Redstate

First, flat and simple are different concept although most flat taxes have been very simple ones. Flat just means everyone pays the same percentage. Simple means easy to fill out and removing the attempts to influence behavior in the tax code.

Second, your question about how it functions. The Alexadner proposal (which seems normal) for a married couple filing together would be (Income-25,580)*.17=tax owed. That's flat and simple. The deduction for single filer is $12,790 and an exemption for each dependent of $5,510. No standard deduction. No itemized deductions. No credits.

Third, 17% is not enough to support all government activity. The government spends about 19-20% of GDP. However, the 17% does not include Social Security tax revenue and corporate tax revenue. I presume those can make up at least 4-6% of GDP. The proposal is meant to be revenue neutral.

Finally, most of your concerns are alleviated b/c it is an optional system. "I'm almost positive it removes the housing deduction and the state income tax deduction. How many people would be screwed in high cost states who are barely holding onto their house right now?" No one is "screwed" b/c they can stay in the old system. That said, I don't know why people who choose to elect high tax politicians get to deduct their state income tax.

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My taxes would jump significantly. I'm single, own my own home and have no other deductions. My tax this year was 7%. You'd have to do better than that to get me to support a flat tax.

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It's an optional plan. You can stay in the current system. There is no way you can be worse off.

Also, it depends on your income whether you would gain by switching to the Flat Tax system. As a single filer, your first $12,790 is not taxed. I assume you have no dependents. If your income is below $21,743 then switching to the new system would be an improvement on your effective income tax rate. If you make more than $21,743 then you should stay in the current system. Either way, you aren't worse off.

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supporting!

I'm single, rent, and have no other deductions. What is fair about you keeping more money than I get to keep? If I got to keep more of my money, I might be able to buy a house.

You're working the system as established to your advantage. I do as well where I can (government subsidy for riding mass transit) and expect everyone else to as well. But the juxtaposition of the two positions is too good an illustration of why the current system can't be considered fair (although it can be properly labeled progressive) to pass up.

The simplification is more important than the flatness. However, the reform go together (see Estonia, most of eastern Europe, Russia). Specifically we are functionally trading all the loopholes to bring down our AGI and taxable income (deductions, credits, etc) in exchange for a lower rate. Thus, your last dollar is taxed at 17% instead of 36% but you end up paying roughly similar amounts of tax (in the abstract).

The biggest gain here is what it does to incentives. The more you tax something, the less you get of it. 17% is much lower than 36% and on the margin will lead to more work hours. Since these are high earners, this creates significant amounts of new wealth in the U.S. So for a revenue neutral change, we increase economic growth.

The other nice thing about a truly flat/simple tax is that it is very hard to make complex again:

Russia's experience, however, suggests that the principal virtue of the flat tax is its simplicity. The government's revenues did not surge because Russians suddenly squared their shoulders and straightened their backs. Rather, Russia's tax system became easier to administer and easier to comply with.

America is not Russia. It has a functioning tax system, albeit a clumsy one, so has something to lose from uprooting its tax system and starting again. But the potential gains are not negligible. In a typical year, the IRS estimates that for every dollar it collects, another 19 or 20 cents is owed, but not paid. This shortfall amounted to between $312 billion and $353 billion in 2001. Small businesses fail to report about 30% of their earnings. Babysitters and gardeners fail to report 80%, says the IRS.

In part, the tax system is burdensome because people dodge it. Every loophole that is exploited must be plugged. Every blurry line that is crossed must be sharpened. But Messrs Owens and Hamilton worry that the tax-codifiers and the tax-dodgers are locked in a mutually destructive “arms race”. The code is made more complex, because of tax wheezes. More people then seek to avoid taxes. The best way to fight tax avoidance, then, is with simplicity.

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"One man with courage makes a majority." - Andrew Jackson

If you say my rates are too low and the government needs more revenue. Ok, if that is the case we would do better with these lower rates and make up some of the difference with a big BTU excise tax on all fossil fuels. That way you get support for alternate energy and conservation without actually having to subsidize them or issue regulations.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

1) Most "working class" families would not be affected by this reform. They would stay in the current system assuming they have some deductions and credits that are valuable enough to make their effective tax rate lower than 4-10% or so.

