Flat Tax Pros & Cons

[genchan]

Can someone please explain to me the positive and negative aspects of a flat tax replacing the current income tax?

[cercis]

The major negative is that no one can agree about the amount that should be exempted.

Most people agree that some should be exempted, but no one agrees what it should be.

The thought on the exemption is that it takes a certain amount to live, poverty level as it were. Now, most of us know the poverty level is pretty much a joke in that no family could actually live on poverty level wages (unless they are getting major welfare, etc). The thought is that you should be taxed on your "disposable income". Well, then you have the people who claim that as your income increases your expenses must also increase (I guess they think they HAVE to have that 5 bedroom mcmansion and the lexus).

The positive is that it is easier to figure out. You state your income, deduct the living expense allotment and then multiply by the percentage.

Another negative is that no one is sure what the percentage should be. And a lot of charities are afraid (probably rightfully so) that they will see a major decrease in contributions when the tax deduction incentive is removed.

There's also the negative of what constitutes income. Does interest earned on inherited investments count as income? If not, then you can have someone who has never worked a day in their life but who collects in excess of $100k/year and not owe anything in taxes.

[Roger]

Flat tax positives - easy to calculate, everyone is taxed at the same rate and pays the same amount per dollar of income, i.e. earn 1 buck pay .20, earn 1,000,000 pay 200,000
Negatives - politics, special interests, ignorance and fear of change

For your information, I could (but won't due to privacy issues) name you a dozen families who live on less than the official poverty level, they do not have a large, air conditioned house, cell phones, internet access, cable television or a car from this decade, but neither do they receive welfare, fight with their children about $100 a month allowances being puny, worry about what the kids are doing when both parents are at work (they all live on one income) and nobody can claim they are dirty, lazy or untrustworthy

[crosses]

How much is the official poverty level?

[Bruce Wayne]

Positives: Easy to understand, potentially producing greater income (due to less avoidance of tax + less wastage on collection), greater incentive to earn your own money, larger personal allowance

Negatives: (had to think hard for some) nope, can't think of any.

Alot of countries have tried flat tax and it has worked very well for them with both national income and government income rising. Have a look at Russia for an example.

[PrincessPerky]

Originally Posted by cercis

.. Now, most of us know the poverty level is pretty much a joke in that no family could actually live on poverty level wages (unless they are getting major welfare, etc). .

Some one forgot to tell my family that, we live on a couple of thousand over the poverty level in our area. Somehow we are doing just fine. (no welfare, no charity)

[VJW]

Originally Posted by Roger

Flat tax positives - ... everyone is taxed at the same rate and pays the same amount per dollar of income

That’s actually a 'Negative', as having everyone pay "the same amount per dollar of income" means that even with exemptions for food, medical care, drugs, and housing, the Middle-class would pay almost 3 times as much of their income, proportionally, as the wealthy, and the poor would pay 5 times as much of their income, proportionally, as the wealthy.

#

[VJW]

Originally Posted by crosses

How much is the official poverty level?

$19,350 for a family of four.

#

[VJW]

Originally Posted by Bruce Wayne

Positives: ... potentially producing greater income

It’s been well documented by the U.S. Treasury that it would garner far LESS revenue, not to mention that the two professors who were the ORIGINATORS of the so-called “Flat Tax” have stated from the getgo that it would garner far LESS revenue.

You’re falling for the hype.

greater incentive to earn your own money

What incentive ?

Alot of countries have tried flat tax and it has worked very well for them with both national income and government income rising. Have a look at Russia for an example.

Non-industrialized countries.

#

[jmjj215]

due to less avoidance of tax

You really think people would not avoid a flat tax at 20% (or whatever %) - but would avoid it now? I think you'd see avoidance - evasion is probably a better word - either way.

[Bruce Wayne]

Originally Posted by VJW

It’s been well documented by the U.S. Treasury that it would garner far LESS revenue, not to mention that the two professors who were the ORIGINATORS of the so-called “Flat Tax” have stated from the getgo that it would garner far LESS revenue.

I'm using real life examples. In 2001 Russia adopted a 13% flat tax. Russia’s economy has expanded by about 10 percent since it adopted a flat tax. That may not be spectacular, but it’s better than the United States, and it’s very impressive compared to the anemic growth rates we see elsewhere in Europe.

Over the last two years, inflation-adjusted income tax revenue in Russia has grown 50 percent. Why? Because people are willing to produce more and pay their taxes when the system if fair and tax rates are low.

There are other industrialised nations using flat taxes very successfully. Hong Kong has had a flat tax for a long time, and it’s been the world’s fastest-growing economy over some 50 years.

[Roger]

Originally Posted by VJW

That’s actually a 'Negative', as having everyone pay "the same amount per dollar of income" means that even with exemptions for food, medical care, drugs, and housing, the Middle-class would pay almost 3 times as much of their income, proportionally, as the wealthy, and the poor would pay 5 times as much of their income, proportionally, as the wealthy.

