Arguments for and Against a Flat Tax

[carpedm9587]

You can check it out here...

So, I'd make one change to this. If a consumption tax is the model - then instead of putting "poverty" as the limiting factor, I would suggest simply excluding the items that are basic for survival. We all need to eat, be clothed, and have shelter. So I would simply exclude form taxation food (bought in a grocery store - not restaurants), clothing, and any expenses related to the primary residence (rent, purchase of a primary home, etc.). All other consumption would be taxed.

But here's the problem: how do you know what tax rate will cover the budget? You have no control over what people buy. Furthermore, taxing will have a negative impact on purchasing, potentially setting up the economy for a recession and deflation. On the other hand, taxing income is a bit more predictable - and people cannot elect to not have an income. Indeed, even when it is taxed, people continue to try to work to improve their income. A flat tax on income would create no impediment to this upward mobility.

So while I am not against consumption taxes, I think income taxes are better.

BTW - "fair tax" is just a marketing gimmick. The income tax I described could also be called a "fair tax." The difference is income versus consumption - not fair vs. unfair.

[carpedm9587]

I prefer the current constitution which prohibits any tax on the common American worker. If an amendment is created to add a direct tax for the common worker, the constitution would have to strike out the prohibition against Congress doing a direct tax unapportioned by population of the states. If the apportionment is removed, then the logic for having the house of Representatives proportioned by state population would be mutilated.

Also, such a removal of this restriction would raise eyebrows as to the lack of legal basis for the IRS collection of such un-apportioned tax since the 30s.

Where does the constitution prohibit taxes on the common American worker?

[Cow Poke]

So, I'd make one change to this. If a consumption tax is the model - then instead of putting "poverty" as the limiting factor, I would suggest simply excluding the items that are basic for survival. We all need to eat, be clothed, and have shelter. So I would simply exclude form taxation food (bought in a grocery store - not restaurants), clothing, and any expenses related to the primary residence (rent, purchase of a primary home, etc.). All other consumption would be taxed.

So, for example, we have "tax free weekend" every year prior to school starting, and a bunch of the stuff you mention is, indeed, tax free. Including school supplies, backpacks, school clothes, etc.

I think they have some reasonable limits, though, like for clothing -- shoes cannot be $150 per pair, etc...

[mikewhitney]

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

see http://constitution.org/constit_.htm

This has not be removed by any amendments. The 16th amendment can only be properly interpreted with the recognition that the prohibition of a direct tax still being in effect.

[carpedm9587]

So, for example, we have "tax free weekend" every year prior to school starting, and a bunch of the stuff you mention is, indeed, tax free. Including school supplies, backpacks, school clothes, etc.

I think they have some reasonable limits, though, like for clothing -- shoes cannot be $150 per pair, etc...

Sensical - but the problem continues to be a) the potential impact on the economy and b) the difficulty in predicting purchases. The latter can be solved by adopting the philosophy that the tax rate for any given year is based on the budget for that year and the expected purchase volume adjusted by the overage/underage from the previous year and any other income sources. I do not see a solution to the former.

[carpedm9587]

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

see http://constitution.org/constit_.htm

This has not be removed by any amendments. The 16th amendment can only be properly interpreted with the recognition that the prohibition of a direct tax still being in effect.

I think your interpretation of the 16th amendment is the problem. It says: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." It pretty explicitly negates Article I, Section 9.

[mikewhitney]

I think your interpretation of the 16th amendment is the problem. It says: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." It pretty explicitly negates Article I, Section 9.

Sure. I guess it is stupid to rely on the supreme court.

One principle of law is that you won't always find the meaning you expect to find based on the simple text of a law (or amendment). You have to understand the law with court clarifications. (In part this is a pragmatic matter since it is difficult to overturn a Supreme Court decision.)

[carpedm9587]

Sure. I guess it is stupid to rely on the supreme court.

One principle of law is that you won't always find the meaning you expect to find based on the simple text of a law (or amendment). You have to understand the law with court clarifications. (In part this is a pragmatic matter since it is difficult to overturn a Supreme Court decision.)

OK - so the Supreme Court case that established this...?

