Can we talk about flat taxes?

[EllieArroway]

So in my little tax reform utopia we ditch the entire tax code and switch to a flat tax w/ a set deduction for everyone - then no loopholes. I know in the real world this would never happen and even if it could it's probably a terrible idea for a million reasons I haven't considered.

I have been playing around with the numbers tonight to see what that rate would need to look like. These aren't exact because I couldn't find the exact data that I was looking for, but they are close enough for my little thought exercise. (Anyone know the # of income earners in the US? I could only find it broken down by households, not individuals.) I used 2009 numbers because that was the most recent year I could find all of the data I needed.

(This is only personal income - totally ignoring corporate income & taxes for now.)

Total personal income 2009 (all sources): $11,916,773,000,000

# of households filing taxes:
single: 38,705,000
family: 78,833,000

poverty guideline: $10k

(These numbers came from the Dept of Commerce, the IRS, and the Dept of H&HS)

So, using that, if we give every individual the first $10k tax free, and double that for families (so no marriage penalty, but no child benefit either--this is where the #s aren't exactly right because single parent households are counted as families I think, and obviously not all 2-adult households have 2 workers. oh well.) we end up with $9,953,063,000,000 in total taxable income. If we double it (so 20k individual/40k family) that # drops to $7,989,353,000,000.

In 2009 the gov took in $1.19t in individual income taxes and $0.99t in FICA taxes. (GPO)

So, to get that same revenue with a flat tax:

$10k exemption ($20k for families): 12% for income and 10% FICA, or 22% total
$20k exemption ($40k for families): 15% for income and 12% FICA, or 27% total

Obviously we would either have to raise those tax levels or cut spending (or both, really) to break even, but IMO those rates are not bad at all.

The average income in 2009 (per the Census) was

$30,444 - individuals
$61,265 - families

So, if we did the $20k exemption/27% rate the taxes would be:

$2820 - avg individual
$5742 - avg family

Now, tell me everything I did wrong. Or let's discuss. Is a 27% tax rate (including FICA) insane? Am I way out of touch?

[EllieArroway]

Also, I have no idea if that FICA number is what individuals paid, or what individuals + employers paid.

eta: That # is the total collected, so right now half of it is paid by employers (in most cases). Currently there are FICA limit caps & my numbers don't account for those at all.

So if we keep the setup where employers pay half of FICA it would look like this:

avg family - $3190 income tax + $1276 FICA (and then their employer pays the other $1276) for a total of $4466 in fed taxes, or $372/month

avg individual - $1567 income tax + $627 FICA = $2194 or $183/month

[EllieArroway]

I included all income at the same rate - investment + wages. I know most Republican plans exempt investment income, but I'm a dirty liberal who thinks that's ridiculous.

[emmybean]

A flat tax is not inherently regressive. It burdens everyone with the same tax rate regardless of their income (minus the exempted amount, which allows lower income earners a substantially smaller effective rate than high income earners)...how is that regressive? Am I missing something?

And, honest question from someone who is clueless on such matters: would it be possible to roll capital gains in to a broader umbrella of "income" for flat tax purposes? So the net gain or (or loss) would be just factored in to ones flat tax liability.

[EllieArroway]

Aug 14, 2012 0:30:27 GMT -5 @bunnybean said:

Aug 14, 2012 0:22:48 GMT -5 EllieArroway said:

I included all income at the same rate - investment + wages. I know most Republican plans exempt investment income, but I'm a dirty liberal who thinks that's ridiculous.

Alright, that makes it a little better. But does it make sense that investments should be taxed at the same rate as your labor? I'm not sure that's very fair.

I'm still just not a flat tax fan. It's still regressive. We need that cash money from the rich folks sometimes. I do like those Eisenhower tax rates for income at 91% for the top tier, and then there could be a lower rate for capital gains, but I want a nice cash flow from the top tier.

I'm an extremely dirty liberal, and I like a nice high burden on the wealthy.

The problem I have with high rates on wages & lower rates on investments is that it really puts all of the burden on people who earn high income levels, and then people like Romney who make the majority of their money in investments have it easier.

