If everyone paid taxes

[F4mandolin]

I have thought of this quite a few times over the years....fairly clueless on an answer. How much would people save (in my opinion) if everybody had to pay taxes...at a lower rate? Say the first $10k or so was tax free and then maybe 3% from $10k to $20/30k.. 4% to $50k etc etc. or some other numbers that are low (ish). You WOULD have to pay with very few exceptions. I know here in the UK they are just raising the top earners up to 50% and all I can think of is....ouch. Just a rambling thought and I haven't seen an answer before......

 

[W2R]

Or how about having the same tax, no matter what the income level? Say 8%. Then, pass beefed up minimum wage laws so that a person working a 40 hour week would still make a livable amount after taxes.

No tax returns would be necessary since exactly 8% would be withheld in advance from salaries or any other income. Vanguard would pay 8% of our dividends or LTCG directly to the Treasury Department. We could eliminate the IRS, and the amount saved by doing that could be applied to lowering our taxes.

I dunno. That is probably WAY too easy and simple to work. But I love dreaming about it.

 

[MuirWannabe]

Or how about having the same tax, no matter what the income level? Say 8%. Then, pass beefed up minimum wage laws so that a person working a 40 hour week would still make a livable amount after taxes.

No tax returns would be necessary since exactly 8% would be withheld in advance from salaries or any other income. Vanguard would pay 8% of our dividends or LTCG directly to the Treasury Department. We could eliminate the IRS, and the amount saved by doing that could be applied to lowering our taxes.

I dunno. That is probably WAY too easy and simple to work. But I love dreaming about it.

W2R,
What a great country this would be under your proposal. Simple, fair, easy. And the marked bonus of eliminating the IRS. Wow. Sign me up.

Oh wait, I guess the IRS will still have it's function to adminstrate the new government health care. One can still dream.

 

[mickeyd]

It would never work. Too logical. Also, it would glut the unemployment rolls with IRS folks. Besides, 47% of our fellow citizens do not pay federal income tax today, so it would negatively affect them and we could not have that.

 

[IndependentlyPoor]

This is off-topic, but in celebration of April 15 , I thought that I would post the history of the highest marginal tax rates along with the cut-off for the top rate. I adjusted the cut-off to 2009 dollars.

You might think that the top rate corresponds to the highest income bracket, but that was not true during the "bubble" years of 1988-1990, when the highest marginal rate was paid by the second highest (middle class) bracket.

The top bracket scale is on the right, and is logarithmic.

 

[flyfishnevada]

The 53% of us Americans that pay income taxes would pay a lot less. Businesses would pay a lot less. The 47% that now pay no income taxes would start caring about government spending since they would then have a vested interest. If we went to a flat tax as suggested above, politicians would not be able to shape social policy through punitive taxes, they would actually have to pass unpopular laws to get people to do what they want. Finally, the America's treasury would be bursting at the seams. Lower taxes always produces higher revenues, more jobs, less drag on the GDP, lower taxes, but more people paying them, etc. Remember every dollar that that someone receives from the government as part of their income rather than from the free market (salary, profit, etc.) is a dollar they don't pay income taxes on.

 

[IndependentlyPoor]

Lower taxes always produces higher revenues

Do you truly believe this?

 

[laurence]

I posted something about this on a different board. With half of Americans paying no income tax (I understand there's more tax than income tax!) it really does produce perverse incentives. I mean, now you've got a near majority that has an incentive to always support more programs/hand outs/benefits from the government because it doesn't come from their dime! In doing our taxes this year, it was a good thing we could max DW's SEP IRA to get our leftover tax liability down to just a couple grand, but we paid a LOT throughout the year! I've benefited a lot living in this country, so I don't mind, but at this point DW and I much prefer time over more work/money. She works less (self employed) in large part to not getting paid that much on the margin.

