I once favored switching the U.S. to some type of flat tax plan. In 2005, I praised Steve Forbes’ tax proposal, though it wasn’t completely flat (the rich would pay more than the poor, under his slightly progressive rate suggestions). As late as 2013, I wrote: “We need to replace the decrepit Income Tax system with something sensible and fair; perhaps a National Sales Tax, perhaps a Flat Tax.”
Recently, I concluded it’s not a good idea. Hopefully, I can explain briefly.
◊ Why I Liked The Idea
I liked the idea of a flat tax because it sounds fair. Every “flat tax” proposal is different, but the general idea is that the rate would be the same for everyone. A true flat tax plan would tax everyone’s income at 10% or 15% — any percent you choose — which means those earning very little would pay very little and those earning a lot would pay quite a bit.
I further liked the idea because it’s simple. You would know your tax amount in advance, based on your salary. If the rate is 10%, and you’re paid $50,000 per year, you will pay $5,000 per year in taxes. At the same time, you would know that a CEO being paid $100 million per year is paying $10 million in taxes. It’s further simple because loopholes, deductions, etc. would disappear (it’s not a true flat tax once those are reintroduced).
I still like the idea of simplification of the U.S. tax code.
There shouldn’t be a need for tax preparation services like H&R Block — but they lobby to keep the process complex. There should never be a time when struggling workers or college students pay a higher rate than those making millions. Giant corporations shouldn’t be able to legislate tax breaks for themselves while smaller businesses shoulder the load. I remain convinced that simplifying the code would make it more fair.
But I am no longer convinced that flattening the rate would make taxes more fair.
◊ Who’s Supporting It Today?
Most “flat tax” proposals aren’t actually flat, offering breaks of some kind to the poorest. Carson is one of the few who eschews that level of compassion, saying: “We need to abandon the idea that some people are too needy and pitiful to be required to make contributions.” Cruz says everyone’s income would be tax free up to a point ($36,000 for a family of four) and his 10% flat rate would only apply to income above that amount. Businesses would all be taxed at 16%. Period. Paul’s suggestion is to tax both individuals and businesses at 14.5% (starting after the first $50,000 for a family of four). Santorum proposes a 20% rate for both people and businesses, with a family of four paying nothing until they reach $37,500.
(Note: Apparently even President Bill Clinton proposed a form of a flat tax at one point in his career.)
◊ Why I Don’t Support It Anymore
1. Few of these plans are actually simple. When read in detail, most still have relatively complex exceptions and loopholes, especially for businesses. Paul’s sounds particularly complex. The more complications you add, the more you defeat the purpose of simplification.
2. Most are not truly flat. Forbes plan, for example, contained “steps” at certain income levels. If your gross salary was near one of those steps, a slight raise could actually mean less take-home pay, or taking an unpaid week off from work could mean an increase in take-home pay. This would allow many to game the system and therefore defeat the purpose of making it fair.
3. It’s not the tax rate that complicates the tax code. What complicates the current tax code is not a variety of rates — there are really only a few — but the many ways in which we define “income”, and the plethora of exceptions, deductions, credits, and other add-ons. If our goal is simplification, then a flat tax doesn’t help unless we also wipe the slate clean of these often popular loopholes.
4. Most flat tax proposals wouldn’t generate the necessary revenue. This single point deserves a lot more space, but others have written at length about it. Depending on how we define “income” and how many deductions and loopholes are allowed, the flat tax rate would actually need to be much higher than the proposed rates in order to maintain current levels of government spending. Estimates start at 23% and go up from there. This would significantly increase taxes for the poor and lower middle class.
Naturally, most who propose a flat tax also propose drastic cuts in government spending. While most U.S. voters want to cut government spending, few of us can agree on what should be cut, and how. If we could agree on spending cuts in specific areas, there would be no need for a flat tax; we could simply reduce the current rates or add more deductions.