I'm not sure if it's fair to tax investments at the same rate as wages. I get the argument that taxing them at lower rates encourages investment & economic growth, but then it also unfairly benefits those ultra-rich people who don't really have actual wages.

There is probably some kind of middle ground, where wages are taxed a bit higher than gains & dividends but not quite the gap that there is now.

[emilyj]

I don't think there is ever going to be one tax code that is ever going to be "fair" to everyone. I just don't see how it can ever happen. That said, I (with the caveat that I suck mightily at math) do support a flat tax system.

It's not perfect, and I have issues with it, but here's what I like:
- Closing off all the loopholes that exist in the current system. No deductions/loopholes/tax shelters. An infinitely simpler system that would be harder to fraud.
- It would eliminate double taxation of savings/dividends and eliminates the death tax and capital gains tax.
- It eliminates global taxation, which would enable the US to compete better in the global market.

But there are problems too - the issues pointed out above of capital gains, business income...

Also, some say this could shift the burden to the middle and lower class, and I can see that argument. It could also cause a massive loss of jobs, which would not be good right now.

Long term, however, I think there are some big advantages to it, and it should be discussed. I think points of it do have merit.

A high luxury tax on items I would support as well.

[emmybean]

Aug 14, 2012 0:32:19 GMT -5 @bunnybean said:

Aug 14, 2012 0:29:55 GMT -5 emmybean said:

A flat tax is not inherently regressive. It burdens everyone with the same tax rate regardless of their income (minus the exempted amount, which allows lower income earners a substantially smaller effective rate than high income earners)...how is that regressive? Am I missing something?

And, honest question from someone who is clueless on such matters: would it be possible to roll capital gains in to a broader umbrella of "income" for flat tax purposes? So the net gain or (or loss) would be just factored in to ones flat tax liability.

$5000 to me and my husband means a lot. $50,000 to a Mitt Romney is absolutely nothing. That's what he spends on Rafalca. That's what makes it regressive.

Eh. It's not any more regressive than the system we have now as far as I can see it, and while I would be more than happy to raise the amount for exemption to even $20k for an indvidual and bump up the rate above that a percentage point or two, I really don't agree that just because $5k means more to some people than $50k means to others, it's reason enough to say they should pay more in taxes. I'm happy to allow high earners to keep the same percentage of their money as I do, they earned it---I don't want all taxes to be equal. Just more equivalent.

Besides, under this tax code, mittens is going to be paying more than $50k---like try over 7.2 million dollars based on the 40k/27% example.

[EllieArroway]

If anyone wants to break down the income sources to split up wages, investments, etc - you can find them here: www.bea.gov//national/nipaweb/DownSS2.asp -section 2 worksheet 20100 annual

Employee compensation was 7.7944 trillion.

[y4m]

12% is the individual and employer part of FICA. I'm fine with including both, because it's more fair to self-employed people.

No reason you couldn't include any income from capital gains in here, although then you should be allowing write offs for capital losses as well.

I think Ryan's proposal is 10%/25%, without FICA, so not far off from this actually.

What percentage of GDP would the total revenue from such a plan be? History has shown that no matter what you do with the tax code, your tax base ends up right around 18-19% of GDP.

[heightsyankee]

Aug 14, 2012 0:32:19 GMT -5 @bunnybean said:

Aug 14, 2012 0:29:55 GMT -5 emmybean said:

A flat tax is not inherently regressive. It burdens everyone with the same tax rate regardless of their income (minus the exempted amount, which allows lower income earners a substantially smaller effective rate than high income earners)...how is that regressive? Am I missing something?

And, honest question from someone who is clueless on such matters: would it be possible to roll capital gains in to a broader umbrella of "income" for flat tax purposes? So the net gain or (or loss) would be just factored in to ones flat tax liability.

$5000 to me and my husband means a lot. $50,000 to a Mitt Romney is absolutely nothing. That's what he spends on Rafalca. That's what makes it regressive.

And this is, primarily, why I don't agree with flat tax. Having lived at the poverty line and also way above it, a flat tax would be detrimental to those under a certain income. I can't say where the line is, but I assure you it's very real.

