My ideal tax plan. It's flat. Read before you flame.

[Recursion]

While we're talking about taxes, thanks to the Republicans' interesting but practically unworkable announcement, I thought I'd once again shill my favored tax plan. It's a flat income tax. Read on before you tell me why I'm wrong.

First off, it has a personal/family exemption up to something a bit below the median income (I'd like to have this indexed, but that never seems to happen). So, everything up to (to just pick a number) $50K for a household is untaxed.

Wages and capital gains are considered identical.

A (relatively) high tax rate is applied to the remaining income above $50K, say 40%.

A flat tax like this is -- counter-intuitively enough -- extremely progressive. The tax rate for households making less than $50K is 0. At just over $50K it's 1%, and as your income increases, it approaches the max rate of 40% asymptotically. That's literally the most progressive tax you could imagine. There's no need for brackets.

To go even further, I would propose a surtax on wealth 2 standard deviations above the national mean. That's a non-starter, but hey. Failing that, a surtax on incomes 2 stddevs above the mean. The surtax would be indexed to the poverty rate: if the rich can get obscenely rich while leaving nobody in poverty, they will pay no surtax. Call it a carrot.

But, seriously, I think my income tax plan is a good idea. It involves literally eliminating basically every deduction and credit there is (though I'm amenable to an EITC or "negative tax", one of the few decent ideas from the right), so a lot of oxen will be gored, but I like goring oxen.

[Scuba]

1. Interesting, but does not come close to "flat" in the way the term is used today.

I do support identical rates for payroll and capital gains. Exempting income below an arbitrary level is done today, of course, although the level is much lower than your suggested $50k.

The idea that that income "just over $50K it's 1%, and as your income increases, it approaches the max rate of 40% logarithmically" defies current usage of the term "flat tax".

[Recursion]

3. It depends. Cain's is like mine, Forbes's isn't

Not that I think Cain had actually read his own press releases, but whoever was responsible for writing them had an idea similar to this.

Forbes's big problem is that he kept his same plan from 1988 and wanted the exemption at $28K. It needs to be much higher.

[hfojvt]

19. exempting income is done by family size though

instead of being more arbitrary, it is more complicated. A family of one making $45,000 a year has more disposable income than a family of six with the same income.

Today, with the child tax credit of $1,000 and the expanded EIC, the tax system is heavily tilted in favor of families with children. Too much so, IMO, although I will never convince the parents of this.

A family of four making $48,000 is simply NOT in the same boat as a family of one making $12,000. They don't need four houses, four cars, their utility bills are not four times as large, probably they are losing less food to spoilage, it's easier for them to "buy in bulk" and so on.

And at some point, having more kids is simply a choice. To say "well, I make $60,000 a year but I have seven kids so we are barely getting by (and I need a tax break)" is somewhat similar to saying "I make $60,000 a year but I spend $25,000 a year collecting beanie babies, so I am barely getting by." or "I make $60,000 a year but I bought two vacation homes and three brand new cars, so I am barely getting by".

We don't, for the most part, ask taxpayers to subsidize other choices, but for some reason we do ask them to subsidize large families.

[Token Republican]

2. fast response

is there is a difference between a flat tax and a flat tax rate.

A flat tax rate with deductions is a progressive tax system, just not as progressive as one with different brackets.

Wealth is not income, and income is not wealth. Income is the means to accumulate wealth and taxing income actually makes it harder to increase wealth.

Rich can and should pay more taxes, but most rich do not have income in the same sense of everybody else.

Final point is we have four overlapping tax systems in place. Federal Income Tax, the AMT, Social Security and State Taxes.

More later, when time permits.

[Scuba]

4. The idea of a "wealth tax" has always been anethema to Americans, but as we now have ...

... so much wealth in the hands of so few people, the idea may gain some traction.

Your thoughts on this matter would be appreciated.

[Recursion]

5. I would love a wealth surtax, but I would also love a pony

That said, the House GOP has just uttered the word "surtax", which makes me hopeful. Take my "progressive flat tax" (to coin a term) proposal, and add a surtax. Hell, if we can make the numbers work out, expose capital gains only to the surtax. That's kind of what a surtax is for.