5. A flat tax simply isn’t as fair as it sounds. This is the reason that finally convinced me.
◊ Why It Isn’t Fair
The one paragraph version: In order to live, a certain amount of money is required. Yes, that amount changes from one small town to another large city, but there is such an amount. While we can argue what should be included in that amount (smartphones?), we can agree that X dollars are necessary. Taxing Person A’s income reduces them to below that amount, while taxing Person B’s income leaves them well above that amount. The former is unconscionable; the latter is what we all hope for.
Any change in tax rates affects the well-being of low-income people much more significantly than it affects the well-being of high-income people. For someone living paycheck-to-paycheck, any reduction can mean a new outfit for work or finally replacing those worn-out shoes. It might mean you can buy medicine and pay rent on time. Any increase is a potential checkmate to their personal finances. For middle class and upper-income people, rate changes might be welcome or frustrating, but there’s a huge quality of life cushion to rest on.
Let’s assume a rate of 20%. (This is on the high end of current proposals, but lower than estimates of what’s needed for revenue.)
If you make $20,000 a year, you’ll pay $4,000 in income taxes. That’s more than what you’d pay with today’s rates (I know; I worked at similar and lower wages for several years). It’s difficult to live on the remaining $16,000, even in the low-cost areas of my experience. On that amount, I had to go without cable or satellite TV, eat cheap, put off buying clothes for years, keep power consumption to a bare minimum, go without health or dental care except in emergencies, and take “vacations” that either consisted of staying at home or making sure I had a free bed at the other end of a short road trip — even when I was single and childless. Any trouble with my car or health would set me back for weeks, if not months.
If you make $80,000 a year, you’ll pay $20,000 in income taxes, which is also more than today’s going rate (if you include today’s loopholes like deductions for children or mortgage interest payments). But even for a family of four, the remaining $60,000 is nice enough — if the cost-of-living is low in your area. You can pay a reasonable mortgage on a small house, make college loan payments, leave your lights on in the day, easily save for the next major purchase (used car, furniture, etc.), have children in dance or youth sports, easily afford hotels and airline tickets a couple of times of year, and so on. (I know, because this is close to what my household earns today.)
If you make $200,000 per year, you’ll pay $40,000 in income taxes. Yes, it’s the same percentage as those poor people mentioned above, but now you get to keep $160,000, which is more than you did before. You’re loving this flat tax. And remember, there’s no requirement that people earning more have to live in fancier houses or drive high-end cars. They can live nicely like the $60,000 couple, and save a hundred grand a year.
But it’s really those in much higher tax brackets that want this flat tax rate, because it means their taxes come way down. Suddenly wealthier people get that long-needed break from being slightly less rich. They make the case that it’s “fair”, because they’re paying the same rate as that first example person. They further note that the amount they pay is still much higher than the paltry $4,000 contributed by the first person.
It’s at this point that a flat-tax advocate usually attempts to spin off the argument into an entirely separate argument about why Person A is only making $20,000 a year versus Person C making $200,000 a year. They didn’t go to college, or didn’t try hard enough, or whatever. I can win that argument too, but it’s not the right discussion. This is about the tax rate.
The fact is, whatever percent you set the rate at, it’s going to more drastically affect those in the lower income brackets than it does those who are paid much more.
◊ An Aside On A National Sales Tax
To some, a national sales tax (as a replacement for the Income Tax) looks attractive. My thoughts on this are in another entry. Short version: I would like it if a few bugs could be worked out.
◊ What Is The Goal?
It’s incredibly obvious that the various proposals and tax law perspectives are based on different underlying goals. If the only goal was to fund the federal government, we’d all likely be going about this differently and much more simply. For some candidates, it’s clear that their goals are to please the owners of the money bags who donate to their campaigns.
For me, having felt the pain of low-income life for far too long (and was only rescued from it by marriage), I’d like one of the goals to be providing a little breathing room for the less privileged among us. Simplification would be another goal. And yes, if Americans can ever agree on what to cut from the federal budget, a goal should be a reduction in federal spending.
◊ What I Propose Instead