Why does a flat tax = closing loop holes? Can't we start to close some of the loop holes with any kind of tax rate? Closing the loop holes and getting all companies and individuals paying their taxes would probably be a step toward making a flat tax an easier reality...

[Deleted]

Flat tax sounds nice, but we've been using our tax code to drive social policy since the advent of taxes.

Mortgage interste deduction--let's encourage home ownership
Lower tax rates for cap gains-let's encourage investment and putting capital at risk
Child care credit-let's encourage people to work, have more babies etc.

the code is so thick because it is full of these types of things.

I like the idea of a massive tax overhaul with a progressive flat tax. I'd like to see something like the first 20k exempt and then no deductions just paying 5% from 20-50k (plus FICA), then 10% from 50-100k, 15% from 100-250k, 20% from 250-1M, 25% from 1m-10M and 33% on 10M+

Or something like that.

[Deleted]

Aug 14, 2012 0:32:19 GMT -5 @bunnybean said:

Aug 14, 2012 0:29:55 GMT -5 emmybean said:

A flat tax is not inherently regressive. It burdens everyone with the same tax rate regardless of their income (minus the exempted amount, which allows lower income earners a substantially smaller effective rate than high income earners)...how is that regressive? Am I missing something?

And, honest question from someone who is clueless on such matters: would it be possible to roll capital gains in to a broader umbrella of "income" for flat tax purposes? So the net gain or (or loss) would be just factored in to ones flat tax liability.

$5000 to me and my husband means a lot. $50,000 to a Mitt Romney is absolutely nothing. That's what he spends on Rafalca's food for a month. That's what makes it regressive.

Let me fix this for you

[earlgreyhot]

I'm all for the idea of a progressive flat tax. The biggest problem I see with the tax code is it's complexity. And I believe income is income so should be taxed at the same rate. I don't have the skills to do the math, but my thinking is that the tax rates could be lower overall if we taxes wages and investment at the same rate.

As for sales tax, I liked how MA treated clothes – they were exempt save for items over a certain amount (maybe $250? $500). It was essentially a luxury tax.

I'd love to see us commit to a tax code for a set number of years and give it a chance to work. As instill the idea that people have to pay there share. I'm not opposed to using the tax code to encourage behaviors, but we also should have a "base" that we start from and can easily return to when the encouragement is no longer needed.

Is it even possible to go from where we are to such a simplified system?

[wawa]

Aug 14, 2012 7:13:43 GMT -5 heightsyankee said:

Aug 14, 2012 0:32:19 GMT -5 @bunnybean said:

$5000 to me and my husband means a lot. $50,000 to a Mitt Romney is absolutely nothing. That's what he spends on Rafalca. That's what makes it regressive.

And this is, primarily, why I don't agree with flat tax. Having lived at the poverty line and also way above it, a flat tax would be detrimental to those under a certain income. I can't say where the line is, but I assure you it's very real.

...

of course that line is real. That's the point of the excemption for the first $20k in income (or whatever it was). You pay zero taxes on that first chunk of money. Is that not enough of a break for low-earning families?

[Deleted]

Aug 14, 2012 8:34:54 GMT -5 wawa said:

Aug 14, 2012 7:13:43 GMT -5 heightsyankee said:

And this is, primarily, why I don't agree with flat tax. Having lived at the poverty line and also way above it, a flat tax would be detrimental to those under a certain income. I can't say where the line is, but I assure you it's very real.

...

of course that line is real. That's the point of the excemption for the first $20k in income (or whatever it was). You pay zero taxes on that first chunk of money. Is that not enough of a break for low-earning families?

Not to get into a deep cost of living debate, but $20k is hard when you single nevermind if you have a few kids and since the USDA has different poverty rates to qualify depending on where you live I think there needs to be a serious conversation about wealth and poverty in this country. If a family of 4 making 75k will qualify for subsidized health insurance under the ACA how do we determine where to draw the line and should the line be different for someone living in San Fran vs. someone living in Mississippi?

[ladybrettashley]

Aug 14, 2012 8:37:55 GMT -5 @septimus said:

Not to get into a deep cost of living debate, but $20k is hard when you single nevermind if you have a few kids and since the USDA has different poverty rates to qualify depending on where you live I think there needs to be a serious conversation about wealth and poverty in this country. If a family of 4 making 75k will qualify for subsidized health insurance under the ACA how do we determine where to draw the line and should the line be different for someone living in San Fran vs. someone living in Mississippi?

