Flat tax...?

[kork13]

"Paying taxes is for the poor." ~Quote from my economics instructor (from 2 years ago), who drew in >$300k at that time through investments and real estate, and paid less than $1k in federal taxes. Trust me, this statement of his, and his gloating explanation of it caused him to lose some of my respect.... but it also stuck with me, and sparked my curiosity in this matter. I've thought about it on multiple occasions recently, and figured this was a perfect way to get some additional thoughts on the topic...

So what are the pro's/con's of a flat tax? We occasionally see discussion of it, but I've never really understood the "too cool for school" discussions that most authorities relate. ...now let the insight/opinions/thoughts flow in 3.... 2.... 1.... mark.


So my personal perspective says that it seems like a reasonably good way to go. I know that the policy is largely hated, but I don't fully understand why... It seems to me that it would be significantly simpler, and overall, would actually bring MORE tax inflow to the federal government. If absolutely EVERYONE paid taxes at exactly the same rate (for conversation, say 15%), then there wouldn't be question to how much you really owe. Eliminate tax breaks, loopholes, safe havens, etc. You make an income of $30k/year, you pay $4.5k in taxes. $25 million, then $3.75 million in taxes. No arguments, no complicated tax law, no expensive accountants (sorry to those here)--simple, equal, fair.

First argument I'll hear is that "fair" doesn't really apply... that 15% of a meager income is debilitating. So perhaps it could be a two-tier system (with no breaks, exemptions, credits, deductions, etc), where perhaps under $50k it's 10%, above that is 15%.

My point is that a flat tax rate, or basically a simple, no-questions-asked tax system without the loopholes, exemptions, credits, havens, etc. would be better for the country. The very wealthy would not be able to escape paying taxes on their millions and billions. Somehow, with our complicated system, the wealthy manage to avoid paying a fraction of what they really should (in spite of their supposed 35%+ tax bracket), and the poor often pay more than they actually need to out of ignorance, or not knowing the "loopholes" available to them.

I hope I have outlined my thoughts adequately... What doesn't make sense or isn't realistic is probably a result of my ignorance in the matter.

So I'd love to hear everyone's thoughts....

[jIM_Ohio]

Realize that around 60% of this country's tax revenue comes from only about 5-10% of the people which pay tax.

Meaning the rich are taxed more. We have a tiered income tax system which means you need to make over 300k (or whatever the limit is) to be taxed at the 33 and 35% levels which account for 60% of the tax revenue for the country.

If we implemented a flat tax the poor would be penalized. Why? Because the revenue we collect as a country needs to stay constant (and some would argue needs to go up), so to do this that 15% bracket where most of the country is now would need to pay probably 25-30% just to keep the budget even (because we would losing the 33 and 35% brackets which account for most of this country's tax revenue).

Some will then argue taxes on the middle class doubled from 15% to 30% for example.

The people in 33 and 35% brackets will love a flat tax because they will pay less from a marginal bracket standpoint.

My own personal philosophy is I want one tax for federal and one tax for state. Both should be income taxes.

Get rid of sales taxes
Get rid of telephone taxes
Get rid of cable taxed
Get rid of property taxes
No more tax on gas
No more tax any anything other than income and maybe personal property.

My logic is that money is being taxed twice (I pay income tax, then go buy something and that money spent is taxed again). If you do business to business transactions there is sales tax again, if I am on a business trip there is an airline tax, a rental car tax, a stadium tax on the rental car, sales tax on all the meals I eat- and then my company has to pay taxes on the profit it made from my trip.

Simplify- eliminate a tax, then adjust the top income tax bracket to make up that revenue.
eliminate another tax and adjust the second highest income tax bracket to make up that revenue
eliminate a third tax and adjust the third highest income tax bracket to make up that revenue

and keep doing this- I bet we find we are paying close to 40% or 50% in taxes without realizing it. Poor people might be paying an even higher percentage than that.

The pass to amendments to constitution-
an amendment which states the goverment can only tax income, personal property and benefits related to either of those things.

a second amendment which requires the budget to be balanced every year and any increase in spending must be accounted for by adjusting the income tax (the government cannot choose to tax renting a car to pay for some program to improve the self esteem of blind people)

Put me on the ballot in 2012 and I will make it happen

[kork13]

I guess my question is this...

Why do we have all these ways to escape paying our taxes? Exemptions, credits, deductions, etc. I see how we do need the tiered system, but I think we could do taxes better as simply saying "You owe Uncle Sam [this much] of your income." end of story.

Also, I totally agree about the "side taxes"... i grew up without sales tax, and don't think I'll ever get used to it. As for the rest, yea, it does seem we're taxed muliple times on the same money.... sooo..... to write you in this Nov., does the underscore go as a part of the first or last name?

[jIM_Ohio]

The exemptions, credits and deductions have a few purposes

1 is basic tax theory- give exemptions to people which create new tax payers (meaning give exemptions for kids). If you don't create new tax payers the whole system could shut down (that is tax theory, or so I am told).