But how much revenue would taxing the bottom half create? I mean, if the median household income is ~$44k, even if you took 10% on average it would still represent a very small piece of the federal budget pie. But perhaps the benefit would be for these people to have some "skin in the game". Wealthier people vote more often, is this solely a factor of education/knowledge or could taxing the poor, even a token amount, increase the franchise? Eh, who knows.

 

[mickeyd]

I've been paying federal income taxes continuously for the last 50 years. What perplexes me is that nearly one out of every two of the folks that I see every day does not pay federal income tax, if I am to believe the stats.

Something's very wrong if this is so!

 

[audreyh1]

It amazes me that people seem to remain convinced that there is some huge fixed portion of the US population (that is - the same individuals) that does not pay taxes year after year and therefore votes to keep it that way.

I suspect "this group" is more likely a breakdown of:

1. Young people, people just getting started in careers, students, part-time workers: most of these folks will likely go on to earning more money and pay Federal Income Taxes (FIT). They have a lifetime of taxpaying ahead of them.

2. Seniors - probably a big chunk of the non-tax paying crowd as these folks tend to have lower incomes. A lot of seniors get by on pretty darn low income - especially if they are only living off of social security. A lot of these folks probably paid federal taxes for several decades and would feel pretty incensed by others claiming they are "free-loaders" whatever you think of SS and Medicare.

3. The recently unemployed and underemployed. The "47% pay no FIT" article mentions that in 2007, then number was lower - 38%. So that means 9% can be directly attributed to people whose income dropped due to the recession. You would hope for most of these folks this is a temporary situation And until 2 years ago these folks WERE paying FITs. To be mad at them now due to the economy seems pretty harsh.

4. Families. Families with children get HUGE tax breaks in this country - deductions AND credits. Whether a good idea or not, that is how the tax code is currently written. I can see how this might make some people mad and seem inappropriate and maybe the room for the biggest gripe is with this group. However, for most families, these tax breaks do not last all their lives, but rather for a couple of decades.

So, I suspect if you back out the above groups, you are probably left with a fairly small "permanent" non-FIT-paying group. And whether or not they religiously vote to keep themselves that way is still a debatable question.

Audrey

 

[Alan]

No tax returns would be necessary since exactly 8% would be withheld in advance from salaries or any other income. Vanguard would pay 8% of our dividends or LTCG directly to the Treasury Department. We could eliminate the IRS, and the amount saved by doing that could be applied to lowering our taxes.

I dunno. That is probably WAY too easy and simple to work. But I love dreaming about it.

It would never work. Too logical. Aso, it would glut the unemployment rolls with IRS folks. Besides, 47% of our fellow citizens do not pay federal income tax today, so it would negatively affect them and we could not have that.

W2R,
What a great country this would be under your proposal. Simple, fair, easy. And the marked bonus of eliminating the IRS. Wow. Sign me up.

Oh wait, I guess the IRS will still have it's function to adminstrate the new government health care. One can still dream.

It's not just a smaller IRS but the loss of loads of tax accountants.

The payment system in the UK works just like this (see my detailed response in the thread about why we have so many threads on taxes this year )

 

[flyfishnevada]

Do you truly believe this?

Yes, I do. Do the math. People paying higher taxes have less money to spend, invest, etc., which means that tax revenue goes down. Lower taxes and then more people spend and invest more money and tax revenues go up. Money in the free market is taxed. Money that has been removed from the free market and spent, invested, given away by the government is not taxed. The more money the government takes, the less there is to tax.

The tax cuts of the 1920s
Tax rates were slashed dramatically during the 1920s, dropping from over 70 percent to less than 25 percent. What happened? Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent.

The Kennedy tax cuts
President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent. Recognizing that high tax rates were hindering the economy, President Kennedy proposed across-the-board tax rate reductions that reduced the top tax rate from more than 90 percent down to 70 percent. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation).

