Why a Flat Tax Doesn't Work

[Aslan]

I always hear my conservative brothers talking about a "flat tax" as a solution to everyone's problems. And it's a huge, huge farse. Kinda like school vouchers...it's not what it seems.

She, here's the problem with a "flat income tax"....taxes are like a see-saw when applied progressively. People at the bottom pay very little, people at the top pay much, much more. To "flatten" that...you have to lower one side of the see-saw while raising the other side of the see-saw.

Here's a real world example:
Lets say you have 4 people that represent all people in the US; we'll call them Ben, Walt, Shannon, and John.
- Ben makes 1.5 million/year.
- Walt makes 500k/year.
- Shannon makes 175k/year.
- John makes 100k/year.

Under the prgressive system:
- Ben pays 75% of his income (1.125 million) leaving him with 375,000/year.
- Walt pays 59% of his income (295k) leaving him with 205,000/year.
- Shannon pays 35% of her income ($61,250) leaving her with $113,750/year.
- John pays 26% of his income (26k) leaving him with $74,000/year.

So while the people at the top pay a larger %...they also keep a larger amount than everyone else. So they have "incentive" to make lots of money...because they'll end up with more money at the end of the year...even though they've paid more in taxes. And the BIGGEST lie...about the flat tax is people tend to leave out the important fact...that taxes are raised to support spending. In the above example...the tax system raises $1,507,250. Consider that what the government NEEDS to bring in to spend on the programs it operates.

So lets look at "flattening" the tax to...lets say 37.5% across the board:
- Ben now pays $562,500....leaving him with $937,500 to spend. (great deal for Ben!)
- Walt now pays $187,500...leaving him with $312,500 to spend. (decent deal for Walt)
- Shannon now pays $65,625...leaving her with $109,375...a little less than before...no bigee.
- John now pays $37,500...leaving him with $62,500. (not a good deal for John)

But, the important thing here is...under the flat tax...the taxes/revenue raised is = $853,125. So in order to flatten the tax to this rate...we would put a much more significant burden on those that can least afford to pay it...while at the same time...not raising NEARLY enough revenue. I ran the same numbers at a 57% flat tax...still ended up very short of the 1.5 million needed to operate the government.

So when you hear "flat tax"...as fair as it "sounds"...it won't produce the same amount of revenue...unless it's so unbearably high of a rate...that many middle class folks would live below the poverty line and even the more affluent of the middle class would end up paying MORE in taxes! And I know the response from the right is "well cut spending then"...but realize...realistically, the government...even if it cut nearly all non-essential things...bare bones budget...could only cut about 16%. Even at a 57% flat tax rate...WITH 16% cuts to spending...you're still short money.

Now...can a flat tax theoretically EVER work? Yes. If the income disparency between top and bottom is minimal....where the line is flatter to begin with...then flattening it further is less burdensome and less devastating to revenue. But our society has seen that gap between rich and poor WIDEN...not shrink. And the wider that gap...the less successful a flat tax would be.

[Aslan]

Next comment: "But if you tax the rich...they can't trickle down wealth."

That was true....60-70 years ago. The reason it's no longer true is globalization. It used to be...that rich men like Rockafeller and Henry Ford...would innovate and create jobs in this country...and sell most of their product in this country. One great man, through trickle down economics...could give rise to cities and towns and a middle class.

It doesn't work like that anymore. Now, tax relief to the wealthy leads to job cuts, factory closures, and investment in China, South America, and Eastern Europe. There's no incentive to pay an American worker minimum wage (or more, plus benefits) when you can have an energetic worker in Vietnam who will work for 50 cents/hour with no benefits. It's simple dollars and cents. So giving money to the top of the pyramid...and watching it roll down to the masses...doesn't work that way anymore. Free trade initiatives destroyed that model. And every administration that has tried trickle down economics SINCE...has ultimately failed....and watched those executives invest in China and India and pocket the rest of the tax breaks.

The other complete falsehood surrounding trickle down economics...is taxes kill investment/expansion. That is economically not the case in 95% of the cases. Most business owners will tell you...the demand for their product dictates expansion. Just like return on investment dictates stock market investment. While taxes are annoying for businesses and investors...the bottom line is...if the demand is there, and profit can be made at a rate higher than a bank savings account...money WILL be invested irregardless of taxes. Taxes simply are not as strong a deterrant to investment/expansion as DEMAND is. Simple supply/demand economic theory...simple capitalism 101.

[J Anderson]

You really think the rich pay anywhere near 75%. Not when their pet politicians write the tax code.

[Aslan]

You really think the rich pay anywhere near 75%. Not when their pet politicians write the tax code.

Well...it was more of an example than an actual breakdown...but you have a valid point. My republican friend has said he'd support a flat tax but would want to get rid of all exemptions so that the rich aren't cleaverly avoiding much of their burden. However, as I explained to him, exemptions are an important part of the tax code...they allow the government to provide incentives.

So it's not as simple as we'd like it.

[Rdmonster]

In this scenario there is only one girl in America......not cool

[Aslan]

In this scenario there is only one girl in America......not cool

True, and well played.

But she does make 175k…which is quite a good haul for a gal…so she's definitely dateable.