2 incentives- some people might bank their money and not spend it. Spending it on education for example improves the intelligence of the country and creates intellectual property in this country- again more tax theory, but one could argue that if the deductions or credits did not exist, the money might not get spent to begin with.

3) Many of the credits and deductions you mention get phased out for high income. The working class have many many more credits available to them than the people which earn 200k+. The credits are actually a way to reduce the taxes for the poor. But at same time those credits are an incentive for the poor to do something to improve their situation and create more tax revenue.

[kork13]

hmmm...... that's new understanding to me.... thanks, jim

^_^ Maybe in all this what I'm REALLY saying is that I wish filing my taxes every year wasn't so difficult.... hahahaha never know....

[maat55]

I would rather see a consumption tax that exempts necessities with a minimal 5% income tax.

[Aleta]

I would also like to see a consumption tax based plan. I think that savers would finally feel like that they were really saving and not paying taxes on the little that some save.

Consumption tax actually gets alot of the money from underground and illegal means and gets taxed.

[kork13]

what exactly is a consumption tax? how does something like that work as opposed to what jim noted above?

[sweeps]

Originally Posted by kork13

what exactly is a consumption tax? how does something like that work as opposed to what jim noted above?

A flat tax refers to an income tax where everyone pays the same percentage of income in taxes. A consumption tax is a sales tax. If you go to the store and buy a loaf of bread, you might pay 25% national sales tax (plus state and local sales tax) on that loaf of bread (but you wouldn't have been taxed on your income). There are a few pros to this approach but there are some serious cons.

[jIM_Ohio]

Consumption tax works well for savers
Consumption tax penalizes those of us using a Roth and benefits those of us with a 401k or tax defferred retirement plan.

opinions-
consumption tax really hurts the poor. The basic staples we buy (bread, milk, gas) would be taxed real high. The rich need these things and the poor people do to.

The price of these goods would go up (because of the tax).

Consumption tax also benefits businesses if the business is not exempt from taxes on profits (income taxes).

[maat55]

Originally Posted by jIM_Ohio

Consumption tax works well for savers
Consumption tax penalizes those of us using a Roth and benefits those of us with a 401k or tax defferred retirement plan.

opinions-
consumption tax really hurts the poor. The basic staples we buy (bread, milk, gas) would be taxed real high. The rich need these things and the poor people do to.

The price of these goods would go up (because of the tax).

Consumption tax also benefits businesses if the business is not exempt from taxes on profits (income taxes).

Many times when the consumption tax is presented, it has certain exemptions for food, clothing and shelter. A straight consumption tax would severely hurt the poor. With necessity exemptions it would be fair.IMO

[banditfist]

Guys,
The tax system now in place is the perfect model that allows politicians to put loopholes and special cases into the code. A flat tax destroys this ability. How can the lobbyist take care of the corrupt politicians then?

[PrincessPerky]

While I realize that many poor folk do not pay any income tax (they do pay other taxes) I am STILL in favor of a flat tax.

possibly a two or three tiered flat tax, but flat no deductions nonetheless.

While I can understand encouraging folk to make taxpayers, in general it is the poor who make em, and they don't end up paying very much. certainly not enough to pay back the deductions mom and pop got for all those years.

I say this while I have 4 lovable deductions at home myself, I realize my theory on taxes would leave me paying a bit more, but it would also be more fair. I am more interested in fair than my own pocket book.

I would be in favor of not taxing retirement interest until it is withdrawn. To encourage others to save, rather than relying on SS.

But regular savings should be left alone up to a certain point.

The trouble is folk want the govt to keep spending willy nilly while not taxing themselves, someone has to pay for all those pet projects. if we switched to food banks and free dorms dropping welfare, and the subsidies (paying farmers NOT to farm!) the budget wouldn't need to be quite so big.

I think a 10-20-30 tiered system would be adequate to pay for what is really needed, add a 40 from the truly rich, to cover corruption, and we are set

[JinCO]

I'm not sure how your instructor is getting away with earning so much and not paying taxes. I don't think our system is setup to tax the poor. Because of deductions, credits and exemptions, a family of four can earn about $43,000 and pay $0 federal income taxes. My wife and I will earn about $260K and pay somewhere between $40K and $50K in federal income taxes this year.

[bigsaver]

Out of curiousity, what types of deductions do you use to only pay 40k of tax on 260k.

[jIM_Ohio]

40k of taxes on 260k is 15% tax rate.

Based on marginal brackets the tax owed on 260k is:

SINGLE: 16,056.25 for first $164550+33% of (260,000-154,551= 105,449)=33% of 105,449=34798

16056+34798=50854 owed. Reduce this by standard deduction of 10900 I can see the 40k number if he files as single. No other deductions needed.

This would be even easier to achieve if married.

Use numbers from tax tables at
Reference Room

[cptacek]

Isn't the AMT really a flat tax? And everyone hates that tax. So why would everyone love a flat tax called something different?