The Reagan tax cuts
Thanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

From the Heritage Foundation

By 2003, Mr. Bush grasped this lesson. In that year, he cut the dividend and capital gains rates to 15 percent each, and the economy responded. In two years, stocks rose 20 percent. In three years, $15 trillion of new wealth was created. The U.S. economy added 8 million new jobs from mid-2003 to early 2007, and the median household increased its wealth by $20,000 in real terms.

But the real jolt for tax-cutting opponents was that the 03 Bush tax cuts also generated a massive increase in federal tax receipts. From 2004 to 2007, federal tax revenues increased by $785 billion, the largest four-year increase in American history. According to the Treasury Department, individual and corporate income tax receipts were up 40 percent in the three years following the Bush tax cuts. And (bonus) the rich paid an even higher percentage of the total tax burden than they had at any time in at least the previous 40 years. This was news to the New York Times, whose astonished editorial board could only describe the gains as a "surprise windfall."

From the Washington Times

Deficits went up due to spending increase, namely the wars and entitlement spending, not because revenue went down.

 

[mb]

Yes, I do. Do the math. People paying higher taxes have less money to spend, invest, etc., which means that tax revenue goes down. Lower taxes and then more people spend and invest more money and tax revenues go up. Money in the free market is taxed. Money that has been removed from the free market and spent, invested, given away by the government is not taxed. The more money the government takes, the less there is to tax.

Deficits went up due to spending increase, namely the wars and entitlement spending, not because revenue went down.

My understanding is that this has been rejected by the vast majority of mainstream economists. Those that are clinging to it seem to be doing so for ideological reasons rather than supporting data/science.

 

[Texas Proud]

Or how about having the same tax, no matter what the income level? Say 8%. Then, pass beefed up minimum wage laws so that a person working a 40 hour week would still make a livable amount after taxes.

No tax returns would be necessary since exactly 8% would be withheld in advance from salaries or any other income. Vanguard would pay 8% of our dividends or LTCG directly to the Treasury Department. We could eliminate the IRS, and the amount saved by doing that could be applied to lowering our taxes.

I dunno. That is probably WAY too easy and simple to work. But I love dreaming about it.

The problem with your plan is the rate is to low... the federal government is spending about 20% of GDP.... so the tax would have to be 20% or higher... This also does not address all the state a local spending...

 

[samclem]

My understanding is that this has been rejected by the vast majority of mainstream economists. Those that are clinging to it seem to be doing so for ideological reasons rather than supporting data/science.

Here's what one source said:

Why does debate over the effects of income tax cs on revenues and the budget deficit never end? Do we not have ample empirical data that demonstrates that lowered taxes produce "more" revenue, not less, by stimulating economic activity? . . .
In each of the last three cuts in marginal tax rates, revenues received by the U.S. Treasury have increased. Coolidge cut tax rates in the 1920s, Kennedy cut marginal tax rates in the 1960s, and Reagan cut them in the 1980s.

But they do agree with you about the importance of ideology over evidence/data:

The reason that much of this data is ignored in debates is politics, pure politics.

 

[mb]

Here's what one source said:


But they do agree with you about the importance of ideology over evidence/data:

I notice that in each of the cited examples the marginal rate was at least 70%. I would be more inclined to believe that there is an effect for a marginal rate of that magnitude than for say a difference between 35% and 39.6% or what ever it was before the recent cut. I agree that 70% is to high.

The data is the data and I'm not going to dispute that but I'm also not certain about cause and effect. For example I suspect much of the Reagan era effect was due to the ramp up in military spending. Despite the increase in revenues the budget deficit did not decrease. The main effect could be Keynes rather than Laffer. IRRC, the inverse effect occurred when the cold war ended and military spending decreased.

 

[flyfishnevada]

My understanding is that this has been rejected by the vast majority of mainstream economists. Those that are clinging to it seem to be doing so for ideological reasons rather than supporting data/science.

Same article referenced by samclem:

In each case, the personal income taxes paid by "the rich" increased when their tax rates were cut. The top 10 percent of earners in the Reagan years paid 48% of the income tax burden between 1981 and 1988.

