The flat tax is opposed to a progressive tax, that says that instead of having a tax rate of 15% for 100% of your income, you have a tax rate of 0% for the first $10000 of your income, 10% of the next 20000, and so on. This is something that can be calculated mentally, looked up using IRS published tables, or calculated with no effort in a 10 line script or some of the simplest Excel sheets possible.
The progressive nature of income tax is absolutely not a problem and recognizes the marginal value of money.
The problem is exemptions, etc., which a flat tax as opposed to a progressive tax does nothing to resolve.
I'd also like to see social security contributions get uncapped. After $118k in income, your average tax rate falls until $189k. Even then, your mean tax rate will still be lower than someone earning $118k until you earn in excess of $411k.
2A) When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think.
2B) Many economists argue that there should be no capital gains taxes at all as they create a distortion between consumption and saving behavior. https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is as good of a place to start as any on this discussion. I also like http://www.thebigquestions.com/2010/01/27/a-quick-economics-... if you prefer things in parable form.
3) With respect to carried interest I generally agree with you but this piece will make some people question their opinions on the matter:
http://www.nytimes.com/2012/03/04/business/capital-gains-vs-...
This doesn't make any sense. All of these things (with the exception of corporate taxes, which shouldn't exist) are priced into the return of the investment[1] and have nothing to do with taxation.
Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate?
[1] More precisely, investments with a lower return are less desirable and their price tends to drop until the return (including risk, inflation, etc) is.
There's actually some bizarreness in the English tax code around this. Most taxpayers are subject to a 28% levy on investment returns. Gamblers themselves aren't taxed on winnings while the house pays 15% on their profits. (The treatment of professional gamblers is a conversation for your accountant.)
The same is true of getting a raise and paying higher taxes on a "fake gain" (i.e., your effective tax rate slowly rises as each boundary shifts lower in real terms). That being said, I guess my main complaint wasn't with the inflation claim but rather with the idea that the risk/return line is somehow relevant to taxation.
What I'm talking about is the fact that you can have a nominal gain that you pay taxes on that is not a real (inflation adjusted) gain at all.
These are two different problems. The first we handle by adjusting the tax brackets every year. The second we do not handle. I suppose we could, but it would be a lot more complicated.
Question though: I worry that some individuals have the ability to recharacterize their earnings as either income or gains by shifting their contracts and methods of compensation.[0] If so, then you end up with odd results. Scenario 2 (a 50% tax on wages) turns into Scenario 1 (no taxes) for that subset of the population.
Looks like a well studied topic, so I'm sure someone tackles this?
[0] Say I build machines that make widgets, and your new widget factory wants such a machine. You could hire me as an machine-building employee, I could own my own business and you could buy the machine from me, or you could give me shares of ownership in your factory. Each of these could result in the same actions and changes in wealth for all parties, but would be taxed under completely different systems. CEO compensation packages are the most transparent real world example of compensation structuring I can think of. On the other hand, Jon Ronson interviewed a woman making 1.5-3 million per year who claimed she paid 35%, that she wasn't rich enough to restructure to avoid income taxes. This was in a piece on income inequality, maybe for GQ. So maybe this is non-trivial until you start getting near the top...
Incidentally, when people talk about "tax shelters" and "complicated schemes the rich use to avoid paying taxes"(1) they're mostly talking about this. Though often they don't make that as clear as they should.
1. http://www.nytimes.com/2015/12/30/business/economy/for-the-w...
2A) Granted. If I had a magical tax wand, I'd obliterate corporate taxation.
2B) It's an argument I've heard, but I'm more interested in avoiding arbitrage. My preferences might be mistaken. :)
3) If I hold the belief that we shouldn't tax income differently based on its source, Mankiw's argument doesn't have much force. His reasoning is sound, sure, but I'm not sold on the premise.
2A) Indeed I agree. Though personally I put the chance of this ever happening at precisely zero due to the political optics.
2B) The difficulty of determining what is a capital gain and what is income is, in fact, one of the biggest theoretical arguments against a zero cap gains rate.
From my perspective, corporations already pay a lower effective tax rate and have access to tax avoidance strategies that not available to the individual.
I've read the argument that eliminating the corporate tax would spur growth but that's like saying eliminating individual income tax would spur consumer spending.
At the end of the day money is going to land in someone's pocket. It'll be paid out as wages and dividends. A company will spend it on equipment, vendors and consumables. When money is retained, it'll get priced into shares and will get taxed (albeit indirectly) once a shareholder realizes a gain.
Corporations are really good at playing a tax minimization shell game. Big corporations are especially good. This leads to all sorts of nonsense like laundering profits through Bermuda and parking capital outside of the US. In the end all we end up doing is compounding the advantages of size to the disadvantage of smaller corporations. Meanwhile there's the added inefficiency of churning money into tax lawyers.
My expectation is that revenues would increase if we set the corporate tax rate to zero and reallocated the burden to personal taxes.
