A Flat Tax Isn't Simpler, Right?

[scrabbler1]

Shouldn't a true "flat tax" at least tax dividends and cap gains at the same rate as wage income? Seems to me that all of these tax "reform" proposals seek to eliminate taxes on dividends, cap gains, estates, and greatly lower the top rate(s) on earned income. So either you end up with less revenue than before, or others who do not benefit from those big rate reductions will have to pay more to make up the difference.

 

[martyp]

I've always felt that calculating your taxable income was complicated and calculating your tax is easy. The candidates seem to be proposing a flat tax with a few deductions. If the deductions are relatively few and easy to understand then I think this would constitute tax reform. The problem is that every deduction reduces revenue which then has to be balanced by taking it from somewhere else, either people or programs. These candidates are in for a vicious circle. Notice that it is presidential candidates who are making these promises. Let's see how many Congressional candidates climb on this bandwagon. Shouldn't the measure of these presidential candidates be how much Congressional support they can muster during the campaign when they make these promises?

 

[samclem]

Shouldn't a true "flat tax" at least tax dividends and cap gains at the same rate as wage income?

It depends what the goal is. If we want "simple," then taxing all income (wages, Cap gains, dividends, etc) at the same rate is very simple, and that is appealing. It also strikes most people as "fair"--no matter how you earned it, once you get it you pay the same tax rate on it. There are at least a couple of problems in implementation:
Cap Gains: If you bought an asset 20 years ago and sell it today for 10% more dollars than you paid, you really didn't earn 10% in income. Due to inflation and the decreased values of today's dollars, you really had a tremendous loss --of approximately 36%. So, to truly tax the value of the income, any Cap Gain tax should be indexed to inflation. That increases complexity (I can see the voter's eyes glazing over). In addition, a significant portion of the cap gains of most stocks is due to retained earnings--the stock went up in price because the company held back some earnings to invest in the company. Those earnings were already taxed when the company earned them, to tax them again when the stock is sold violates the principle of fairness for which we are striving.

Equitable treatment of capital: Is there any inherent reason that income produced by putting your money at risk should be taxed at the same rate as income produced by your labor? After all, you are taking a risk. Will the government treat the results of your risk equitably--treating losses just as they treat gains? So, if you put $1000 at risk and earn $100, they take $10, but if you lose $100 ("earn a negative $100") they pay you $10? I don't think so.

Practical impact on the economy: The US has had the same tax rate on wages as it had on investment income (capital gains, interest, dividends, etc) several times in our history. For example, the 1986 Tax Reform Act made the cap gains rate the same as the rate for earned income (up to the 28% rate). The impact of this policy is (frequently) that business slows down as capital availability dries up. In 1997 President Clinton signed another piece of tax reform legislation lowering the top cap gains rate to 20%, and this had a positive impact on the economy.

So, in some cases, the appearance of fairness really isn't, and in some cases simplicity brings neither equity nor prosperity.

But I still think the tax code can be very simple, fair, and promote prosperity (largely by turning the tremendous energies now devoted to "gaming the system" of our bizarre tax code to producing things instead)

 

[scrabbler1]

Samclem, I actually agree with you about the indexing element of cap gains treatment. I have no problem with some form of mild indexing even though it would make Schedule D more complicated, then tax any remaining gain as ordinary income. But the alternative of zeroing out the cap gains tax just to "simplify" the tax code is totally unacceptable and unfair IMHO. As for dividends, I have no problem with any so-called "double-taxation" because there are many other places in the tax code in which there is double-taxation. Why is only this type singled out as being so unfair?

Tax simplification and tax fairness do not necessarily go hand in hand. Whenever I hear some politician spout "simpler, flatter, fairer," I hear more BS and talking points and slogans than a real workable solution which may pit those goals against each other.

 

[ertj]

It's estimated that compliance with the tax code costs 30 cents for each $ collected. A very simplified method for determining taxable income would presumably cut into this compliance cost (be it, IRS agents, CPA's, corporate tax lawyers...). So in theory it's possible to net more $ overall, while not lowering the gov'ts overall take.

But there are many other benefits:
1. To the extent that you believe in "dynamic scoring", there could be additional benefits by changing behavior -- i.e. gov't probably shouldn't be subsidizing large mortgage debt. It does nothing but distort what the market would be without the subsidy. Likewise, many charities are worthy. But should the fed gov't be subsidizing ballet or opera -- or should those that wish to see these low attended arts pay the full cost of the performance? I lean toward subsidize as little as possible and let the market decide what it wants, and in what quantity, and at what price.

