Flat-tax musings by Peter Burrows 1/29/22 firstname.lastname@example.org
This is the time of year when the income tax gets peoples’ attention, big time. Most of us have no idea how progressive our income tax is, and we always hear that ‘the rich’ don’t pay their ‘fair share’, whatever that is.
In fact, under our progressive tax system, in 2019 the top one percent of income earners earned about 20 percent of the taxable income and paid about 39 percent of total income taxes. By contrast, the bottom fifty percent of earners paid only 3 percent of the income taxes collected. Incredibly, the top one percent paid more than all of the bottom 90 percent.
Whether this is fair or not is debatable, but one advantage of a flat tax is that it would put an end to all the “fair” nonsense. That’s a big reason why it will probably never happen. Politicians have so much fun with what’s “fair” and what isn’t. A more knowledgeable electorate would put an end to those politicians, but that probably isn’t going to happen, either.
In the face of that daunting reality, let’s talk about the flat-tax anyway. First, a caveat: this is about the Federal income tax that is paid, not total Federal taxes paid, which would include Social Security taxes. In theory, SS payments are not taxes but retirement savings that go into the Old-Age & Survivors Insurance Trust Fund and will be paid back to the individual. The reality is different, but that’s a separate can of snakes.
As mentioned, in 2019 the top 1 percent of income earners paid 39 percent of the income taxes and the bottom 50 percent paid only 3 percent, and all issues of fairness aside, this creates incentives for the high-income payers to find ways to avoid taxes, both legal and illegal, that have nothing to do with economic merit.
For the low-income cohort, they have no incentive to be against increases in the income tax because they don’t pay it. Since they also don’t know anything about how the income tax works, demagogues go after their vote by railing about the rich not paying “their fair share.” It happens all the time and nobody ever calls them out on it. Republicans? Ha!
As an aside, I think people who don’t pay, on balance, any Federal taxes should not vote in national elections, and before you call me an evil-dirty-bastard-racist-plutocrat, you should know that this would mean that I couldn’t vote in Congressional or Presidential elections. My Social Security benefits far outweigh any Federal income taxes I owe, which makes me a net tax consumer.
As it is, since most of us oldies actually vote, the politicians have thoughtfully increased the standard deduction for those over 65. I bet most of you whippersnappers didn’t know that. It’s a small example of how our current income tax structure encourages politicians to buy the votes of some tax payers voters at the expense of other tax payers. If most of us oldies couldn’t vote, I doubt the politicians would have been so thoughtful.
A flat–tax would work something like the example below. The deductible amounts and the flat-tax rate can be changed to achieve different tax totals.
1) A standard deduction of $10,000 for an individual, $20,000 for a couple, and $5000 for each dependent. All income over that would be subject to the same rate, for example, 30%.
2) NO other deductions would be allowed. This means no deduction for state and local taxes, no deduction for interest paid, none for charitable contributions, etc., etc.
3) Capital gains would be taxed at the same rate.
This would send whole bunches of people into a huge tizzy: realtors, charities, and 501(c) (3)’s, who receive taxable deductions and whose ranks include such disparate entities as Planned Parenthood and Prager U. By far, though, the biggest objectors would be tax lawyers, tax preparation services and IRS employees.
Who needs all those people if income taxes can be calculated on a post card? A flat-tax would put most of them out of work and greatly reduce the cost of compliance, which has been estimated to be over $400 billion. That’s BILLION.
Some will object by saying progressive rates are a good thing, i.e., higher incomes should have higher rates of taxation. In fact, flat-tax results ARE progressive. Using the above example, a couple with two dependents and $40,000 of income would have $10,000 of taxable income and pay $3000 in taxes, which is 7.5 percent of total income (3000/40000). The same couple with twice as much income, $80,000 would pay five times as much tax, $15,000, which is 18.5 percent of their income. If they had three times the income, $120,000, they would pay nine times as much, $27,000, which is 22.5 percent of their income.
Even with this flat tax idea, high incomes would still pay most of the income taxes and low incomes, those below the standard reduction, would still pay no taxes. I have no idea what the exact percentages would be across the spectrum of tax payers, only that the tax base would be considerably broadened and that the number of voters with ‘skin’ in the income tax game would be increased.
As it is, “tax game” is an all-too accurate description of our income tax, and it is a “game” open to all sorts of political manipulation. If the Republicans take control of Congress in the midterms, I hope that they will propose a flat tax. Sadly, I’m afraid that’s not going to happen.