I agree with this, which is why I think there should be deductions for each child as well as each adult (up to a limit).

If I were Queen of America, my tax plan would be something like this:

There are two tax rates: 25% and 45%. You can deduct 401k contributions up to the legal maximum, and take a $15,000 deduction for each adult, and $10,000 for each dependent up to a maximum of 4 dependents ($40,000). All income above those deductions is your taxable income and is taxed at the 25% rate. All taxable income greater than $100,000 is taxed at the 45% rate.
All types of income are subject to the same rates, including capital gains, dividends, and carried interest.
All current deductions and credits are eliminated.
Eliminate employee portion of payroll tax, but maintain employer portion.

This would be progressive and would account for the burden of lower/middle income families who have children. But it wouldn't be so progressive that high earners would continue to be taxed at ever increasing levels. And the 45% rate would only affect the top few percent of households. Of course I don't have budget numbers, so I have no idea if this would generate the revenue needed...it's just a wild guess.

[heightsyankee]

Aug 14, 2012 8:37:55 GMT -5 @septimus said:

Aug 14, 2012 8:34:54 GMT -5 wawa said:

of course that line is real. That's the point of the excemption for the first $20k in income (or whatever it was). You pay zero taxes on that first chunk of money. Is that not enough of a break for low-earning families?

Not to get into a deep cost of living debate, but $20k is hard when you single nevermind if you have a few kids and since the USDA has different poverty rates to qualify depending on where you live I think there needs to be a serious conversation about wealth and poverty in this country. If a family of 4 making 75k will qualify for subsidized health insurance under the ACA how do we determine where to draw the line and should the line be different for someone living in San Fran vs. someone living in Mississippi?

Easy- poor people don't get to live in or near the fancy places. YWIA

[Deleted]

Aug 14, 2012 8:46:57 GMT -5 heightsyankee said:

Aug 14, 2012 8:37:55 GMT -5 @septimus said:

Not to get into a deep cost of living debate, but $20k is hard when you single nevermind if you have a few kids and since the USDA has different poverty rates to qualify depending on where you live I think there needs to be a serious conversation about wealth and poverty in this country. If a family of 4 making 75k will qualify for subsidized health insurance under the ACA how do we determine where to draw the line and should the line be different for someone living in San Fran vs. someone living in Mississippi?

Easy- poor people don't get to live in or near the fancy places. YWIA

heights-I know you are being TIC, but so many people say this or they tell people to move closer to the jobs which they can't do because they can't afford the housing. There are no jobs where there is cheap housing

(I'm also really frustrated that I have a client dinging candidates who live a 45 min. commute away from the office, yet only want to pay $45k. Most of the cheap/safe housing is on the outer burbs.).

[wawa]

Aug 14, 2012 8:37:55 GMT -5 @septimus said:

Aug 14, 2012 8:34:54 GMT -5 wawa said:

of course that line is real. That's the point of the excemption for the first $20k in income (or whatever it was). You pay zero taxes on that first chunk of money. Is that not enough of a break for low-earning families?

Not to get into a deep cost of living debate, but $20k is hard when you single nevermind if you have a few kids and since the USDA has different poverty rates to qualify depending on where you live I think there needs to be a serious conversation about wealth and poverty in this country. If a family of 4 making 75k will qualify for subsidized health insurance under the ACA how do we determine where to draw the line and should the line be different for someone living in San Fran vs. someone living in Mississippi?

I think getting into the cost of living debate would be neccessary to make sure that cut-off is set somewhere reasonable. Maybe step it - anything under 2x the poverty line is not taxed at all. Anything between 2x and 4x is taxed half as much? And then 4x is fully taxed? I dunno. I'd need to actually do the math, but I think it's possible to come up with a simple system that would help assure people are not prevented from paying for the absolute basics because of their tax bill.

I have no idea how you handle regional differences though. That's freakin' complicated.