[mikewhitney]

OK - so the Supreme Court case that established this...?

established what?
do you mean the wording of the 16th amendment or do you mean their decision on its range of application?

[mikewhitney]

The easiest summary of this is in a foot note on the case of South Carolina v. Baker, 485 U.S. 505 (1988):

the sole purpose of the Sixteenth Amendment was to remove the apportionment requirement for whichever incomes were otherwise taxable. 45 Cong.Rec. 2245-2246 (1910); id. at 2539; see also Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U. S. 17-18 (1916)

https://supreme.justia.com/cases/federal/us/485/505/

[mikewhitney]

Sorry, you post didn't make sense until I re-read it several times. The court case is the Brushaber. But it helps to get there by simpler statements from the court.

Stanton v. Baltic Mining Co., 240 U.S. 103 (1916)

[By the [Brushaber] ruling, it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived -- that is, by testing the tax not by what it was, a tax on income, but by a mistaken theory deduced from the origin or source of the income taxed.
https://supreme.justia.com/cases/federal/us/240/103/

The Brushaber ruling then is the case that was decided
https://supreme.justia.com/cases/federal/us/240/1/

[Starlight]

I tend to think of myself as a fiscal conservative. I don't have any objection to spending money on programs that align with my social liberalism, so some people might object to me calling myself a fiscal conservative.

I am similar and tend to use the term "tax and spend" to describe what I prefer: A fairly high level of both taxing and spending which at least approximately balances.

1) The budget should ALWAYS be balanced (spend what you take in and no more). That includes a path to paying off any debt. I understand the need, sometimes, to incur debt. But it should be carefully time-bounded and amount-limited

I am personally a fan of running surpluses and the government accruing for itself a reasonable amount of wealth over time. So I would point to, for example, the government of Norway, who due to its heavy taxes on offshore oil drilling have accrued a truly massive amount of money for themselves and their citizens (they own 1% of stock globally).

But getting into debt during a financial crisis makes sense too. I think the government should be fairly responsive to the economy and thus should try to stimulate the economy via debt spending during a down-turn and should run a surplus during the good times (standard counter-cyclical budgets). I am deeply skeptical of the appropriateness of sticking any hard-and-fast numbers on exactly how much debt the govt is or isn't allowed to hold and exactly how much of a surplus it's allowed to run. The EU has run into big problems recently by not having enough responsiveness to the 2008 global financial crisis, and I am skeptical of the need or the desirability for too much red-tape in this regard.

2) Taxes should be simple and applied using the same rule for all people.

I'm not sure I agree with either of those. I would say "The rich should pay more taxes than the poor, and furthermore tax evasion should be stopped". Now taxes being "simple" can potentially help prevent tax evasion because often the complexities in tax law are deliberately added by lobbyists with a view to deliberately creating loopholes they can subsequently use for their clients, so to some extent "simple" can mean "less loopholes". I also agree with "simple" insofar as the average person is concerned: e.g. the vast majority of people in my country don't have to file a tax return it's just automatically deducted from their paycheck at the correct rate, and for the vast majority of those of us that do file tax returns they're reasonable simple (~10 boxes across 4 pages, takes me ~30 mins each year... took about 1 min this year because it was an online form that was pre-populated with most of the right figures). I don't believe in things like "deductions" because those waste everyone's time and complicate the tax system unnecessarily. But if by "simple" you mean you want the mathematical algorithms that calculate the amount of taxes owed to be simple then I don't agree: What's it to you if the computer does 100x the calculations in the background to come up with the amount of taxes you owe? Being able to describe to other people the algorithm for calculating the taxes they owe is not a useful or relevant type of simplicity, yet it strangely seems the one you want to use.

And why should there be the same rule for all people? For the last 100 years taxation in the Western world has been (mathematically) "progressive" - i.e. the rich pay a higher percentage, i.e. taxation is not the same for everyone not even as a percentage of income paid. There's been pretty much universal agreement (except for from the whining rich) that progressive taxation is a Good Thing, because the rich do need to pay a higher percentage, because otherwise you get runaway wealth inequality where the rich just keep getting richer.

