Thursday, November 29, 2007

Only the Rich Believe a Flat Tax is Fair

Last night, Republican candidates for President discussed the “fair tax.” To them, fair taxes are some form of flat tax. Nonsense … There is nothing fair about a flat tax.

These fair-taxers should re-open their economics textbooks and read the section on the marginal-value-of-the-dollar. The theory is simply this: Each dollar you have is worth slightly less than the previous dollar. Stated another way … a check for $5,000 means one heck of a lot to someone making $20,000 per year, but is almost meaningless to someone making $1 million per year.

Years ago, our income taxes were fully graduated and fair. The biggest earners paid over 90 percent on the top dollar they made, while the lower middle class paid a fraction of that on every dollar they earned.

As an example, lets look how a flat tax and a graduated tax would effect three families (2 adults, 2 children, and an elderly parent); the Smiths earn $20,000 per year gross, the Jones $100,000, and the Bushes $1 million per year.

Survival spending, for the basic human rights of shelter, nutrition, health care, education, and care for the elderly, can be equated to the poverty level. Even though the poverty level is grossly under calculated, for argument sake, we’ll still use the rounded figure of $20,000 per year.

Flat Tax

A low, and easy to use, flat tax would be 25 percent.

The Smiths would pay $5,000 on their $20,000, leaving them with $15,000. The Smiths come up short. They’re $5,000 short of $20,000 they need to even survive. Assuming they can find a way to get by, they couldn’t handle any emergency. If the car breaks down, they’re done; there’s no way to get to work so they can pay the rent.

The Joneses would pay $25,000, leaving them with $75,000. Less survival spending, they have $55,000 to spend on a better life. The Joneses can afford a new car, a bigger house, and possibly even send their kids to college someday. They can even afford to put the elderly parent in nursing home, if necessary.

The Bushes have $750,000 left over after paying their flat tax. They have enough money to buy a mansion, send the kids to an elite private school and Yale, and have a live-in nurse for the grandparent, with funds left over.

Graduated Tax

Now, let’s look at a simple graduated tax of zero on income up to $20,000, 25 percent up to $100,000, and 50 percent on income above $100,000.

The Bushes would now pay $470,000 in taxes, leaving them $530,000 for ‘expenses’. Perhaps their house would have to be room or two smaller and the kids would have to go to the local elite prep school instead of Exeter. But, the difference in the Bushes’ lifestyle is unrecognizable.

The Joneses would actually pay a little less in taxes, only $20,000. Their lifestyle wouldn’t change at all.

The Smiths, on the other hand, would see a tremendous improvement in their lives. The difference between $20,000 and $15,000 is huge. They now have enough to live on and, with some wily money management, they could protect themselves against an emergency. Maybe the kids could even go to vocational school. And, just as an aside, their children would be more likely to be become tax payers than entitlement recipients.

A Graduated Tax is the only Fair Tax

No measure of fairness can be based on dollar values. Fairness can only be determined by outcome. Our tax system was originally designed so that each American would pay their fair share. Our current system of taxes has already become too flat and now, the rich want to shift even more of the tax burden to those who can’t handle it.

If we allow a flat tax, Karl Marx could turn out to be right … the workers would rise up and smite the leaders.

8 comments:

decentsociety said...

Given your argument, which seems sound, where would you begin a "fair tax" plan? At sometjing like 150% of a $20,000 poverty base?

GreyTheory said...

The poverty base of $20,000 is way off. Please see http://greytheory.blogspot.com/2007/07/minimum-wage-increases-today-but.html

BigDog said...

Why in your article must you take a swipe at President Bush? It was needless to the point you were trying to make. Also, you leave out the fact that though the couple making $20,000 have the right to have 2 children, they also have a responsibility not to since they obviously do not have the resources and should not be allowed to steal from anyone making more than they do, because they have applied themselves and made their breaks. Your class warfare attitude is despicable. Over 80% of Americans polled believe "everyone" should pay some tax to support "our" government. I work damn hard for my $42,000 a year (wifes incl) and for you to want to give it away to those who will not shouldered their responsibility, or worse take it away through you income redistribution plan is wrong. No "gray" area about it you thief! By the way, in case you think I'm heartless, I give 10% off the top of gross income per pay check and then in my monthly budget have another $40 set aside for additional giving. People like you do not have any understanding of what fair is or actual giving! John E. Jordan

GreyTheory said...
This comment has been removed by the author.
Anonymous said...

Jordan ... That's the standard load of libertarian drivel.

Jennifer said...

Most flat tax proposals have an exemption for a base amount of salary. For instance, the first $17K is not taxed, but any dollar above that amount is taxed at a flat 17%. Therefore your argument about how a flat tax would hurt a poor family is largely irrelevant.

While there is a principle for not taxing the basic amount an individual would need to live off of, this does not logically lead to the idea that people who make considerably more than what is needed to survive (for instance the Obamas) should get to keep a much lower percentage of income.

You may not like that people make more than you and can therefore live in houses or take trips that you don't get to take, but that does not mean that it's "fair" to take it away from them just because you don't like that they have more. If one is able to earn substantially more, that excess belongs to them because they earned it. It's fair to be able to retain just as much of what you earn as the next guy. For every $20 one earns, it is fair that each person gets to keep the same percentage.

Jennifer said...

Also, if you are really worried about the rich people paying their taxes, you should advocate the flat tax. The flat tax has been shown to reduce tax evasion (see Russia). Getting rid of our current tax system (in USA) would get rid of all the legal loopholes that allow the rich to currently pay a much lower percentage of their revenue than the middle class. Not only do the rich believe the flat tax is fair, that's the reason they don't want it (and the reason we don't have it.) It would mean higher taxes for the rich and lower taxes for the poor.

Actually, your comment has made me angry now, because in place of morality you have espoused an idea that people who have more than you should get to keep less.

And this idea has blinded you to the system that could actually help the poor you are pretending to care about.

GreyTheory said...

Reed Hastings, the multimillionaire founder of Netflix, proposed the same thing just today:

"Then, the next time a chief executive earns an eye-popping amount of money, we can cheer that half of it is going to pay for our soldiers, schools and security. Higher taxes on huge pay days can finance opportunity for the next generation of Americans."

http://www.nytimes.com/2009/02/06/opinion/06hastings.html?th&emc=th