[Hampe]

A progressive tax is obviously the best solution......it doesn't have to be THREE times as much though, like in Aslan's example. If you make a million a year, you can afford to pay 50% to taxes.....if you make 30k, you probably can't.

[sprocket]

Here's a real world example:
Lets say you have 4 people that represent all people in the US; we'll call them Ben, Walt, Shannon, and John.
- Ben makes 1.5 million/year.
- Walt makes 500k/year.
- Shannon makes 175k/year.
- John makes 100k/year.

None of those people "made" money (unless they're counterfeiters). The U.S. Treasury Dept. makes money. And no I'm not just being nit-picky. It's an important point, but I'll leave the actual debate to others.

[MICHAEL]

WHAT about the vase majority of people in the united states, the 95.3 percent that make less then 100,000!! Much less!! lol We live in a country that is slowly, but steadily destroying the middle class! Rich are getting Richer, and the middle Class is getting poorer!

Its sad what greed can do to a country! How much wealth is enough on the upper levels! Laws are being made and changed to protect their wealth on a unsurpassed level!

LIKE Jesus always said, Wealth is the path way to the kingdom of Heaven on earth, "Harder for a poor man to make it to the kingdom of heaven then for that same man to pass through the eye of a early 1800's century needle"! Much more space in heaven since that mantra was changed, and the accommodations are very plush now to cater the RICH!

What is the world is wrong with spreading the wealth! Why, and what good does a few having owned such a huge chuck of it, and not putting it back into the bowling industry!!

Its getting hard to even own more then 6 bowling balls now days!! I just hope this trend stops, before it destroys BOWLING, and the bowling ball industry! Rich don't bowl,,, they are into the game of making money, for making money's sake!

[Aslan]

Obviously Iceman...it's a more complex problem than just the progressive vs. flat tax. I was just pulling one rabbit out of one hat.

But this country is on track for a SERIOUS downfall by 2025.

1) The middle class is eroding. The gap between weathly and poor is widening. And nobody really seems to care that much.
2) We've traded "fair trade policies" for "free trade" policies. Which has led to global corporations and a massive expansion in places like Mexico, Indonesia, India, and China. Yet the masses in those countries have been slow to see any benefits as most of the money has went to the corporations, governments, or a few private individuals.
3) We continue to hemmorage $$$ by not having a single payer health care system and not having control over immigration. We have the poor and uninsured going to hospitals and getting $650 bills for a sore throat...a bill they don't pay...so the costs rise for everyone else. We have illegal aliens getting driver's liscences, free healthcare, and free educations while most Americans born in the US or here leagally are finding healthcare and eduacation more expensive.

Examples of past vs present that illustrate the issue:

Back 40 years ago or so...if you gave a tax cut to Rockafeller or Henry Ford...they used that money to open a factory. That factory provided good wages and propped up local economies. And if a person lost their job, they would go to the unemployment office and be offered a choice of a few available positions.

Nowadays...Bush's tax cuts went into the pockets of corporations...that then closed factories and moved their headquarters overseas. And the people losing their jobs didn't go down to the unemployment office and get offered a few other positions...they went online and signed up for welfare/unemployment benefits and sat home receiving a check.

There's a LOT that needs to be fixed...too much to list here...but the first item of business is the US needs to withdraw from the WTO...and move towards isolationism before it's too late. We are still the World superpower NOT because of military might...but because we have the largest consumer base in the World. Right now, the World needs us more than we need them. In 5-15 years...that won't be the case. And when we lose "consumer power"...our military will erode as fast as Russia's did. The government can't keep priniting money..and running up foreign debt...eventually the well WILL run dry and the creditors will come calling. We still have a small window where we can tighten our policies and rebuild our industry and middle class. But in 15 years...that window will be permanently shut.

This country recently bailed out the auto industry..which cried that "we're the last US industry!" Well...whether that bailout was good or bad...the question I have is...why didn't we act when we lost the 2nd to last industry...the 3rd to last industry??? You're telling me Americans can't make bicycles? Clothes? Appliances? We used to. And they cost more...but people making them MADE more...so it all evened out. Now we put 50 people on unemployment, close their factory, and the company moves it's production to Indonesia where they can get a 15-year old to work 16-hour days for $0.25 cents an hour...we then buy that product for 1/8 the original cost...because thats all we can afford since we're living on unemployment benefits. And who profits from the arrangement?? The corporation...which makes 12.5% of what it used to sell the item for...but pays 0.5% what it used to pay to make it. No salaries, no safe working conditions, no "benefits", no retirement pensions or 401k....all profit. And the right wing conservatives in this country will tell you...those corpotations need tax cuts...THAT will get them to create jobs in the US! Yet that model hasn't worked in a global economy since the dawn of global economies. Instead...they take that tax cut, pocket it, and move the factory to Beijing...and hire a "venture capitalist" firm like Mitt Romney's to do the whole thing for the least amount of financial loss.

It's a BIG problem...and we need BIG solutions. But we haven't had a president since Franklin Roosevelt willing to do anything but half measures. The Affordable Care Act was the biggest "venture" since Roosevelt...and not only was it stripped down to useless status before it ever got through Congress...but once it did get approved...it became a lightening rod for political fighting and venom and gridlock.

If ya don't laugh...you'll cry.