More on the Flat Tax
Way back in September last year, I expressed my displeasure with the flat tax. Two recent articles, though, remind me that the flat tax is not going away any time soon. The first links it to our future prosperity. The second calls it the way of the future.
The second article in particular perpeptuates the confusion. Mitchell conflates changing the tax rate with changing the tax code. But the truth is, we can simplify the tax code without getting rid of a progressive marginal tax rate structure. We can still have the much-desired postcard-sized tax return without a flat tax. I address this in more detail in my September post.
So, one might ask, why am I against the flat tax? Two reasons. First, when conservatives tax about a flat tax, it's really means lowering taxes. Second, the flat tax shifts the tax burden from the rich onto the poor. 
This is illustrated in the chart below. This shows two hypothetical tax curves. The blue one uses the current marginal tax rates (10%, 15%, 25%, 28%, 33%, and 35%), and the second uses a flat 17% as recommended by Wilson in the first article.
Total tax receipts is the area underneath the two lines. Note two things. First, the flat tax, the red line, produces less tax revenue total. Second, at low incomes, to the left, the red line is above the blue line, while at high incomes, the red line is below the blue line. This means that a flat tax will increase the tax for poor people and decrease the tax for rich people. This fact would be exacerbated if the flat tax rate were made higher, in order for it to produce the equivalent amount of tax revenue as the current rate structure.
Why do I support a progressive tax? Because I believe that the rich should pay more in taxes, both absolutely and relatively.
By the way, I don't necessarily support high taxes for anyone. But I do believe that taxes are a necessary evil, and that a progressive tax structure is the best one.
posted by The Judge @ 3/22/2006 07:35:00 AM
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Cecil Adams has some interesting words on flat tax. This is in the context of Reagan's 1986 tax reforms, and the presidential candidacy of Steve Forbes:
"Taxes went up for most affluent Americans. In 1987 they reported an additional $300 billion in income, of which maybe two-thirds stemmed from closed loopholes. As a result, people making from $50,000 to $1 million paid an extra $24 billion in tax. OK, nobody's bleeding for a $500,000-a-year lawyer. But look who paid less tax: those making under $50K (average tax cut: $5 to $867) and those making $1 million and up (average cut: $214,000). Like I say, some reform. Other points:
(1) Forbes claims his flat tax rate will be 17 percent. Most knowledgeable observers say if that happens the government will go broke. The real flat tax rate will have to be at least 20 percent. The working poor will get screwed because they will lose the earned-income credit, which lets them collect a tax "refund" greater than the amount of taxes withheld. You don't have to be a genius to figure out that if taxes for the Forbes crowd go down, they have to go up for somebody else.
(2) The income tax is progressive for several reasons, the cynical one being that there are a lot more poor voters than rich ones. The practical reason is that a progressive income tax overcomes the regressivity of the sales tax, which falls most heavily on the poor, and the property tax, which falls most heavily on the middle class. Some analysts say total taxes as a percentage of income are about the same for all income levels."
http://www.straightdope.com/classics/a5_139.html
Actually, I forget my favorite Cecil quote from that article:
"Nobody's sure what the actual flat-tax rate would be, but let's suppose it was 20 percent. Based on the 1992 returns, if this inane proposal were implemented, taxes on everybody making $200,000-plus will go down and those on everybody else will go up."
Alright, I'm a little late getting to this, but I'll comment all the same. I think it might be best to just go through a few of the argument's in Why the rich should pay more taxes article.
First we have an argument about the cost of defense being larger for the wealthy. This is true, however, taking off with the author's insurance analogy why don't we examine the fact that the wealthy do actually buy insurance for their property (so they're really being doubly taxed). Furthermore, the wealthy also buy insurance for their health. What is the fastest growing, long-term drain on both the tax coffers and private income...healthcare.
The next argument is about Social Security payments...I'll conceed the point and offer that Social Security should be turned into what it is yet nobody can admit to, a welfare program. Everyone should pay, and wealthy shouldn't collect.
On to energy being disproportionately used by the rich. If so, then it's a no-brainer...add a consumption tax. I'm all for boosting the federal gasoline tax by $1/gallon with all the proceeds earmarked for alternative energy R&D. However, if I remember correctly I think the Judge doesn't believe there's such a 1-to-1 relationship between wealth and energy consumption because he was opposed to a flat energy consumption tax.
Next comes education, where the author was clearly dilusional for including. He offers no argument about how the rich are taking more from the system than they put in. He's simply saying the rich take out what they put in and the poor take out what they put in separately from segregated systems. (However, the rich actually don't take out all that they put in. Many of the affluent send their children to private schools, yet still pay taxes in support of public schools)
Really the problem here is mainly just of distribution. As the author points out later, high population density states in the east have their tax wealth distributed to the more sparsely populated western states. This is necessary to have some consistency. The same issue is at hand with education. You can't raise money locally for localized educational use. You need to pool the resources at a higher level for a more consistent public school system.
And on a related note regarding the broader problem of the large income divide, I'm all for improving the public education system. If people are more equally qualified and skilled there will be a smaller income divide.
The S&L bailout...well, there are plenty of well intentioned but wasteful programs coming out of Washington. Pension bailouts will be next and I'm sure there will be more corruption associated with that. However, it doesn't address the rich vs. poor issue. Corruption is criminal behavior and not necessarily inherrent in either the rich or the poor.
Finally, we move on to corporate taxes and tax shelters. The corporate tax issue is rather moot. Go ahead and raise corporate taxes, it will likely come back in the form of increased consumer prices which will in effect be a consumption tax. Tax shelters on the other hand are one of the things which would disappear greatly with a flat tax system.
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