2. To the extent that this greatly eliminates the power of Congress to dole out special favors, who knows how much benefit there could be. Eventually the exceptions would crawl back in, but for a while there would be much less reason to lobby.

Since 50% of the people end up paying no fed income tax, and there are many that file a 1040EZ or a less complex 1040, I don't see an impetus for change. ...at least not one remotely big enough to combat all the vested interests in the status quo.

 

[hopingtomakeit]

In and of itself, a flat tax isn't any simpler than the current system, right? That is, the returns could involve exactly the same 1040 forms, schedule A's, schedule C's, etc., but in that last step, everyone multiplies their AGI by the same percentage.

I realize that many flat-tax proposals would also involve other simplifications. I'm guessing that "flat-tax" has come to mean "flat and simplified" in the same way that "fixed income" often means "fixed and low income."

i apologize for the fact that i haven't contributed for a while.

here's robert reich's concise article:

The flat tax fraud - CSMonitor.com

best to all...

 

[scrabbler1]

i apologize for the fact that i haven't contributed for a while.

here's robert reich's concise article:

The flat tax fraud - CSMonitor.com

best to all...

Great article. Thanks for the link and looking forward to seeing you post more.

 

[Telly]

I've stopped reading most articles about a "flat tax". It's rare that I have taken such an atitude. IF a Federal Income flat tax ever gets implemented, I expect it will be about 1/2 to 2/3rds as convoluted as our present tax system. Then it will be modified over a few years to become just as convoluted. And I will probably get screwed by it.

It's the "devil you know, versus the devil you don't know" story. I'll stick with the present devil, thank you.

 

[retire@40]

I'm really surprised nobody has ever talked about scrapping the entire tax code as it relates to individuals and implementing a national real estate tax.

I can't think of any negatives in having a national real estate tax, but here are some positive points:

• Everyone pays some tax, except for the homeless. Even renters would have this tax built into the rent they pay to the landlord.
• The tax can be made progressive in $100K assessed value increments. For example, a 0.10% tax on the first $100K value ($100), 0.20% on the next $100K value, 0.40% on the next $100K value, etc. I just made these numbers up for example purposes, but with everyone paying something, we would all pay less.
• The assessed property values and associated taxes would be transparent since they would be in the public domain. Hence, very little or no cheating.
• No tax forms to complete.
• No April 15 deadlines.
• No audits.
• No need to keep receipts to justify income/expenses under an audit.
• All wages and other income are tax-free, so make as much money as you want without worrying about being taxed at a higher bracket.
• Efficient collection if the IRS uses the same method as each town already uses. Maybe the IRS could even have the towns collect the tax and keep a small amount for admin purposes.
• There could be a "special assessment" in areas prone to natural disasters where it may cost the government (aka other taxpayers) money to keep saving people from themselves when they build in these areas.
• There could be tax-free zones where the government wants to stimulate population growth, or needs workers for a specific military need.

Bottom line, this is the easiest tax plan to understand, implement, and collect.

 

[ERD50]

I'm really surprised nobody has ever talked about scrapping the entire tax code as it relates to individuals and implementing a national real estate tax.

I can't think of any negatives in having a national real estate tax, but here are some positive points:

• Everyone pays some tax, except for the homeless. Even renters would have this tax built into the rent they pay to the landlord.
• The tax can be made progressive in $100K assessed value increments. For example, a 0.10% tax on the first $100K value ($100), 0.20% on the next $100K value, 0.40% on the next $100K value, etc. I just made these numbers up for example purposes, but with everyone paying something, we would all pay less.
• The assessed property values and associated taxes would be transparent since they would be in the public domain. Hence, very little or no cheating.
• No tax forms to complete.
• No April 15 deadlines.
• No audits.
• No need to keep receipts to justify income/expenses under an audit.
• All wages and other income are tax-free, so make as much money as you want without worrying about being taxed at a higher bracket.
• Efficient collection if the IRS uses the same method as each town already uses. Maybe the IRS could even have the towns collect the tax and keep a small amount for admin purposes.
• There could be a "special assessment" in areas prone to natural disasters where it may cost the government (aka other taxpayers) money to keep saving people from themselves when they build in these areas.
• There could be tax-free zones where the government wants to stimulate population growth, or needs workers for a specific military need.

Bottom line, this is the easiest tax plan to understand, implement, and collect.

There will be a tidal wave of complaints over what is a 'fair' assessment, and there will be fraud.

Why should the govt promote population growth in any specific area?

If they need workers - pay 'em.

People in high cost housing areas will complain. SS payments are not changed for geography, but this tax would be sensitive to it. That would hurt them.