That is why the flat tax I advocate has:

When I see "flat tax" I immediately roll my eyes because I have seen so many selfish wealthy people who want to lower their personal taxes suggest some sort of crazy-low "flat" rate for everyone. Like the absolutely bonkers 10% "fair tax" suggested by some of the other posters in this thread. So I paraphrase "flat tax" / "fair tax" as "wouldn't it be great if the rich paid basically no taxes, and wealth inequality were to sky rocket, so the rich 1% could get richer and richer and who cares if the rest of the country dies?" in my mind whenever I see it, because that is typically the sentiment.

1) Only one standard deduction based on the cost-of-living for 1 (for an individual return) or 2, 3, or 4 people (for a family.group return).

2) All income above that deduction is taxed at the same rate for everyone, which is set annually to correspond to the revenue required for the projected spending for that year plus/minus any loss/gain from the previous year, minus projected income from any/all other revenue sources (e.g., fees, tariffs, etc.).

I imagine you could find settings for this which make it function approximately similar to a standard progressive income tax. To me, it begs the question of why you would want a system like this. It seems slightly worse than a standard progressive income tax of the kind we have here in NZ.

3) No business taxes for any business

Why on earth? This seems like another rich getting richer thing. I'm sure a lot of rich people would love you to give them this 0% tax rate.

No other deductions (mortgage, charity, business, etc.).

100% agree. There should be no deductions at all for anything. It adds pointless complexity to any taxation system and wastes everyone's time.

[carpedm9587]

I am similar and tend to use the term "tax and spend" to describe what I prefer: A fairly high level of both taxing and spending which at least approximately balances.

I am personally a fan of running surpluses and the government accruing for itself a reasonable amount of wealth over time. So I would point to, for example, the government of Norway, who due to its heavy taxes on offshore oil drilling have accrued a truly massive amount of money for themselves and their citizens (they own 1% of stock globally).

But getting into debt during a financial crisis makes sense too. I think the government should be fairly responsive to the economy and thus should try to stimulate the economy via debt spending during a down-turn and should run a surplus during the good times (standard counter-cyclical budgets). I am deeply skeptical of the appropriateness of sticking any hard-and-fast numbers on exactly how much debt the govt is or isn't allowed to hold and exactly how much of a surplus it's allowed to run. The EU has run into big problems recently by not having enough responsiveness to the 2008 global financial crisis, and I am skeptical of the need or the desirability for too much red-tape in this regard.

I'm not sure I agree with either of those. I would say "The rich should pay more taxes than the poor, and furthermore tax evasion should be stopped". Now taxes being "simple" can potentially help prevent tax evasion because often the complexities in tax law are deliberately added by lobbyists with a view to deliberately creating loopholes they can subsequently use for their clients, so to some extent "simple" can mean "less loopholes". I also agree with "simple" insofar as the average person is concerned: e.g. the vast majority of people in my country don't have to file a tax return it's just automatically deducted from their paycheck at the correct rate, and for the vast majority of those of us that do file tax returns they're reasonable simple (~10 boxes across 4 pages, takes me ~30 mins each year... took about 1 min this year because it was an online form that was pre-populated with most of the right figures). I don't believe in things like "deductions" because those waste everyone's time and complicate the tax system unnecessarily. But if by "simple" you mean you want the mathematical algorithms that calculate the amount of taxes owed to be simple then I don't agree: What's it to you if the computer does 100x the calculations in the background to come up with the amount of taxes you owe? Being able to describe to other people the algorithm for calculating the taxes they owe is not a useful or relevant type of simplicity, yet it strangely seems the one you want to use.

The "simple" does not have to with how much work a computer has to do to calculate the tax - but rather how much work the individual has to do to pay/file the tax. Frankly, there is no reason, in this modern age, why a person's tax burden should not simply come out of their pay (or any other source of income) automatically over the year, requiring no filing at the end of the year. Bit if a filing is required, it should be doable on a postcard, IMO.

And why should there be the same rule for all people? For the last 100 years taxation in the Western world has been (mathematically) "progressive" - i.e. the rich pay a higher percentage, i.e. taxation is not the same for everyone not even as a percentage of income paid. There's been pretty much universal agreement (except for from the whining rich) that progressive taxation is a Good Thing, because the rich do need to pay a higher percentage, because otherwise you get runaway wealth inequality where the rich just keep getting richer.