#

I thought we were talking about a Flat Tax, not a "tax the rich because they can afford it" scheme. I believe if you look at the math, you will see that you are wrong when you say the poor and middle class would pay more proportionally. Perhaps you would like to take a space here and explain how you calculated your conclusions.
If everyone is paying 20 cents on every dollar they earn, how can the so-called wealthy be paying less? That is what happens with the system we have today. Under a flat tax, if you earn a dollar, you pay a flat percentage of it to the government. Hence the name - flat tax.

[cercis]

http://www.atdn.org/access/poverty.html

In my area, you can't buy a house for less than $40k (I've looked and kept looking, that includes 2 bedrooms). That's a house payment of $400/month (with property taxes and insurance). So $4,800. To rent an apartment is considerably more - for a family of 4 you are required by law to have a 3 bedroom apartment (unless both kids are the same gender). A 3 bedroom apt is $500/month, plus you need to buy renters' insurance and it doesn't include utilities. But we'll stick with $4,800.

Plus there is SS tax on the income (the poverty levels are pretax dollars) so for the family of 4 that's $1,175.

Then you have health insurance (since most jobs paying poverty level don't pay health insurance or only pay a little). For a family of 4 the cheapest health insurance I could find was $489/month. We'll assume that I just couldn't find the best insurance and cut that to $400/month - another $4,800.

Then you have utilities. The minimum payment for electric is $25 (that's the absolute minimum they will charge). The lowest electric bill I've ever had (840sqft home, no AC) was $40/month - $480. Trash and water is $25/month minimum (and you have no choice but to have garbage service in most cities) - $300. Phone of some sort (you need some sort of phone for emergencies because you can't rely on your neighbors or payphones - assuming you can find a payphone) minimum $25 - $300.

That leaves $7,495 for food, doctor visits, transportation costs, clothes, school supplies, etc. $625/month sounds like enough for that, but that's if all your expenses were kept to the absolute minimum, which never seems to happen as much as you try your hardest.

Most people making poverty wage collect WIC and medicaid insurance for their kids. That's a form of welfare.

[PRICEPLUS]

How about a value added tax instead of a flat tax?

[VJW]

Originally Posted by Bruce Wayne

I'm using real life examples.

Too bad they’re not relative.

In 2001 Russia adopted a 13% flat tax. Russia’s economy has expanded by about 10 percent since it adopted a flat tax.

And who says it wouldn’t have if it hadn’t adopted a flat tax ? Geez, China is growing far faster than that under Communism !

Over the last two years, inflation-adjusted income tax revenue in Russia has grown 50 percent. Why? Because people are willing to produce more and pay their taxes when the system if fair and tax rates are low.

You’re claiming that the rooster crowing causes the sun to rise every morning.

There are other industrialised nations using flat taxes very successfully.

Like ?

Hong Kong has had a flat tax for a long time

You’re making my case for me:

A) Only the top 1.5% of income earners are subject to the single-rate ‘flat tax’ in Hong Kong.

B) The other 98.5% of taxpayers in Hong Kong pay a graduated income tax which consists of four separate tax brackets and allows for sizable personal and dependent deductions.

and it’s been the world’s fastest-growing economy over some 50 years.

More evidence favoring a progressive income tax.

#

[VJW]

Originally Posted by Roger

I believe if you look at the math, you will see that you are wrong when you say the poor and middle class would pay more proportionally.

You believe wrong.

Perhaps you would like to take a space here and explain how you calculated your conclusions.

Neither the calculations or the conclusions are mine. You need to take it up with the Treasury Department and the Congressional Budget Office, as well as Professor Robert Hall and Professor Alvin Rabushka.

If everyone is paying 20 cents on every dollar they earn, how can the so-called wealthy be paying less?

Because the wealthy spend a tiny fraction of their income on necessities, while having large amounts of discretionary income, whereas the Middle-class spends far more, PROPORTIONALLY, of it’s income on necessities, while a fraction of their income is discretionary. The Working Poor spend practically ALL their income on necessities and have almost no discretionary income.

It’s Economics 101.

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[VJW]

Originally Posted by PRICEPLUS

How about a value added tax instead of a flat tax?

Flat tax, National Sales Tax, Value Added Tax, Fair Tax, are all versions of a consumption tax, and consumption taxes are inherently regressive, which greatly favors the wealthy, while badly hurting the Middle-class and Working Poor.

#

[Bruce Wayne]

Its an interesting point about the tax situation in Hong Kong. For those not familiar with taxation there here is a summary:

Hong Kong has no payroll tax for Social Security, no general sales or value-added tax, no tariffs on imports and no personal tax on income from financial assets. What Hong Kong has is called a "Dual Tax" -- progressive tax rates on labor income but a flat tax of 17.5 percent on corporate profits, 16 percent on property owners and unincorporated enterprises.