-ERD50

 

[Hamlet]

I didn't have to think very long to come up with some big negatives.

The distortion of the real estate market by this system would be extreme. If people are taxed on the value of their house and other real estate exclusively, they will go to some pretty extreme lengths to reduce their property ownership. I can see people in places with no shortage of space living in those little pods that the Japanese use for travelling.

I suspect that you would see an awful lot of real estate become government owned as people try to ditch their tax liability.

Businesses would contract their property use to reduce their tax liability. A sit-down restaurant would become a luxury only the very wealthy would indulge in. Most fast food places would become kiosks.

Millionaires would stop building fancy houses. The ultra-high end RV, plane, and yacht markets might explode depending on whether they were categorized as "real estate" for tax purposes.

I'm really surprised nobody has ever talked about scrapping the entire tax code as it relates to individuals and implementing a national real estate tax.

I can't think of any negatives in having a national real estate tax, but here are some positive points:

• Everyone pays some tax, except for the homeless. Even renters would have this tax built into the rent they pay to the landlord.
• The tax can be made progressive in $100K assessed value increments. For example, a 0.10% tax on the first $100K value ($100), 0.20% on the next $100K value, 0.40% on the next $100K value, etc. I just made these numbers up for example purposes, but with everyone paying something, we would all pay less.
• The assessed property values and associated taxes would be transparent since they would be in the public domain. Hence, very little or no cheating.
• No tax forms to complete.
• No April 15 deadlines.
• No audits.
• No need to keep receipts to justify income/expenses under an audit.
• All wages and other income are tax-free, so make as much money as you want without worrying about being taxed at a higher bracket.
• Efficient collection if the IRS uses the same method as each town already uses. Maybe the IRS could even have the towns collect the tax and keep a small amount for admin purposes.
• There could be a "special assessment" in areas prone to natural disasters where it may cost the government (aka other taxpayers) money to keep saving people from themselves when they build in these areas.
• There could be tax-free zones where the government wants to stimulate population growth, or needs workers for a specific military need.

Bottom line, this is the easiest tax plan to understand, implement, and collect.

 

[HFWR]

Just too many [-]testicles[/-] tentacles of special interest groups/lobbyists that have written the code and have a vested interest in not simplifying it...

Cap Gains: If you bought an asset 20 years ago and sell it today for 10% more dollars than you paid, you really didn't earn 10% in income. Due to inflation and the decreased values of today's dollars, you really had a tremendous loss --of approximately 36%. So, to truly tax the value of the income, any Cap Gain tax should be indexed to inflation. That increases complexity (I can see the voter's eyes glazing over).

Can we stipulate that if you aren't intelligent enough to use a table to index your cap gains, you are to be deported...

I can't think of any negatives in having a national real estate tax, but here are some positive points:

In Texas, if you fence your property, and keep a couple of [-]goats[/-] horses, you pay the "agricultural" property tax rate.

 

[TromboneAl]

Goodbye McMansions!

Any change will be so bitterly opposed by those who pay more, so I'm sure change is impossible.

 

[Hamlet]

I'm fine with paying more if they pass reform like they did in 1986.

My wife and I are paying a much lower percentage in federal taxes than a lot of people making much less money than us.

I was bitter about the system when I was a single renter, because I felt that I was getting shafted. Now I feel like I'm the one doing the shafting.

Goodbye McMansions!

Any change will be so bitterly opposed by those who pay more, so I'm sure change is impossible.

 

[unclemick]

Flat tax is one of those ill defined terms that means different things to different people, much appreciated by media and candidates because it is so flexible. I'm guessing that responses on this thread will reflect that.

Once again 'The Red bead Experiment' proves too difficult for the media.

Stand in front of the camera,look pretty or maybe serious, pronounce a short zinger and move on.

Rant, rant, rant.

heh heh heh - heck I might even do something silly - like start reading books again.

 

[kcowan]

Any tax system will inevitably tweaked by special interest groups dealing with politicians. Over time, this creates a mishmash of exceptions and loopholes. Politicians are poor at anticipating loopholes and side effects. And they love special interest groups.

The best that can be achieved is a one time simpification before the process starts again.

 

[M Paquette]

I like the latest flat tax proposal, as an outstanding example of simplification, American Politics style. My tax preparation would reduce to:

1) prepare my standard old tax code style return, including all the assorted deductions, income sources, and credits. 1040, Sched A, D, Foreign Taxes, etc.
2) prepare my alternative minimum tax return, including fewer deductions, more income sources, adjusted credits. More of the usual forms.
3) note the larger of the amounts due from steps 1 and 2
4). Prepare a tax return under the new rules, including the new proposed exemptions, taxable income sources, and new credits. All new forms to complete!
5) choose the smaller amount from steps 3 and 4, and file the appropriate return.