Note that the first $25,580 would be exempt and each dependent exempts $5,510. So a family of 4 has the first $36,600 is exempt. So lets say the family of 4 lives on $50,000/year. Their tax under the flat system would be ($50,000-$36,600)*.17 = $2,278. That's a 4.4% effective income tax rate.

FWIW, doing the same calculation for a family of 4 with income of $100,000, the results are: tax owed, $10,788; effective income tax rate 10.8%.

The bottom line is that by having a higher deduction, the effective tax rates are still progressive. But each additional dollar is taxed at the same rate, 17%.

2) I agree with your idea of rolling the FICA tax into the income tax and getting a flat, simple tax out of that. It would have more of an effect on working class members. I don't agree with multiple rates. Once that is established they get changed and it becomes complex again. The success of flat, simple taxes is due to the umbrage that changing the system brings. Once you start making it complex, it is easier to make it even more complex.

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If we compare the incomes of two families, each with two adults and two dependents, and with incomes of $70K and $12MM, Alexander's plan appears to work like this:
The rich family has income 171.4 times the middle-class family (pretty impressive). Each family gets an income exemption of $25,580, and each dependent gets an exemption of $5,510. The tax works out to 0.17*$33,400 and 0.17*$11,963,400, respectively. Under these terms, the middle-class family pays $5,678 and the wealthy family pays $2,033,778 in federal income taxes. The rich family pays gross federal income taxes 358.1 times what the middle-class family pays, even though their income is 171.4 times that of the middle-class family. Looks progressive to me.
So why would a middle-class family feel that this was somehow unfair? What's the problem - should the wealthy family be paying gross federal income taxes 500 times the tax of the middle-class family? 1000 times? And if so, under what system of "equality under the law"?

"A republic, if you can keep it..." - B. Franklin

There is much to the argument that those who benefit the most from the system should pay the most.

If this is true, then a flat tax of, say, 17%, still accomplishes what you want, as the average working couple in your scenario would contribute $11,900 but the guy who just made 12MM would contribute $2,040,000!

For instance, first one hundred thousand dollars you pay ten percent. One hundred to one million you pay 20%. And over a million you pay 25%.

I don't see the justice in this. It penalizes success and it creates absurdly distorted situations where you're better off earning only $950,000 than you are if you'd earned $1,000,001.

Can you explain why you feel the sort of progressive tax system you propose is more compatible with a free society that values liberty and justice than the flat tax system being discussed?

you would still be better off making the extra dollar because only that dollar is taxed at a higher rate.

I justify it because if you are making over one million dollars you are benefiting much more from our free society than someone earning less than one hundred thousand.

As far as perverse incentives go, we have that now with the present system, this would make them far less as it would eliminate special considerations.

I long ago learned that a "pure" libertarian, or classical liberal system is just almost as harmful and unworkable as a pure socialist system.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

if you are making over one million dollars you are benefiting much more from our free society than someone earning less than one hundred thousand.

Convince me. My million+ alter ego drives on the same roads, uses the same airport system, receives the same police protection, relies on the same-sized defense and military budget, has to file for the same permits to do business or get married, must pay the same sales tax, and stands in the same lines to take the White House tour as my 50k alter ego. In what way has the former benefited more from the government than the latter?

If the former earns more, is it a fluke? Random chance? Or did the former by and large work harder, smarter, make better decisions? Doesn't the former stand to contribute to society in many more ways than merely taxes - by managing businesses that employ citizens, or by investing their wealth in companies that employee many more citizens or in ventures that produce new innovations and technology? Why do we penalize this behavior by extracting from them a larger percentage than less wealthy citizens?

I'm not seeing the justice in forcing the wealthy to pay a greater percentage of their earnings to the government. Can you make a better argument that they should? For bonus points - an argument rooted in conservative principles?

you don't like my argument, and I am singularly unmoved by yours. Principles are fine, but they often don't work in the real world. Some progressivity is much more doable than a flat tax, and would allow lower rates for the average worker.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Fair enough, but I was trying to establish just what your argument was in the first place. Short of stating, "if you are making over one million dollars you are benefiting much more from our free society than someone earning less than one hundred thousand" I didn't see anything from you in the way of supporting that declaration. So I asked for more.