I'm not sure I see that happening.
1. Probably also the employees would make more and the customers would pay less for products as well. This has to do with something called tax incidence.
But naively speaking, what's the incentive for a corporation to increase employee pay in this scenario rather than just maximize shareholder value?
Under a progressive system, Company A paying you $10,000 and Company B paying you $10,000 results in a different tax rate so neither company knows how much tax you owe. Under flat tax, Company A can just take $1500 out of your earnings before it gets to you, regardless of any arrangements you have with other payers. Since there are far fewer companies than employees, this makes tax enforcement significantly easier and evasion much less likely. Ordinary citizens now no longer have to deal with the IRS and tax is handled transparently.
Every flat tax proposal also tends to come with a negative income tax component to make up for the regressivity. The NIT essentially becomes a basic income like social safety net to make up for the loss of progressivity. And since it involves the govt giving you money rather than you giving the govt money, compliance will naturally be much higher.
If governments really want to collect taxes from the ultra-rich, a wealth tax is what is necessary. However that alone poses problems because 'wealth' is not always liquid - do you tax the old lady whose house has appreciated significantly but who doesn't have an income? Do you tax an entrepreneur whose firm is worth several million but hasn't actually realized any significant income?
Anyhow, just a few musings, but the summary is that taxes are hard. Too high and people evade them, too low and the government has a shortfall...
It's precisely a terrible solution. Yes, taxes are hard, but a solution that punishes the poor (or the not rich) by not recognizing the marginal utility of money is terrible in any form.
The idea with a flat tax isn't to punish the poor, but to reduce tax evasion on the higher end, and to reduce to burden on the middle class.
'Fair' depends strongly upon one's beliefs, and can't be objectively defined.
Which is a position completely ignorant of the marginal utility of money. No, it isn't fair that for one guy 10% could be the difference between getting by and not getting by while for the other guy 10% means no change to his lifestyle all.
No, progressives think it's fair that the burden is felt equally and that requires understanding how money works.
> 'Fair' depends strongly upon one's beliefs, and can't be objectively defined.
Fair does depend on beliefs, but some people's beliefs are objectively stupid. Anyone who denies the marginal utility of money and insists a flat percentage is fair, doesn't understand money and doesn't belong in the conversation just as anyone who believes vaccines cause autism is objective stupid and doesn't belong in that conversation. Everyone has opinions, that doesn't make them equal.
For the record, I agree with Piketty, Marx, and others of that particular persuasion. I'm all for progressive taxation, wealth and inheritance tax, all of it. But I'm also not ignorant of history...
Anyhow, the example was just rhetoric. The point is that communism started because people thought it was unfair that there was a rentier class who essentially monopolized wealth because they had inherited wealth. And communism fell because people thought it was unfair that people who were lazy made the same as people who worked hard.
Studies have shown that most people in western societies prefer inequality as long as someone has less than them. They think inequality is 'fair'. Why do you think people value celebrities and rich people? People are happy with our 'lottery' system, where anyone can become rich, even if the majority don't, and even if the average struggles...
It's funny, you're arguing for progressive taxation, but you don't understand the history behind labour movements, equal rights, welfare, socialism, etc... Or why communism is relevant in a discussion about rational choice, inequality and perceived fairness.
I do get it though - Americans have been taught to hate communism, and thus have purged an entire century of socialist philosophy from their collective thoughts.
Comparing different schools of economic thought absolutely relates to a discussion about rational choice and fairness.
> Communism is not relevant just because we're talking about progressive taxation and that you think is simply shows you're too biased to have an intelligent conversation.
Too biased? In what direction? Have you even been able to ascertain what my position is?
> Your arrogance is sickening. You're a kid, still in college, and you're acting like no one else has heard of history, grow up and learn to engage like an adult. Have some thoughts of your own.
Do you know me? Yet you decide to attack me. Here's a few fun facts about me: I'm not a kid, I'm 30 and have been married for 4 years, have already had a successful career and am changing pace for awhile, and I'm in university because I want to be.
What I know about you - most of your replies in this thread have been one or two liners about progressiveness, with the words 'marginal utility' occasionally thrown in.
> No one is here for a history lesson from a kid who screams communism and socialism every time tax policy is brought up.
Again, just 1 question: What do you think my opinion on taxes is?
> Progressives think it's 'fair' that everyone pays what they can afford.
Which is not what progressives believe, and then you went full on communist with this little nugget
> Some people also thought "From each according to his ability, to each according to his needs" was fair.
And then you started pretending only you knew history.
I don't care what you position is, I'm replying to what you say, not what you think; I can't read your mind, only what you write.
> Do you know me? Yet you decide to attack me.
I don't have to know you to tell you you're behaving arrogantly, and I haven't attacked you, if you think I have, you don't know what attack means. I've criticized your bad behavior, nothing more.
> I'm not a kid, I'm 30
Still a kid to me bub.