Easy. Simple. And even better, it creates thousand of new jobs for tax preparers! What's not to like?

 

[gerntz]

I'm really surprised nobody has ever talked about scrapping the entire tax code as it relates to individuals and implementing a national real estate tax.

I can't think of any negatives in having a national real estate tax, but here are some positive points:

• Everyone pays some tax, except for the homeless. Even renters would have this tax built into the rent they pay to the landlord.
• The tax can be made progressive in $100K assessed value increments. For example, a 0.10% tax on the first $100K value ($100), 0.20% on the next $100K value, 0.40% on the next $100K value, etc. I just made these numbers up for example purposes, but with everyone paying something, we would all pay less.
• The assessed property values and associated taxes would be transparent since they would be in the public domain. Hence, very little or no cheating.
• No tax forms to complete.
• No April 15 deadlines.
• No audits.
• No need to keep receipts to justify income/expenses under an audit.
• All wages and other income are tax-free, so make as much money as you want without worrying about being taxed at a higher bracket.
• Efficient collection if the IRS uses the same method as each town already uses. Maybe the IRS could even have the towns collect the tax and keep a small amount for admin purposes.
• There could be a "special assessment" in areas prone to natural disasters where it may cost the government (aka other taxpayers) money to keep saving people from themselves when they build in these areas.
• There could be tax-free zones where the government wants to stimulate population growth, or needs workers for a specific military need.

Bottom line, this is the easiest tax plan to understand, implement, and collect.

I like the idea. Thanks for bringing it up.

Why wouldn't cash, gold, art, stocks, etc., be "property"? I.e., why not a wealth tax that includes all tangible assets? 0.5% of Gates' or Buffett's ~$50B wealth tax/yr would $250M. Somebody with $5M assets tax would be $25K. Somebody that's in net debt would be $0.

 

[Mach]

The way it's typically proposed, a flat tax is orders of magnitude more simple than the current tax code.

This does not mean your own personal taxes will be a lot more simple, although that will likely be the case. Believe it or not, the rules surrounding what you currently file for yourself, do not make up the entirety of the U.S. Federal tax code! Although having fewer deductions and such, would still simplify that.

This is much more about taking all the thousands of provisions in our tax code and doing away with them, while simultaneously making it so that government can't behind the scenes, be granting constant streams of special tax breaks for their donors, for political reasons, etc.

Additionally, if congress asks for a tax hike, the idea is that most of the population is then affected, so you won't get pandering based on wealth in terms of who gets taxed and who doesn't. A democrat in office might run on lowering taxes for the middle class and below, a Republican might run on cap gains reduction, for example. That would go away by in large, you'd have to propose to the U.S. population, a tax increase. Might go a long way to promote less government spending right?

 

[M Paquette]

I like the idea. Thanks for bringing it up.

Why wouldn't cash, gold, art, stocks, etc., be "property"? I.e., why not a wealth tax that includes all tangible assets? 0.5% of Gates' or Buffett's ~$50B wealth tax/yr would $250M. Somebody with $5M assets tax would be $25K. Somebody that's in net debt would be $0.

Oh, don't stop there. Tax the intangible assets, too.

 

[FIREd]

I like the idea. Thanks for bringing it up.

Why wouldn't cash, gold, art, stocks, etc., be "property"? I.e., why not a wealth tax that includes all tangible assets? 0.5% of Gates' or Buffett's ~$50B wealth tax/yr would $250M. Somebody with $5M assets tax would be $25K. Somebody that's in net debt would be $0.

A number of countries have experimented with the wealth tax and it has never been a success. There are more efficient ways to collect taxes.

 

[Chuckanut]

I have looked at all the flat-tax proposals. Every one of them means I will pay MORE taxes, unless there are huge reductions in Federal expenditures. This is just a way of increasing the tax burden on the middle class.

 

[Chuckanut]

if the goal is lower taxes, then do what the rich do - get more income from capital gains and dividends taxed at a maximum rate of 15%. Own your own business so you can write off all sorts of expenses. Be happy that we have the best government money can buy!

