Flat tax?
I’ve been thinking about taxes recently and reading Andrew Sullivan’s opinions on them, and I’m mostly convinced that a flat tax with a significant standard deduction/personal exemption is at least a reasonable idea. I haven’t yet convinced myself to support it, but I can’t think of any arguments against it. The Rockridge Institute has a good argument that rich people should be expected to pay more in taxes than poor people: they get more in return from the government. But that doesn’t easily extend to an argument that they should pay a higher percentage of their income. If you have a good argument against a flat tax, please comment.
If we assume that no tax should interfere with your ability to feed and house your family and that taxes should treat everyone equally otherwise, then we get the following system. First, add up all of your income. That includes both money you worked for and interest and capital gains. Subtract the poverty line for your household. Multiply that by the tax rate, which is the same for everyone. Pay that amount to the government. Oh, and payroll taxes are evil and should be rolled into the standard income tax.
tax = net_income * tax_rate
net_income = income - poverty_line(your_household)
income = earned_income + capital_gains
+ interest + forgotten_stuff?
Variations are possible on this theme. We’d probably want to keep some deductions, like for green vehicles, mortgage payments, and charitable donations. These can be subtracted from the net_income. Given deductions, we might want an alternative minimum tax, which could be simply (income - poverty_line) * lower_tax_rate, and then your tax is the larger of the two. Finally, we might want some tax credits. I suspect that these are a bad idea, and that the government should directly subsidize anything it is tempted to give a tax credit for, but they easily fit in as a decrease in the total tax.
Hey Jeff, long time, no talkie.
I agree with the flat tax schema, for a few reasons. First off, it’s more or less fair. Just straight up, plain ‘ol fair. No crazy exemptions, no rich folks with badass lawyers finding nutso loopholes, just taxes. That’s it.
Also, say goodbye to complicated forms, thousands of trees of wasted paper, and a multitude of headaches. And, I believe it’d be reasonable to assume, through simplifying the process of paying taxes, that more people would file taxes, more income would be received. Also, with less loopholes, the very richest would end up paying more than they previously did. That might be a moot point, but the advantages of having a simple tax system are plentiful and significant. Also, no more complicated IRS. Efficient (or at least a possibility for) bureaucracy.
-Alex
Comment by Alex Wiltschko — 3/21/2005 @ 10:05 pm UTC
A flat tax is not the same thing as no exemptions. The question of what the tax should be for a given income is completely orthogonal to the question of how we determine that income. If we think that money you’re using to pay for a house, or to get an education, or to drive a fuel-efficient car, shouldn’t be taxed, then we just don’t add it into your “income”. So there’s no particular reason to think that a flat tax would wind up any less complicated than our current progressive system.
Comment by Jeffrey Yasskin — 3/21/2005 @ 10:39 pm UTC
ooh, touche salesman. however, my gut feeling says it’d make things easier, and the way i visualize this in my head (very rough and hypothetical), i’m not willing to give that concept up. but you’re most likely right.
Comment by Alex Wiltschko — 3/21/2005 @ 10:41 pm UTC
Summary:
Flat taxes will straightforwardly result in the rich paying less, not more, and as Jeff says, probably no less complication. I think this is bad.
Elaboration:
Well, tax law is really all about effects. The global depression of the 30s proved that you can’t keep order without paying off most of your citizen-peasants not to starve and revolt. Call it a social safety net, or a tax-and-spend welfare state. Of course, the government should make sure to get the most labor and value out of all of that other people’s money. Communist governments tried to do it all themselves, but for better efficiency, capitalist governments hire interchangeable subcontractors.
The wealthy always insist they can handle paying off the populace perfectly well themselves, but the fact is that you can only spend so much on luxury goods, and the wealthy just aren’t quite generous enough about throwing their money into the bottomless cash sinks of art and science. Currently the US is biased to science rather than art, as our government hires relatively few people as painters, sculptors, musicians, composers, poets, and writers, and more as doctors, physicists, and mathematicians. Our art is based on individual citizens buying luxury goods: TV, video games, movies, rock music, and sports. So spending taxes shapes the world.
But of course, instead of going through all the hassle of taking money and spending it, you can just not take very specific pools of money. In a high-profile disaster, eighties tax policy made real estate investments ridiculously good deals, even if the investor could only find some desolate swamp to buy; eventually that bubble burst in the notorious S&L scandals. In low-profile successes, the maze of deductions has no doubt guided all sorts of US development and commerce. It keeps lots of churches going, and even helped shepherd them through the cultural changes of the late sixties. Ending these deductions will force the economy, particularly investors, into a free market. That will obviously force tax spending to change as well, and I have no idea what will be the good and bad net changes.
I agree that simplification is a very good thing. It will force the social engineering to be done more openly, as well as saving everyone great hassles and eliminating lots of bad loopholes. But this can be done by eliminating either of income and payroll taxes. Without an income tax, workers could simply spend everything they took home from the job, and payroll tax calculation and payment would be centralized. Interest, dividends, and other income would be taxed separately, allowing different rates for them than for real wages.
But on to my main argument with your statement: the tax system is inherently and inevitably social engineering. Progressive taxes tend generally to push society into a bell curve and flat taxes tend to let it spread more, possibly even creating a 2-class caste system. Poor countries like Mexico have always had a few wealthy people, a lot of poor people, very little middle class, and high crime and oppression, and there is evidence of this happening in the US as our middle class shrinks. Therefore, I recommend tax = net_income - (tax_rate*log(net_income)). The equation’s a bit uglier, but it makes a lovely curve.
Comment by Will Warner — 5/22/2005 @ 12:16 am UTC
addendum: I was too careless about dismissing your sentiment against payroll taxes– I’d better ask first, what makes them evil?
Comment by Will Warner — 5/22/2005 @ 12:27 am UTC
Payroll taxes are evil because they are regressive. They’re a flat tax with no deductions on the first $X (currently about $80,000) of your income, and then nothing afterwards. Furthermore, on investment income, you pay no payroll tax at all. The only reason to separate payroll tax from the rest of the income tax is to sneak a tax on the poor and middle class by the unsuspecting public.
Comment by Jeffrey Yasskin — 6/17/2005 @ 11:29 pm UTC