Simplified Tax Plans and Flat Tax Rates

Many Republicans are drawn to simplified tax plans that use graduated flat tax rates for federal income taxes.  I’m a liberal, but I also find the idea interesting.  Now the chance of such a system being implemented is very close to zero, but it’s still an interesting topic.

flat-tax-fair-tax-1

Why do simplified tax systems have no chance?  Well, if we had a flat tax, there would be no deductions.  Levying tax breaks gives lawmakers power.  Law makers have various forms of power.  They can regulate and not regulate, they can tax and not tax, they can spend and not spend.  If we went to a flat tax our leaders would lose one-third of their tools of power.  Can you imagine that?

If we went to a flat tax system think of how many millions of people we’d put out of work.  First, many that work at the IRS would be added to the unemployment rolls.  But then think of all those bean counters and lawyers that work at corporations whose careers depend on finding tax loopholes, those people wouldn’t be needed either.  Then companies like Turbo Tax and HR Block would go out of business too.  And think of all those little people who do people’s taxes every year would also be out of work.  And what about lobbyists?  There would be less work for them too.

All-in-all, if we went to a flat tax system it would put millions out of work.  Our complicated system of federal taxes is a never-ending economic stimulus package.  Is getting rid of it even possible?

The government could enact a flat tax so we didn’t even have to prepare annual tax forms – just take their cut in every income transaction.  They could come up with a graduated flat tax so most people would end up paying the same or less than what they do now and the government would earn just as much money without all the complications.  Most advocates hope they would pay less and that tax cheaters would pay more, and the privilege would pay the same as the those people without influence.  Of course that means those with connection to power would pay a lot more.  Are they really going to back such a system?

Theoretically, a flat tax would be fairer, until lawmakers tried to reintroduce the first exception, then it would get complicated all over again.  A flat tax depends on lawmakers giving up their power to help certain groups or endeavors with tax breaks.  Will that ever happen?  I don’t think so.  Can you imagine such a world?  Businesses couldn’t wheel and deal for favors.

And what if this extended to states and cities.  One tax for all.  How could states entice companies into their borders without tax break incentives?  But wouldn’t that also be fairer for competition if everyone had to pay the same taxes?  Could we survive in a society where all individuals and corporations were treated absolutely the same by the taxman?

People get home mortgage deductions because the government wants people to own homes.  That kind of social influence would be over.  Is that good or bad?

What if the government eliminated tax havens and all other forms of “legal” tax evasions so there was no way to to skip out on taxes.  Just kill off accounting chicanery, tax-law loopholes, or off-shore three-card Monte, and the issue of how much people or corporations paid in taxes were no longer an issue for debate – could we handle such a society?

For people who take the standard deduction every year a flat tax wouldn’t be a big deal, but for those people delight in adding up their deductions and lowering their tax bill, a flat tax might be a bummer.  Some people hate to pay taxes and will do anything they can to lower their tax bills.  If they can’t shoot for zero taxes I doubt they will be happy.  What happens if everyone pays the same?  I think a certain percentage of the population would revolt at such egalitarianism.

And should everyone pay the same?  Do some people do things for society that merits lowering their taxes?  Will the go-getters of society be happy if their efforts are taxed in a higher bracket than the indolent?  All flat tax proposals depend on the idea that the poor pay a flat rate less than the rich.  Could we come up with a rate and rational that will satisfied the rich?  Currently the rich live in higher tax brackets, but they get the chance to lower their taxes with our complicated tax system.  If we had a simple system, there would be no hope for them.

Right now the rich protest they pay at a higher tax rate than the poor, so they are being penalized as individuals.  We could think of that in another way, we could create a flat tax saying that norm for all humans is to make $100,000 a year.  If you are unfortunate enough to make less we’ll put you in a lesser tax rate for your suffering.  But should someone making $250,000,000 a year pay at a different rate than someone making $100,000 or $10,000?  Are we taxing the person or the income?  Is a rich person different form a poor person in the eyes of the law?  We could consider income like pollution.  The bigger the impact you have on the environment, the more taxes you pay.  It’s actually very hard to justify how to tax people.  If a person only makes $14,000 and the government makes them pay $1,400, is that the same as someone who makes $140,000 and has to pay $14,000, or someone who makes $140,000,000 and has to pay $14,000,000.  Does 14 million hurt as much to a super-rich person as $1,400 hurt someone on minimum wages?  But if the super-rich have a 20% flat tax, they’d be paying $28,000,000.  They’d still have $112,000,000 to spend that year, whereas the poor person would only have $11,200.

See how hard it is to make a fair tax system.  I suppose we could add up all the expenses for the country and then divide by the 313,000,000 people who live here, and everyone pay their fair share.  But then many people would owe more than they earn.  That’s why the rich have to pay more.

As far as I can foresee, I can’t imagine a flat income tax system ever passing Congress.

JWH 5/5/12

2 Responses

  1. Jim, a flat tax has nothing to do with deductions. That’s just how they market it. You can have a flat tax with deductions, and you can have progressive tax rates without deductions. They’re two different things.

    Right-wingers market a flat tax as tax simplification because they know that so many people are sick of our complicated income taxes. But the flat tax has nothing to do with that. We could make income tax preparation simple enough to put on a postcard and still keep a graduated tax rate. Please don’t buy into their phony argument.

    I’ve got another objection, too, I’m afraid. In reality, the rich don’t pay a higher tax rate than the rest of us, not on average. (Just look at Mitt Romney.) There are a number of reasons for that, but the biggest is that the wealthy tend to get much of their income as dividends and capital gains, which are taxed much less than ordinary income.

    They can take more advantage of tax shelters, too. True, the highest tax bracket is probably more than what you or I pay, but that’s misleading. The rich actually tend to pay a lower tax rate than middle class working people. Much of their income isn’t even considered taxable income at all.

    And they pay a lower rate on payroll taxes, too, if they pay them at all. The right-wing loves to say that half the country doesn’t pay taxes, but that’s a lie. Many people don’t make enough to pay federal income taxes – and again, some of them are quite well off and just shelter their income – but even the working poor pay payroll taxes at a significant rate (not to mention other taxes).

    But high-earners only pay payroll taxes on part of their income, and wealthy people who have passive sources of income don’t pay it at all. (I’m not wealthy, but I don’t. And my income tax rate is embarrassingly small, since I live entirely on investments.)

    The right-wing has done a very good job of misleading people about these things. Well, that’s their specialty.

    • There are many different tax simplification plans, and some of them involve flat tax rates. And some of those involve doing away with all deductions. My research shows that few people want flat tax rates or even simplified tax systems. Some people want flat rates hoping to pay less, and other people want flat rates hoping everyone will pay equally.

      No one likes paying taxes, and many people deeply resent it, and some people feel the whole system is corrupt. My point is taxes are used for power, influence and agents of change, and that is corrupting, and I doubt politicians will give up that power.

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