 

[Independent]

It depends what the goal is. If we want "simple," then taxing all income (wages, Cap gains, dividends, etc) at the same rate is very simple, and that is appealing. It also strikes most people as "fair"--no matter how you earned it, once you get it you pay the same tax rate on it. There are at least a couple of problems in implementation:
Cap Gains: If you bought an asset 20 years ago and sell it today for 10% more dollars than you paid, you really didn't earn 10% in income. Due to inflation and the decreased values of today's dollars, you really had a tremendous loss --of approximately 36%. So, to truly tax the value of the income, any Cap Gain tax should be indexed to inflation. That increases complexity (I can see the voter's eyes glazing over). In addition, a significant portion of the cap gains of most stocks is due to retained earnings--the stock went up in price because the company held back some earnings to invest in the company. Those earnings were already taxed when the company earned them, to tax them again when the stock is sold violates the principle of fairness for which we are striving.

Equitable treatment of capital: Is there any inherent reason that income produced by putting your money at risk should be taxed at the same rate as income produced by your labor? After all, you are taking a risk. Will the government treat the results of your risk equitably--treating losses just as they treat gains? So, if you put $1000 at risk and earn $100, they take $10, but if you lose $100 ("earn a negative $100") they pay you $10? I don't think so.

Practical impact on the economy: The US has had the same tax rate on wages as it had on investment income (capital gains, interest, dividends, etc) several times in our history. For example, the 1986 Tax Reform Act made the cap gains rate the same as the rate for earned income (up to the 28% rate). The impact of this policy is (frequently) that business slows down as capital availability dries up. In 1997 President Clinton signed another piece of tax reform legislation lowering the top cap gains rate to 20%, and this had a positive impact on the economy.

So, in some cases, the appearance of fairness really isn't, and in some cases simplicity brings neither equity nor prosperity.

But I still think the tax code can be very simple, fair, and promote prosperity (largely by turning the tremendous energies now devoted to "gaming the system" of our bizarre tax code to producing things instead)

I'd agree that cap gains should be adjusted for inflation. But, if I'm already keeping track of the cost basis, doing the inflation adjustment is just another line of code. If we made dividends deductible on C-corp tax returns as part of a deal to raise the dividend rate to the labor income rate, then companies would probably pay out profits, and cap gains would have very little after tax accumulated profit.

I don't see any reason why "putting your money at risk" should be taxed at lower rates than "going out and earning money by working for it". In my life, I've earned investment returns for doing what I was going to do anyway - save for retirement. But, I wouldn't advise higher rates on investment income, just keep it simple and have the same rates. Then we don't have hedge fund managers claiming their $100 million bonus is really "capital gains".

I believe that if you do a full history of cap gains rates since WWII, you won't find the correlation you're claiming. There's good evidence that people will adjust the timing of events to reflect tax changes (defer income to January or advance it into December if you know rates are changing). There's some evidence that they will re-label income (people formed S-corps when the relationship of corp and individual taxes changed in the 80's). But there is little evidence that they simply stop or start saving/investing when tax rates change (just like you can't find much evidence that people work more or less when tax rates change). The market rewards people for working and for saving/investing. I don't think the gov't should use the tax code to try to "correct" the market incentives.

 

[retire@40]

There will be a tidal wave of complaints over what is a 'fair' assessment, and there will be fraud.

Why should the govt promote population growth in any specific area?

If they need workers - pay 'em.

People in high cost housing areas will complain. SS payments are not changed for geography, but this tax would be sensitive to it. That would hurt them.

-ERD50

There will always be complaints in any tax system. The nice thing about a real estate tax is that it is transparent, so fraud will be less than any other tax system. Of course an assessment falls within a range since the only time a property is more precisely assessed is when a willing buyer and a willing seller agree on a price.

I just threw out the idea that the government may have the option to have tax-free zones in certain areas. For example, if they wanted more doctors or teachers in Alaska, they could implement that tool.

Of course people in high cost real estate areas would complain. Self-employed people in the 35% tax bracket who also pay 15% in self-employment tax plus state income tax of 5.3% (in MA) complain to me all the time that they are paying over 50% of their net income in taxes. The good thing about the national real estate tax (NRET) is that they only pay a high tax if they choose to live in a high value property. Otherwise, they can make millions and live in a modest home and pay less tax. The well-to-do will keep their mansions and pay the real estate tax for that benefit.

Someone who only lives on social security will not be living in a million dollar home. Not under the current system, not under the NRET tax system. That is why the NRET system would be a progressive tax. So under the examples I gave in my original post, the person on a fixed income living in a $100K to $200K home would only pay a annual NRET of $100 to $200. Enough to make them proud taxpaying Americans, but not enough to break the bank. If even that amount would be a problem, then the rate could be reduced or maybe the first $100K of value would be exempt from taxes.