[ladybrettashley]

Aug 14, 2012 8:47:24 GMT -5 pennypenny said:

Really 45% for 100K or higher? That is not even Obama rich.

ETA: that was in response to Ladybrettashley's post.

That is $100k of TAXABLE income after deductions. So if you were a married couple with two kids and both spouses maxed out their 401ks, they would have to gross more than $184k before they even hit the 45% rate. $184k is certainly not super wealthy, but I think the majority of Americans would consider that pretty well-off and able to shoulder a little higher tax burden.

[marie427]

Aug 14, 2012 8:47:24 GMT -5 pennypenny said:

Really 45% for 100K or higher? That is not even Obama rich.

ETA: that was in response to Ladybrettashley's post.

Agreed. I kind if agree with LBA's overall concept but 45% is too high for someone making $110K a year. I don't believe that person should be taxed the same as someone making $500k either. This is why I do want to like the idea of a flat tax but I don't think it can be reasonable for all income ranges.

And ditto septimus re: social behaviors being encouraged by the tax code. People may want things to be simple but they also want to benefit from it and deductions give people the sense that they are benefiting from the system.

[heightsyankee]

Aug 14, 2012 8:52:57 GMT -5 @septimus said:

Aug 14, 2012 8:46:57 GMT -5 heightsyankee said:

Easy- poor people don't get to live in or near the fancy places. YWIA

heights-I know you are being TIC, but so many people say this or they tell people to move closer to the jobs which they can't do because they can't afford the housing. There are no jobs where there is cheap housing

(I'm also really frustrated that I have a client dinging candidates who live a 45 min. commute away from the office, yet only want to pay $45k. Most of the cheap/safe housing is on the outer burbs.).

Oh, I am well aware. Houston (well TXDot) wanted to expand I45 and tear down 200 homes on the other side of the highway from my neighborhood. My neighborhood = middle to high income. Other side = low income. I was very happy to see my neighborhood stand up for the homes on the other side. Granted, part of the argument was rich people didn't want more noise pollution, but at public meetings a lot of people talked about how the residents on the other side have a right to live and work in the city, just like the rest of us. It was mind boggling that TXDot didn't see any value in all the people who live there.

[kadams767]

Aug 14, 2012 9:09:00 GMT -5 mr+ms said:

Aug 13, 2012 23:27:20 GMT -5 EllieArroway said:

The average income in 2009 (per the Census) was

$30,444 - individuals
$61,265 - families

So, if we did the $20k exemption/27% rate the taxes would be:

$2820 - avg individual
$5742 - avg family

Now, tell me everything I did wrong. Or let's discuss. Is a 27% tax rate (including FICA) insane? Am I way out of touch?

Am I the only one whose taxes are WAY lower than that at a 60K level? $5700 would kill us. What would you do about self-employed people who take on so much financial risk? Most small businesses are individuals and I don't know the percentage, but it's possible that a lot of these people are not paying taxes separately for their business entity. For example, something like the mortgage interest deduction is helping my business because part of my home is an office space.

Well, no, you aren't the only one. Without getting into whether it's right or wrong, this is what people are saying. If you have $60k in income and pay less than $5700, that's an effective tax rate under 10% (without accounting for FICA).

[EllieArroway]

I know that we use our tax code to encourage things like home ownership, but I don't know that I necessarily think that's a good thing.

I do think encouraging saving for retirement is good, and would need to be worked in. Not sure if it would be better to do a set amount or a percentage of income, and would it be phased out for higher earners?

And the exemption level/col debate is tough. Plus deciding whether or not to allow child deductions.

Obviously there are tons of complicated questions that have to be answered, but something needs to happen and honestly, it probably needs to end with almost everyone paying more than they do now.

[NitaX]

Aug 14, 2012 9:47:47 GMT -5 EllieArroway said:

I do think encouraging saving for retirement is good, and would need to be worked in. Not sure if it would be better to do a set amount or a percentage of income, and would it be phased out for higher earners?

The only problem I have with encouraging saving for retirement is if you just expect everyone to do it. If I make 30K a year and I have a kid, I'm probably going to just try and eat and get by. Saving for retirement if I have to do it won't happen. You have to include some sort of mandatory retirement vehicle.