> Again, just 1 question: What do you think my opinion on taxes is?
I know what your position is, you stated it
> I'm all for progressive taxation, wealth and inheritance tax, all of it. But I'm also not ignorant of history...
But that's not what we're talking about anymore because you can't stop being arrogant and have derailed any conversation to the point that I no longer care what you think. "But I'm also not ignorant of history", please, grow up, your superiority complex is disgusting.
But you've been breaking the HN guidelines over and over again, and I've asked you to stop many times. You need to stop categorically if you want to keep commenting here. These rules apply to everyone, and it wouldn't be fair to other users to let you get away with it.
I'd be happy to try to clarify this if you want to discuss it further, but [email protected] would be better than here.
1) utility maximization 2) Rawlsian justice 3) fee for service model based on benefits received from government
It's actually pretty hard to justify a flat tax from most underlying axioms. I think you'd actually have an easier time justifying a flat fee where everyone pays the same $ value regardless of income.
I also contest your assertion that "Conservatives think it's 'fair' that everyone pays the same rate." While that might be true for some conservatives, political support for progressive tax rates go much beyond Democrats.
Are you proposing replacing the tax bracket system with an algebraic equation?
I wonder if that would be more or less confusing. I guess if you just showed people "this is what the tax curve looks like", it would be obvious that:
1) They need to use a calculator or look up in the tax table.
2) You don't actually lose money when your income goes from $37,449 to $37,451.
What does this have to do with the poor? Are you under the impression your federal tax dollars get redistributed to the poor? Government contractors aren't poor.
Do you have any idea what percentage of government proceeds are redistributed to the poor? Do not include social security. That money was taken from them to begin with.
Look up what regressive means and what marginal utility means; nothing I'm saying has anything to do with how taxes are redistributed. Flat taxes are inherently unfair, they ignore the marginal utility of money; they are regressive.
I'm sorry but its just a terrible idea.
You can get a 0 deductions system with a progressive tax system too, it isn't some magical property of a flat tax.
The current system, in practice, is progressive up to the upper middle class, and regressive after that.
Flat tax rates aren't about taxing the poor (you can still build in income exemptions and most flat tax schemes do), but reducing tax evasion by the rich...
2) The proponents of flat tax schemes frequently set the exemptions low enough to raise the tax burden on the poor.
As for getting rid of the IRS, who will collect, administer, and audit the flat tax?
Clearly the numbers should be adjusted if someone wants to turn this into a serious tax proposal, but it seems possible to design a progressive sales tax.
Yachts were more expensive and due to highly elastic demand, the industry plummeted. Companies went under or laid off thousands.
But don't worry. Guess who works at yacht manufacturing plants? Not rich people. They weren't hurt, and they were fine with taking their money elsewhere.
However, if I misunderstood and you advocate having the same tax rate on luxury goods as other goods, then we are in agreement on this point.
I have come to find that "regressive" moves the goalposts. It sounds as if the rich pay less. They don't pay less; they pay more. They just don't pay more when dividing taxes by their total income. I've never heard a convincing argument for why that formula is the ultimate benchmark.
And anyway, virtually all sales tax proposals have some per capita rebate/basic income, and that can be tweaked to make it as progressive as your heart desires.
[1] http://www.pressofatlanticcity.com/business/new-jersey-cuts-...
Yes.
I'm not sure if you're aware, but sales tax is already ubiquitous in the US.
The taxable entities are far fewer than income tax, making for less administrative overhead. Tax evasion rates also lower.
Of course there are tricky questions, but they're already being answered, IMO better than the personal income quagmire.
Having both today is a complicated tax structure (corporate taxes and sales taxes). Between the two, sales tax is the simplest choice.
It would be bad in any form, it's regressive; marginal utility and all that, taxes should be progressive or they're not a fair burden.
Also, on that note, its not logically possible to tax a business alone. Any tax a business pays must by necessity be passed on to consumers, else the company goes out of business. You can get around it by only taxing profits, but then you open the giant loophole of all value that's not profits, like capital, income, tax free expenses, etc. There is no "fair" way to do that makes everyone happier.
Well I have a problem with people who think fair doesn't matter.
> There are so many ways to define fair its rediculous and has no solid meaning.
Fair is like porn, it's hard to define, but everyone knows when they see it. It's genetic, even monkeys have a sense of fairness and refuse to cooperate when they're being treated unfairly. If that's not enough meaning for you, look harder.
> There is no "fair" way to do that makes everyone happier.
Sure there, look up the veil of ignorance; people think more fairly when they don't know which side of the equation they'll come out on.
One short summary of his proposal -- http://www.thepoliticalinsider.com/donald-trump-unveils-his-...
I think a pure flat tax would actually be bad for the country implemented immediately, but maybe a gradual rescinding of tax breaks (mortgage, etc -- i use said benefit) might be worth considering.
Wall Street bankers running off pure capital gains is a big problem.