As a negotiator, I would say offer a wealth surtax and accept an income surtax instead. Also offer the flat tax to unearned income and accept just the surtax instead.

It would be both simpler and more progressive than what we have now.

[JaneyVee]

6. These billionaires are already crying about feeling "persecuted"

A wealth tax would make their heads explode.

[Scuba]

7. I've no problem with that.

[Recursion]

8. Agreed. And they don't actually have many votes

But it's dangerous to make policy based on discomforting your opponents.

[WinkyDink]

9. They don't need votes when they can buy the politicians outright.

[Egalitarian Thug]

17. No, it hasn't. This is a very recent and completely out of character aspect of the

American consumer that replaced the American Citizen.

Traditionally, we used to tax the hell out of wealth (that's why the mansions with only 6 rooms, the trusts of the mid-19th century, and so on).

Our great and great-great grandparents wouldn't recognize us today.

[Token Republican]

27. Tax on Wealth

is different than a tax on income of the wealthy.

In theory, a wealth tax exists by the gift and estate tax, but i don't think that's what you're talking about.

Do you mean taxing people a percentage of accumulated wealth and not income?

[Scuba]

30. Yes, I mean a tax, perhaps a one-time tax, on accumulated wealth.

When so few citizens hold so much of the wealth, one can make a strong case for it.

Th net worth of US household is about $77 trillion (Source: http://www.federalreserve.gov/releases/z1/current/z1.pdf ) so there is, in fact, plenty of wealth in the Country to cover our debt. However, this wealth is concentrated in the hands of a very few people.

Appreciate your thoughts on the matter.

[Gothmog]

10. Progressivity in taxation is a good thing

I do not think that you plan meets the definition of progressivity. I would prefer something like the Buffett Plan

[Recursion]

13. It's much more progressive than our current system

Your tax rate starts at 0. After $50k, it creeps up asymptotically towards 40%.

What on earth is more progressive than that?

[Gothmog]

16. This is not progressive

Your plan does not meet the economic definition of progressive taxation and is really a bad plan. If you want to make the system more progressive, look at the Buffett Plan where all taxpayers have to pay a minimum tax.

[OKNancy]

11. Right now dividends and long term capital gains are not taxed if you are in the bottom

income groups. I think I'd like to keep that.
So, if you make, (guessing) less than $35,000 a year, you pay 0%.
This helps retirees on Social Security with small investment accounts.

[SheilaT]

12. For the very first tax rate to be 40% , that strikes me as

excessively high.

Among the reasons the inheritors were able to convince the rest of us that estate taxes were unfair Death Taxes, is that while the first reasonably large amount was untaxed, at least at the federal level, it kicked in at (if I recall correctly) 25% and quickly climbed to about 40%, maybe more. So even though those paying the tax were a tiny minority, they were able to make up all sorts of bogus hypotheticals about family farms and small businesses going under, and got the rest of us to think we'd someday be faced with these horrible, confiscatory taxes.

I do like the semi-high initial tax free income.

Not so sure about the wealth surtax. What is the national mean for wealth? What are the standard deviations? I'd be very curious to see how that would hit me. I saved bonus and gift money for many years, and now have what I call my nest egg. It's somewhat substantial, but I didn't get it because I in any way exploited anyone else, just saved money that others in a similar situation might have spent. Rather like someone who puts maximum money into a 401k and does well on the investing side can wind up with quite a lot of money. Or if a spouse dies and there's a large life insurance payout. Should I be penalized for thrifty habits? Do you really want to encourage people to essentially spend all of their money and not having much in the way of savings?

Meanwhile, the idea of trying to lift people out of poverty is a good one. I'd start with some kind of guaranteed minimum income, if I were in charge. I'd also have a maximum wage at the highest level.

[cali]

14. nope. not buying. bad, bad idea.

Why the fucki should someone earning $50,000 or even $100,000 a year pay taxes at the same rate as someone making $20,000,000?

horrendous idiea.

[Recursion]

15. Read my post. They don't

Under a flat tax plan with a household exemption someone making $20,000,000 pays a higher percentage than someone earning $50,000.

No tax plan anyone has suggested is actually more progressive than this.