You're mistaking income for wealth. Why should the guy worth $1,500,000 who made $1,000,000 last year pay a higher rate than the guy worth $1,500,000,000 who made $500,000 last year?

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besides, you have to get money somewhere, the rates I proposed are very low to begin with. It is sort of like why John Dillinger robbed banks, cuz that is where the money is.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Soak the rich generally isn't appealing to conservatives though.

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Keep in mind that the flat tax system really has two rates: 0% and 17%. The way to adjust progressivity in a flat tax system is to adjust where it goes from 0 to 17. The Alexander Plan has that being at $26,000ish for a married couple. If you want a more progressive plan then you move that to $35,000 or $50,000.

If the cut off is $50,000 then a family (with no children) making $100,000 is paying a 8.5% effective rate. If its $70,000, the rate is 3.4%.

Most importantly, flat taxes with a single deduction are progress and you can adjust the progressivity.

I don't quite follow why you think we should discourage more successful people from working more by taxing each additional dollar more as they get more successful.

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Not really. It only seems like a hard sell because to date, the presentation of the argument has been controlled by the socialist elite. If you ask someone in Maine whether they ought to be paying for a bridge in, oh, let's say Alaska, they will categorically deny it is fair because they will never use the bridge. Socialists make counter arguments about people in Alaska paying for things in Maine, but that only obscures the argument, it doesn't answer it. What is fair is paying for what you use. That means excise taxes and use fees, not even flat taxes. Because flat taxes create situations where the middle class guy making $100,000 pays $10,000 in taxes (to make the math simple) and the rich guy making $1,000,000 pays $100,000 in taxes. No way the rich guy is using $100,000 worth of government services.

When the flat tax is presented in a fair light, it garners something like 70% approval from working families. It only looses when socialist advocates start messing with the presentation.

hate to say it but you are blaming the wrong party. It was primarily Republican sponsored reforms that are responsible for getting so many people off of the tax rolls.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

First, that was bipartisan. It was part of compromises for lower tax rates for all Americans.

Second, 50-60% of Americans don't pay income taxes. They do pay FICA (12.4%), sales tax, property tax, and "fees." So the idea that they entirely free ride is incorrect.

For that reason, I agree with a poster upthread that rolling the FICA and income tax into one system is a good idea. I don't mind that people at the low end of the income tax scale pay nothing to very little (see example above of family of 4 with $50,000/year income paying 4.4% effective tax rate under the Alexander Plan). And I support the EITC (a negative tax rate that pays the lowest tax filers) because it is a form of welfare that encourages work rather than discouraging it.

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it is very important that people who earn any wages at all not pay zero. When you create a class who pay nothing, but use the most in social services then you create a natural constituency to demagogue politicians, since as Spartan said, they get benefits but have no dog in the hunt for the actual costs.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

How would you put EITC into a flat tax without starting to complicate the system?

It probably isn't feasible. Then again, it was supposed to replace welfare when originally envisioned (by Milton Friedman).

You could fit it into a flat/simple tax, but it would be the first step toward unflattening the system.

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A simple or perhaps simplistic way would be if total income is smaller than the deduction, the tax becomes a payment. For example if a married couple makes 20000 then the tax liability would be:

(20,000-25,580)*.17=-948.

So the couple would receive a check for $948.

This is simple but I'm not so sure it's desirable.

it would be a big improvement. Friedman pushed the EITC as a replacement for AFDC (now TANF) or what we all know as "welfare." Instead of sending a check to people not working, he wanted to supplement low income jobs. This changed the incentives from make $4/hr to do nothing or $5/hr to work --> make $0/hr to do nothing or $8/hr to work. Thus, the incentive to work is increased significantly.

I agree with the principle that 1970s welfare discourages work and good behaviors and that the EITC favors work. I'm not sure how having both types of welfare makes sense.