It is often forgotten that the wealthy often shelter their money in times of high taxes. The wealthy don't need to invest, they are already wealthy. They sit on their money. No dividends, no interest, no taxable income. When tax rates are low, they invest, making more money paying more taxes, in turn driving the economy. They see no need to do so when rates are high because the return isn't worth the risk.

I would agree that the examples sited reduced very high rates to rates that were much lower, however, the Bush tax cuts reduced fairly low rates to even lower rates and revenue still increased.

Taxes are a shared responsibility. No one, no matter how poor, should be exempted. On the other hand, poor or wealthy, should be bankrupted by taxes. In all sharing in the burden, we keep out individual taxes low. I am as opposed to punitive income taxes on the wealthy as I am to regressive taxes like the soon to be proposed value added tax. Neither is fair. We fought and won a war over this stuff back in the 1700's.

Arguments over tax rates and who should pay more and who doesn't have to pay miss the point. The point is the Federal Government is spending too much money. We, as a nation, have some hard choices. No matter what your feelings towards Health Care, SS, Medicare, foreign aid, corporate welfare, etc. we can't afford all of it. Raising taxes, even if raising taxes increased revenue, is a dead end street. Someday, there will be no more money to take! You can't have your cake and eat it too.

 

[Nodak]

Or how about having the same tax, no matter what the income level? Say 8%. Then, pass beefed up minimum wage laws so that a person working a 40 hour week would still make a livable amount after taxes.

No tax returns would be necessary since exactly 8% would be withheld in advance from salaries or any other income. Vanguard would pay 8% of our dividends or LTCG directly to the Treasury Department. We could eliminate the IRS, and the amount saved by doing that could be applied to lowering our taxes.

I dunno. That is probably WAY too easy and simple to work. But I love dreaming about it.

Much too logical. Besides, you'd have to get rid of some bureaucrats and that will NEVER happen.
I can't understand it; I started my first paying job at the age of 12 as a projectionist in the local theater. I worked for 48 years before FIRE at the age of 60 and never had a year when I didn't pay FIT.

 

[lets-retire]

Almost anything would be better than the system we currently have. You can have your taxes done by three or four "experts" and each come up with different results. There is a problem with that. The system needs to be much simpler.

Personally, I'd like a national sales tax on only retail sales. Consignment shops, yard sales, wholesale sales to businesses, etc. would all be exempt. The G gets their money up front and they don't have to worry about people working "under the table". This tax would automatically be progressive and voluntary. The rich spend more than the poor so they would naturally pay more in taxes than the poor.

 

[IndependentlyPoor]

Here is some data I was able to get together. The tax reductions mentioned in flyfish's quotes are marked in yellow.
1 The Kennedy cuts
2 The Regan cuts
3 The Bush cuts
Data from
http://www.taxpolicycenter.org/taxfacts/Content/Excel/fed_receipt_sum_historical.xls
www.google.comhttp://www.taxfoundation.org/files/fed_individual_rate_history-20091231.xls
This data doesn't go all the way back to the 20s. Sorry

I'll let folks draw their own conclusions. But what about that pesky 91/92 Clinton tax increase?

 

[laurence]

My degree in Econ is now 11 years old, but I remember we had a senior seminar class on taxes and the effect of cuts/raises in tax rates on revenue was clearly dependent on the current marginal rate. The graph was an upside down "U" with significantly higher revenue if cutting from say, a 70% marginal rate to 60% but revenue starting to decrease again once it reached a certain marginal rate floor (it was somewhere in the high 30% range, I believe).

Now as far as the half that don't pay income taxes being a transient group, well, the retired group is in that category for a decade or more (they hope - beats being dead!), and I don't think many people vote for policy based on their possible place in life 10-20 years from now, they vote on how they feel now! What's that saying, "If you are young and not liberal, you have no heart..." so the fact that people go in and out of that group is debatable, but not really relevant to the point of tax policy affecting behavior.