[hfojvt]

18. brackets ARE more progressive

with a bracket, somebody would pay, say 40% on income between $1,000,000 and $5,000,000 but then they would pay 50% on income over $5,000,000 and 60% on income over $10,000,000.

As such, a person making $20,000,000 would pay more under my plan than they do under yours.

As for the $50,000 family exemption (for singles too?), clearly going from the current system to your system is a much bigger tax cut for people making $50,000 than it is for people making $20,000.

[Orsino]

20. That's nearly the opposite of flat. n/t

[Token Republican]

26. Except for

the existing tax system which is highly more progressive.

Even more progressive rates were used until the tax reform acts of Ronald Reagan. I forget which one did what, but by the mid 1980s, the highest rates of 95% was abolished and replaced with a top rate of 28% if memory serves correct.

But

While the rates were drastically cut, that's only half the story. In addition to cutting the rates, nearly all deductions were eliminated as well. Prior to the RR changes, nobody actually paid the 95% tax rate, due to massive use of tax shelters and careful tax planning. The best example I know if is the music from the 1960s. The reason why so many artists sold the right to their songs was because of taxes. If they recieved royalties to their songs, they'd be taxed at a marginal rate of 95%.

As a silver lining, this tax rate did inspire at least one " target="_blank">good song.

Artists who sold the rights to their songs exchanged them to a capital interest, meaning they would be taxed at the lower capital gains tax rate.

That's why so many 60's bands wound up losing their songs.

[taught_me_patience]

21. Why should people making less than 50k pay no tax?

Don't they benefit from federal taxes? Don't we all benefit from government that is funded by income taxes? If we all benefit, shouldn't we all pay in some way?

[Pretzel_Warrior]

23. yep. that cutoff for no taxes is way too high. over half the population paying ZERO?

[Pretzel_Warrior]

22. a)that's not a flat tax, b)run the numbers on how much revenue increases or decreases based on

your tax rates and makeup of income in the U.S. and we'll talk.

[badtoworse]

24. OK, except for the surtax - no way on that as far as I'm concerned.

[Token Republican]

25. Flat tax or Flat Tax Rate?

There's a huge difference between the two.

A flat tax is a system where everyone pays the exact same tax as measured in dollars. This is a highly regressive system, as the less income someone has the greater the percentage of it goes to the fixed tax amount. ie - total tax paid is independent of income.

A flat tax rate is a system where everyone pays the exact same percentage of income in taxes. This is a neutral system, as everyone pays the same percentage of taxes. ie - total tax paid is a function of income, which is a straight percentage.

A progressive tax system is a system where the tax rate increases. Lower income is taxed at a lower rate than higher income. ie - for the first X amount of income, one tax rate applies, while for amounts over X, higher tax rates apply. This is the model that is currently in use.

However, our tax system as it exists today is such a convoluted mess that the tax rates are nearly meaningless when determining what taxes are actually paid. There are the tax rates as a base line. Then you add exceptions to these rates. Then there are exceptions to the exceptions, and exceptions to the exceptions to the exceptions. On top of that, there are at least four tax systems in place. There's the Federal Income Tax, the Alternate Minimum Tax, Social Security Tax and State Tax.

Then add to the discussion as to what the term wealthy means. There are two ways to view wealth. In the UK, which I think is more accurate, is to measure wealth by the total net worth of someone; ie - Mr. Banks is worth X million dollars. Contrast that with how we measure wealth in the USA, which is usually by income - ie - Mr. Money earns X million per year.

There's a lot of talk about taxing the wealthy, but what is meant is taxing higher incomes. The wealthy do not earn income in the same sense that most people do.

Its also important to differentiate between wealth and income too. There's a lot of talk, and rightfully so, on DU about the wealth gap. But the wealth gap is separate from an income gap and the cure to an income gap only exacerbates the wealth gap. Remember, income is simply the accumulation of wealth. Taxing income progressively means increased barriers to becoming wealthy, or even moving from one wealth category to another. I'm specifically avoiding what a policy should be, and focusing on how the effects of specific policy choices.

