do you think the u.s. should do a flat tax?

[tgavin71]

Re: do you think the u.s. should do a flat tax?

I wish we had a flat tax rate. Many times when overtime is done the dreaded bracket creep kicks in. It is ridiculous that people who work hard get penalised. As long as it is the same for all it won't matter how much you earn. If it was say 20% those on $20,000 would pay $4000 and those on $200,000 would pay $40,000. I'd even tax people on welfare as well.

[sweeps]

Re: do you think the u.s. should do a flat tax?

Well, look at the bright side. In a bracketed structure, any tax break you can find comes off your highest bracket.

[Bruce Wayne]

Re: do you think the u.s. should do a flat tax?

What is the tax free personal allowance in places such as Hong Kong and Estonia?

Did some research and the amount of basic tax-exempt income (personal allowance) is 20400 Estonian kroons (approx. 1302 euros). Parents with children under 17 years have an additional personal allowance per third and every following child and certain state pensions and pensions from compulsory pension schemes are subject to an additional personal allowance of 36000 Estonian kroons per year (2298 euros).

Estonia's economy has grown impressively since its 1994 reform. Growth reached double digits in 1997, and has since settled at around 6% annually, after a slump at the turn of the century. Repealing its high tax rate on the rich did not erode the country's tax base as some might have feared. In 1993, general government revenues were 39.4% of GDP; in 2002, they were 39.6%. Estonia now plans to cut its flat tax from 26% to 20% by 2007.

But how much do Estonia's robust revenues owe to its flat income tax? Perhaps less than is frequently advertised. In 1993, the year before its reform, Estonia's multiple personal income taxes raised revenues amounting to 8.2% of GDP. In 2002, its flat income tax raised revenues worth just 7.2%. Indeed, the flat income tax that generated so much excitement abroad seems to be carrying less weight than Estonia's old-fashioned VAT, which raised 9.4% of GDP in revenues in 2002.

The most remarkable turnaround in government revenues was recorded in Russia. Prior to its 2001 tax overhaul, the federal government's tax-raising powers were rapidly deserting it. Clifford Gaddy and William Gale of the Brookings Institution report that tax arrears amounted to 34% of collections in 1997. By 1998, federal revenues had fallen to just 12.4% of GDP, leaving the government unable to pay its creditors. Investigators appointed by the president revealed that Russia's biggest enterprises ignored 29% of their taxes and paid another 63% in kind, with goods and services the government might or might not want. In lieu of $80,000 in taxes, one company reportedly offered the government ten tonnes of toxic chemicals.

On January 1st 2001, Russia flattened and broadened its personal income taxes, collapsing 12%, 20% and 30% bands into a single, uniform 13% rate. The state also withheld taxes at source, identified taxpayers by number, and audited suspected tax-dodgers. Messrs Gaddy and Gale note that no tax system could hope to bring in much revenue without these rudimentary instruments of tax enforcement.

How did revenues respond? A year after the reform, the personal income tax was raising almost 26% more revenue in real terms. Some of this was due to the rebound in the economy: real wages grew by 12% that year, and the take from all taxes, flat or otherwise, consequently improved. But the surge of rubles encouraged by the flat tax was more sustained.

A careful study by two IMF economists, Anna Ivanova and Michael Keen, together with Alexander Klemm, of the Institute of Fiscal Studies in London, tries to unearth the causes of this pleasant fiscal surprise. They find little evidence that Russians, freed from the yoke of progressive taxation, suddenly started working much harder. This is perhaps not surprising, as Russia's reform actually raised personal income taxes for the many households that previously fell into the 12% bracket.

They did discover a conspicuous increase in compliance with the tax authorities, however. In the year before the flat tax, Russians in the two higher tax brackets reported only 52% of their income to the taxman. In 2001, after falling into the new, all-encompassing 13% bracket, these same households reported 68%.

[VJW]

Re: do you think the u.s. should do a flat tax?

I wish we had a flat tax rate. Many times when overtime is done the dreaded bracket creep kicks in. It is ridiculous that people who work hard get penalised.

This perspective indicates a fundamental misunderstanding of the tax system. We have a progressive income tax not to 'penalize' the wealthier incomes, but to prevent the lower incomes from being penalized. A single-rate flat tax would have to be 35% to 40% to be revenue neutral to where we were in 2000. That level of taxation would bankrupt the Middle-class and worse for the Working-Poor. Therefore, the only manner in which to provide realistic tax rate levels for the lower incomes is to raise them on the higher incomes, which by the way is where the bulk of the income exists.

A simple solution to your "dreaded bracket creep" would be lots of incremental brackets as they used to have instead of just a few large jumps in rates.

Again, "flat" is not limited by a single rate.

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[VJW]

Re: do you think the u.s. should do a flat tax?

A careful study by two IMF economists, Anna Ivanova and Michael Keen, together with Alexander Klemm, of the Institute of Fiscal Studies in London, tries to unearth the causes of this pleasant fiscal surprise. They find little evidence that Russians, freed from the yoke of progressive taxation, suddenly started working much harder.

That’s what I was telling you previously. You have to make sure that you’re not attributing a result to what is more likely one side or another of a cyclical economic curve. Not to mention, once again, not attempting to compare emerging economies with industrialized economies.

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[JBinKC]

Re: do you think the u.s. should do a flat tax?

I think they should abolish all income taxes and establish a VAT.

[VJW]

Re: do you think the u.s. should do a flat tax?

I think they should abolish all income taxes and establish a VAT.

A VAT would act the same as a national sales tax. Even with exemptions for food, medical care, prescription drugs, and housing, the Middle-class would pay almost THREE TIMES as much of their income, proportionally, as the wealthy, and the Poor would pay FIVE TIMES as much of their income, proportionally, as the wealthy.

Some of the impact of the heavy regressiveness of a Single-Rate income tax, National Sales tax, or VAT, can be blunted by a large exemption at the bottom, however this thereby reduces revenues even further which then requires raising the eventual rate even higher.

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