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I think we would be much better off if EITC replaced TANF and perhaps the food stamp program. If nothing else I believe EITC is more efficient and less money is spent on administration.

What I'm not sure is desirable is the simplistic plan I outlined above that would create a negative tax alongside the flat tax.

this would certainly transform it from welfare to workfare. I like it.

Then again, I seem to like just about everything I have ever heard M.F. advocate.

Milton Friedman invented tax withholding. Sure it was supposed to temporary during WWII. But he should have known better. Now the government gets to take our money interest free throughout the year. And people don't feel the burn of sending a single check for $2,000 or $12,000 or $204,000 to the government at the end of the year.

I think withholding has made tax increases much easier than they otherwise would be.

But I'll take school choice, EITC, no conscription (his most proud policy accomplishment), deregulation, and a recognition that taxing something makes less of that something in exchange for his mistake on withholding.

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So I did a little CYA on this one eh.

BTW, I know they use a different deduction numbers, but FreedomWorks has a Flat Tax calculator for anyone that wants to try it: here

as such, it is correct. All of the founders were concerned about what would happen if the government were able to transfer money from one group of people to another, and some faction start advocating for it. That has now come to pass, and with 50-60% of the people immune to one of the taxes, they really do have no incentive not to take advantage of their power. It is primarily for that reason: protection of the integrity of our system, that I believe a flat tax should be imposed, and it should be imposed on all people regardless of income. If it is imposed on all people, everyone has the same risk, not a different risk, when government increases the tax rate. I might be willing to allow an exemption for those people who would not pay enough in taxes to justify the cost of processing their forms, but even that would be an allowance, not a desired part of the plan. We may have arrived at this point as a result of a bipartisan agreement, but it's danger to the continued health of the Republic is no less for being bipartisan. And the more people that are removed from the tax rolls, the more likely we are to arrive at riots in the streets.

I'm single, make a decent income and live in a high-tax state, so like blackhedd, the more I pay in taxes the more I am forced to pay in taxes as my exemptions phase out. For this I am bitter, but I am more bitter at the time required to accurately complete a relatively simple return.

Past efforts to get politicians to sign a flat tax pledge failed in part because the "it sounds good but I have to study it more" dodge is easy to make. How about a new tax pledge for Congressional and Presidential candidates - I will fill out my own tax forms.

It is tough to duck without being correctly branded as elitist (I'm too important, too rich, ...). And, if they actually filled out their own taxes it might lead to some reform. I dislike sending checks to the government, but I dislike even more the waste in tax-avoiding legal and accounting fees our system encourages people to incur instead.

So, how about the "I will fill out my own 1040" pledge?

The greatest single cause of Atheism today is Christians who profess Jesus with their lips & then go and deny him by their lifestyle. That's what an unbelieving world simply finds..unbelievable -Brennan Manning

I wish he was following the Huck path of creating HuckPAC and campaigning. Fred and McCain are close. I'm a bit miffed that he isn't more public with his support.

Fred could be doing Rush/Hannity/etc in support of the good parts of McCain's plans, including this proposal. And he could keep enough of a presence that he could be a real cabinet level consideration.

It sucks that even Romney is doing more for McCain and conservative ideas than Fred is right now.

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commentator. He lacks the desire to play politics.

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"One man with courage makes a majority." - Andrew Jackson

One of the things that drew me to Fred was a sense that here was a genuine man; that little - if anything - was crafted for public consumption.

I suspect that Fred has told John:

"I'm your friend and love ya' like a brother. If you ask for my support, I'll tell the world you are a man of integrity, however, so am I. If they ask my opinion of your stance on (x), I'll be honest and tell them I disagree with you on that, but that you're the best man left in the crowd for the mission at hand"

Or something like that.

I've got friends I love to death, but they're as wrong as wrong can be on certain issues.

So is McCain. I could never support my friends in certain areas and I suspect Fred will support John, but only on Fred's terms.

The greatest single cause of Atheism today is Christians who profess Jesus with their lips & then go and deny him by their lifestyle. That's what an unbelieving world simply finds..unbelievable -Brennan Manning