Back to personal taxes. While our current tax system is progressive in theory, in reality a strong argument can be made that it is highly regressive at the lower end, ie - under $50,000 give or take. While the taxes due on income under that amount is progressive, when various assistance programs that are income based are factored in, a higher income means that people lose the benefits. I have to find a link, but to the best of my memory a family earning $20,000 a year, plus assistance only comes out ahead by a few hundred dollars after taxes and loss of assistance when the income doubles to $40,000. Another example I remember reading was someone figured out that under very specific circumstances, (I think it was a single family household with exactly three children, non home owner) increasing income from $20,000 to $40,000 actually meant a loss of after tax dollars of about $500 per year.

Back to the OP, a flat tax rate with deductions is progressive when you do the math. Its a flat line of zero taxes (or some nominal tax) until the normal flat tax rate kicks in. The actual percentage of income increases as income increases. It will approach but never reach the flat tax rate, since there's always the tax free income that lowers the average. For such as system to work, all income from all sources should be taxed at the same rate and nearly all itemized deductions should be eliminated too. Personally, I think this is fair. A mortgage deduction means renters are subsidizing people who can afford to own. Capital gains & dividends? Why should wealthy people who earn income that way subsidize people who earn income as employees.

Last point for this post. A flat tax rate doesn't mean that additional steps can't be taken to enact a progressive tax structure. It just doesn't have to be based on income. Taxing wealth is a possibility, or the estate tax, or property tax on various luxury items, or whatever. If the rich pay taxes on items that the rest of us don't, then a combined income and other tax will result in a more progressive tax system overall, even if a flat tax rate is used.

[Recursion]

28. Flat marginal rate

Progressive effective rate.

[Token Republican]

29. Why Rich Pay No Income Taxes

The rich pay very little in income taxes. That is often presented as some sort of scandal, that the rich somehow found some super duper secret way to avoid paying income tax.

That's nonsense. The reason is very simple and the underlying supporting reasons have merit, although I don't agree with them.

Rich people don't work. They don't punch a clock, don't get a salary or a regular paycheck. Their income derives from their wealth. Wealth can generate income. You can stick it in a bank and earn interest. You can invest in stocks and get cap gains and dividends. You can buy income producing assets, or even start a business.

Due to our progressive tax rate structure, the more income someone makes, the higher levels of income are taxed at a higher tax rate than lower amounts of income. This is not a statement supporting or criticizing a progressive tax system, its simply stating what exits.

But the tax code was designed to encourage loans to States and Municipalities. States and munis love to borrow money for services. So to help reduce the amount of tax payer funded interest that states and munis pay, and to encourage people to invest in state/munis, the Feds decided to throw them a gift. While normal interest on loans is taxed, any interest payments made to states and munis are defined as tax free. The theory being is that states and munis could compete with privately held bonds easier and pay a lower interest rate if the interest was not taxed to the lender.

So the tax code itself makes these kind of bonds tax free. For normal people, there is little incentive to invest in tax free bonds, since taxable bonds often pay a higher return rate. But for those in the highest income brackets, the tax free status makes a lot of sense, since the after tax dollars at the lower interest rates is more than the after tax dollars of taxable interest at higher rates.

Most super rich generate a lot of their income this way, and that's why they don't pay taxes.

Buffett suggested that the tax law be changed and require that the rich pay at least some percent of income. That effectively negates the tax free status of the state and muni bonds, and i see no reason why to use the Buffett model; far simpler to simply make state and muni bond interest taxable.

However, the end result of either approach will mean less loans (bonds) being made to state and local governments, and/or the loans that are made and repaid will cost taxpayers more money since the muni bonds will be forced to charge market rates. This is generally the reasons given for keeping the tax free status, and it does have merit.

However, if you connect all the dots, the tax free status of state/muni bonds means that the working classes are transferring their money to the super wealthy tax free, via state sponsored bond.

The real question is therefore, is the transfer of wealth to the wealthy tax free, worth the services obtained through the bonds. If so, then they should be kept. But the cost is transferring money to the already rich.

[Scuba]

32. If there were no other options, the dilemna you describe would indeed pose a problem.

However, there's nothing keeping the fed from loaning money to municipalities at low interest. After all, they loan money to banks at low interest.

Simply give the municipalities another source of loans besides very wealthy private citizens/corporations.

[Squinch]

31. That's not a flat tax. But it seems like a good idea to me.