When I see "flat tax" I immediately roll my eyes because I have seen so many selfish wealthy people who want to lower their personal taxes suggest some sort of crazy-low "flat" rate for everyone. Like the absolutely bonkers 10% "fair tax" suggested by some of the other posters in this thread. So I paraphrase "flat tax" / "fair tax" as "wouldn't it be great if the rich paid basically no taxes, and wealth inequality were to sky rocket, so the rich 1% could get richer and richer and who cares if the rest of the country dies?" in my mind whenever I see it, because that is typically the sentiment.

I imagine you could find settings for this which make it function approximately similar to a standard progressive income tax. To me, it begs the question of why you would want a system like this. It seems slightly worse than a standard progressive income tax of the kind we have here in NZ.

Any tax model with a standard deduction is going to be effectively progressive. I've shown this in other posts. If the numbers I used were to be implemented, and the tax rate were set to 30%, a family of four would pay the following taxes:

------Income----------------Tax----Effective Rate
---$25,000.00-------------$0.00----0%
---$50,000.00-------------$0.00----0%
---$75,000.00-------------$0.00----0%
--$100,000.00-------$9,000.00----9%
--$125,000.00------$16,500.00----13%
--$150,000.00------$24,000.00----16%
--$175,000.00------$31,500.00----18%
--$200,000.00------$39,000.00----20%
--$300,000.00------$69,000.00----23%
--$400,000.00------$99, 000.00----25%
--$500,000.00-----$129,000.00----26%
$1,000,000.00-----$279,000.00----28%
$2,000,000.00-----$579,000.00----29%
$5,000,000.00---$1,479,000.00----30%

Essentially, the tax rate sets a cap on the maximum rate anyone pays. The more you make, the closer you get to the rate.

Why on earth? This seems like another rich getting richer thing. I'm sure a lot of rich people would love you to give them this 0% tax rate.

I've explained this already. Businesses use their money for two things: 1) to invest in the business, or 2) to pay people in the form of salary, dividends, disbursements, or stock buy-backs (which increases the value of the stock - effectively giving the owners a capital gain). If all personal income is taxed at the same rate (including capital gains), there is no reason to tax the business. The money will be taxed at the individual level when it pays out. Zero tax on business makes the U.S. an except and attracts new businesses. It also encourages the business to invest in itself - because it is one way the business escapes taxation on the funds.

100% agree. There should be no deductions at all for anything. It adds pointless complexity to any taxation system and wastes everyone's time.

With the exception of the "standard" deduction described above, agreed.

[Roy]

I've explained this already. Businesses use their money for two things: 1) to invest in the business, or 2) to pay people in the form of salary, dividends, disbursements, or stock buy-backs

Most businesses also provide non-financial rewards for their employees in the form of company cars, accommodation, travel, subsistence, phones, laptops, clothing budgets etc, the value of which often far exceeds salary, especially for business owners and executives. The immediate effect of your proposal would be that everyone who can gets their living via their business, drops their salary below the threshold, and stops paying any tax.

[carpedm9587]

Most businesses also provide non-financial rewards for their employees in the form of company cars, accommodation, travel, subsistence, phones, laptops, clothing budgets etc, the value of which often far exceeds salary, especially for business owners and executives. The immediate effect of your proposal would be that everyone who can gets their living via their business, drops their salary below the threshold, and stops paying any tax.

I'm sure that the tax code can be written to classify such things as "salary." Basically, anything that is used solely for business use is a business expense, and anything that is for personal use is a part of compensation. That is currently done for healthcare premiums and HSA contributions provided by the company: they show up as compensation on my taxes. I see no reason why it could not be done for the list you just provided. Frankly, if the company provides me with a company car today - it is a company asset that is depreciable - so we already have the problem you outline. Indeed, I own/operate an S-Corp and can bypass several taxes by reducing my salary to a minimum for someone in my line of work and taking the rest of my compensation as disbursements instead of salary. My proposal would clean all of that up, so it's better than what we have, even if we cannot solve the problem you outline, which we also already have.