The low tax on profits brings in substantially more revenue than the tax on salaries, in marked contrast to the United States, which collects little from profits taxes that are nominally twice as high. Corporations in Hong Kong pay the profits tax before distributing dividends to shareholders, so there is no extra tax on dividends to be collected from individuals. Reinvested profits result in more business income to tax in the future, so there is no extra tax on capital gains to be collected from individuals.

Companies in Hong Kong deduct interest payments, however, so it would be theoretically appropriate to tax individuals on income they receive from local corporate bonds. This exemplifies the key tax principle of symmetry: Whatever is a deductible expense for those making any payment ought to be taxable income for those receiving that payment. But there would still be no need for individuals to report interest income, because a flat tax can easily be collected at the source, before the check goes out.

Personal income (salary) is taxed thus:

15% of "assessable income" after the deduction of allowances (raised to 16% in the 2003/2004 budget); or

A progressive rate levied on "assessable income" after the deduction of allowances. These progressive rates are:
Nil to HK$35,000 - 2%
HK$35,000 to HK$70,000 – 7% (8% from 2004)
HK$70,000 to HK$105,000 – 12% (14% from 2004)
HK$105,000 upwards – 17% (20% from 2004)

You can also get deducations from your taxable salary of the following:

Charitable contributions representing up to 10% of an individual's income;
A residential care allowance in respect of a parent or grandparent of up to US$7,700 per annum.
Home loan interest deductions of up to US$12,800 per annum, for 5 years (extended to 7 years in 2004).
A current pension allowance of up to US$1,550 per annum conditional on the monies being invested in a recognized pension fund.
Depreciation allowances on all plant and machinery essential to the production of income subject to salaries tax.
A single person's allowance of US$13,850 (reduced by about 8% in the 2003/2004 budget)
A married persons' allowance of US$27,700 (reduced by about 8% in the 2003/2004 budget)
Child allowances of US$3,850 on the first and second child and US$1,925 thereafter.
Dependent parent, grandparent,sister, brother sibling (to include more than one where necessary) - allowances US$3,850 each.
Dependent disabled person's allowance of US$7,700
Education allowance of US$3,850 for any course which educates or assists an employee in his profession.

So you can see that people have a choice over whether they are taxed progressively or via a flat rate. With either system the tax rate is incredibly low, yet the tax revenue is approximately 1% of GDP less than in America, despite the US having much higher general taxes.

I would like to think VJW that even you can see that such a system of flat tax with high personal allowance certainly would not harm low earners as they would probably get to keep large chunks, if not all, of their salary as personal allowance. They also would not be taxed on purchases, savings or investments.

[PrincessPerky]

Originally Posted by VJW

Because the wealthy spend a tiny fraction of their income on necessities, while having large amounts of discretionary income, whereas the Middle-class spends far more, PROPORTIONALLY, of it’s income on necessities, while a fraction of their income is discretionary. The Working Poor spend practically ALL their income on necessities and have almost no discretionary income.

It’s Economics 101.

#

So I suppose you would like to punish people who earn more/spend less? I should be taxed higher than my firend who lives above her means every month? I have a higher percentace of 'discrecionary income' after all. The fact that it is due to my own hard work means nothing I suppose, I should pay more in taxes becaue I use my money wisely?

Sorry while I will agree that the richer you are the easier it is to 'hide' money I will not agree that rich people should be taxed higher than me, just becasue they have more spare change. 20 cents on the dollar is still 20 cents on the dollar (and truthfully since our money is taxed in out, during 'storage' and every other way concevable I doubt it is as low as 20cents right now.)

[Roger]

[quote=VJW]You believe wrong.
[quote=VJW]
Can you prove it?



[quote=VJW]
Neither the calculations or the conclusions are mine. You need to take it up with the Treasury Department and the Congressional Budget Office, as well as Professor Robert Hall and Professor Alvin Rabushka.
[quote=VJW]

The Treasury Department has a vested interest in keeping the current system. If it was a Flat Tax, there wouldn't be a need for most of the people who work at the Treasury Department.

[quote=VJW]
Because the wealthy spend a tiny fraction of their income on necessities, while having large amounts of discretionary income, whereas the Middle-class spends far more, PROPORTIONALLY, of it’s income on necessities, while a fraction of their income is discretionary. The Working Poor spend practically ALL their income on necessities and have almost no discretionary income.
[quote=VJW]

You are right about the amount of income spent on necessities by the classes. That does not mean the tax is proportional, the tax would still be a flat percentage.


I think this discussion is going no where between us, so until you can produce something more to talk about, besides our beliefs, I am done.