This is the problem I have with privatizing Social Security. You can't expect everyone to do it or understand how to invest. It's an unrealistic expectation. Maybe what you would need to do is if we privatized SS, if you opt out, you would need to include some sort of statement with your taxes to indicate that you are in fact saving for retirement. If not, you must be included in some sort of federal or employer based retirement program.

[ladybrettashley]

Aug 14, 2012 10:22:21 GMT -5 @littlemoxie said:

Kids are somewhere in between. I mean, we want some new population growth, but some of the same benefits could be achieved by allowing more immigration, or even auctioning off some number of green cards.

If there were federal maternity leave policies and/or subsidized childcare, that could be enough help without having to involve the tax code. I mean, in 99% of circumstances kids cost more than the tax savings, right? People don't need that incentive.

I agree with this. I would be onboard with no extra deductions/credits for children if we had paid maternity leave and free childcare. But if those things are not available, I think it is necessary to have extra deductions or credits, not as an incentive to have children, but rather an acknowledgement that the necessary amount of income for someone with kids is greater than for someone without kids just to keep a roof over their heads, food in their mouths and childcare.

[EllieArroway]

Aug 14, 2012 7:03:32 GMT -5 y4m said:

What percentage of GDP would the total revenue from such a plan be? History has shown that no matter what you do with the tax code, your tax base ends up right around 18-19% of GDP.

Well for 2009 the numbers would be the same, since that's what I based the rate off of. For 2010 (assuming we don't touch corporate taxes at all -- I have no idea where to even start there):

total revenue that would have been collected with my #s (20k exemption/15% individual/12% fica):

income taxes: 1,264,923,550,000
FICA taxes: 1, 011,138,840,000
total: 2,276,062,390,000

(in reality we collected $814b in individual taxes and $820b in fica taxes -- $2.276t is actually more than the gov collected from all sources in 2010.)

so add the $2.276t to the $244b collected from other sources (corporate, excise, and estate) = $2.52t total revenue collected, $14.526 GDP = 17%

[kadams767]

Aug 14, 2012 10:28:00 GMT -5 ladybrettashley said:

Aug 14, 2012 10:22:21 GMT -5 @littlemoxie said:

Kids are somewhere in between. I mean, we want some new population growth, but some of the same benefits could be achieved by allowing more immigration, or even auctioning off some number of green cards.

If there were federal maternity leave policies and/or subsidized childcare, that could be enough help without having to involve the tax code. I mean, in 99% of circumstances kids cost more than the tax savings, right? People don't need that incentive.

I agree with this. I would be onboard with no extra deductions/credits for children if we had paid maternity leave and free childcare. But if those things are not available, I think it is necessary to have extra deductions or credits, not as an incentive to have children, but rather an acknowledgement that the necessary amount of income for someone with kids is greater than for someone without kids just to keep a roof over their heads, food in their mouths and childcare.

Using this reasoning though, it could apply to many different deductions and credits. Where do you we draw the line? The "no deductions" plan would be a total falacy again.

It costs me more to own my home than rent one. Mortgage interest deduction helps defray that cost. For a lot of people, this argument is just as valid as the child-related deductions and credits.

[EllieArroway]

Aug 14, 2012 10:22:21 GMT -5 @littlemoxie said:

If there were federal maternity leave policies and/or subsidized childcare, that could be enough help without having to involve the tax code. I mean, in 99% of circumstances kids cost more than the tax savings, right? People don't need that incentive.

I agree with you. In my perfect world, healthcare, retirement, & education (including public universities) would also be gov funded. Obviously a lot would have to change with the tax code & everything else to get there, though.

[y4m]

Aug 14, 2012 10:50:40 GMT -5 EllieArroway said:

Aug 14, 2012 10:22:21 GMT -5 @littlemoxie said:

If there were federal maternity leave policies and/or subsidized childcare, that could be enough help without having to involve the tax code. I mean, in 99% of circumstances kids cost more than the tax savings, right? People don't need that incentive.

I agree with you. In my perfect world, healthcare, retirement, & education (including public universities) would also be gov funded. Obviously a lot would have to change with the tax code & everything else to get there, though.

NOT unity horse