 percent, 9.4 percent for the middle 20 percent and 5.4 percent for the top 1 percent, the report said.

Which proves flat taxes are regressive.

sisboombaa

Matt, you ended your post with "They're our employees, not our rulers" referring to our elected politicians. In the real world that is not the case; it's suppose to be but it's not. We allow it because don't know any better. We, collectively, don't study the voting habits of our representatives and address there short comings. We even allow them to set their own wages when it is we who should set their wages and benefits. We should, collectively, be able to fire their butts when they stray from their elected duties but we don't, can't, what ever. So we end up getting screwed; and that is what we deserve.

MatthewlovesAyn Loc: Ohio

You're kind of making the argument for me. If people took the time to study what they were voting for (because they had to pay), there probably wouldn't be many of the aforementioned taxes. Just the flat one. You also didn't address the issue of voting your own largess, which, along with the virtual criminality of the tax code, were the points of my reply.

buffalo Loc: Texas

What about the BILLIONS in corporate "largess", especially the military industrial corporations? Corporate welfare dwarfs what little is spent on social welfare. I don't remember ever getting to vote for any corporate largess. And I do not include Social Security and Medicare in that social spending. Those are funded, or should be, with their own separate taxes.

Just goes to prove who really pulls the strings of the puppets in DC.

MatthewlovesAyn Loc: Ohio

For the most part, I think we are on the same page. I hate the fact we are stationed in more than half the countries in the world. Ike was right. The military industrial complex is insidious. That being said, Social security should never have started, or should have been put in INDIVIDUAL accounts.

pafret Loc: Northeast

Good exposition. This puts the lie to the assertion that high income families pay most of the taxes when in truth they are not affected by the plethora of taxes born by middle and poor income families.

pafret Loc: Northeast

This is a simple solution, disenfranchise all those who receive public assistance in any form of charity. If you are not self sustaining then you have no right to tell those who are how to use their money.

American Vet

Unfair? I am just philosophically opposed to "fair and unfair". Who gets to determine what if "fair"? I don't want to be treated "fairly" - I want to be treated equally. That' what America is all about.

MatthewlovesAyn Loc: Ohio

Aside from the probability of never passing this proposal, where does that idea end? Should teachers be allowed to vote for the Board of Education?
I personally don't think there's a valid argument for publicly funded libraries.