 

[flyfishnevada]

Here is some data I was able to get together. The tax reductions mentioned in flyfish's quotes are marked in yellow.
1 The Kennedy cuts
2 The Regan cuts
3 The Bush cuts
Data from
http://www.taxpolicycenter.org/taxfacts/Content/Excel/fed_receipt_sum_historical.xls
www.google.comhttp://www.taxfoundation.org/files/fed_individual_rate_history-20091231.xls
This data doesn't go all the way back to the 20s. Sorry
View attachment 8757
I'll let folks draw their own conclusions. But what about that pesky 91/92 Clinton tax increase?

I believe the 91/92 increase was Bush (the father). He took office in 1989 and left in 1993. Remember, "Read my lips"? Clinton likely won due to that increase and Republicans jumping ship to vote for Ross Perot.

Tax increases can produce more revenue, but usually only in the short term. The effects of the higher taxes erode the revenues over time. In this case, we had a sustained growth period due to the dot com industries. Money was being made, lots of money, and taxes were being paid. You can also see that revenues then decreased sharply in 1999/2000 after the bust (I'm sure many of us remember that), but began to rise again after the Bush tax cuts.

You can also plainly see on that chart that the tax increase in the 50's led to a mild decline in revenue, during what was a growth period in the economy. Lots of veterans getting jobs, buying homes, having children, buying televisions, cars, etc. The decline in the late 40's probably has more to do with the end of world war II and the transition from a war time economy to the cold war and consumption economy of the 50's. The war time tax increases were pumped back into the economy immediately and in huge amounts to build and supply the war effort. They were not used for social programs, welfare, and other programs that tend to reduce the tax base by removing the money from the free market.

 

[Alan]

Almost anything would be better than the system we currently have. You can have your taxes done by three or four "experts" and each come up with different results. There is a problem with that. The system needs to be much simpler.

I do my son's taxes for him and it really is as simple as it can be, but in his first year of working after college I ran his return through both Turbo Tax and TaxAct and was amazed to find a $35 difference. Turns out his wages were very low but he still contributed to his 401(k) and TaxAct spotted a $35 tax credit for low wage earners that contribute to 401(k)'s that Turbo Tax missed.

 

[Zathras]

Tax increases can produce more revenue, but usually only in the short term. The effects of the higher taxes erode the revenues over time. In this case, we had a sustained growth period due to the dot com industries. Money was being made, lots of money, and taxes were being paid. You can also see that revenues then decreased sharply in 1999/2000 after the bust (I'm sure many of us remember that), but began to rise again after the Bush tax cuts.

In general, I feel there is a 'sweet spot' for maximizing tax revenues.
However, you seem to be picking and choosing your correlations. Other than a general correlation, I see no evidence.
For example, you state that in the 90s, even though we had a tax increase, we had sustained growth do to the dot.com bubble.
You then attribute the rise in the 2000's to the Bush tax cuts. But couldn't it also be due to the housing bubble?

And your "Always" qualifier certainly doesn't work. For example, what would happen to tax revenues if you lowered taxes all the way to zero? Obviously there would be none.

As I see it, the question is: where is that sweet spot? Surely it is less than 90%, but likewise I am sure it is above 10%.

As for a type of 'fair tax'. I am all for it. Simplify taxes to the point where you can fill them out on a post card and I suspect you well get fewer people trying to dodge taxes.

 

[IndependentlyPoor]

The war time tax increases were pumped back into the economy immediately and in huge amounts to build and supply the war effort. They were not used for social programs, welfare, and other programs that tend to reduce the tax base by removing the money from the free market.

You are right about the "read my lips" tax increase. One of my senior moment there.

I don't get your distinction between stimulative wartime spending and social programs that remove money from the free market. The government's tax revenues all get spent, and I don't think it makes much difference to the economy if that spending comes in the form of missiles or food stamps... literally guns or butter. It all goes back into the economy.