The Folly of the Flat Tax
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By ALAN S. BLINDER
Next year must be divisible by four because the flat tax, one of the hardy perennials of bad tax policy, has come bouncing back like a bad penny. The flat tax is typically marketed as a way to achieve drastic tax simplification—something virtually everyone favors, at least in the abstract. But what a flat tax would actually achieve is a drastic reduction in tax progressivity.
Let's start with simplicity, and with the frank admission that both the U.S. personal and corporate income taxes are disgracefully complicated messes. Throw any insult at them you wish; they probably deserve it. In my view, the loophole-ridden corporate income tax is a bigger offender than the personal income tax. But the competition is fierce.
Why? Sad to say, our ungainly tax code is a logical byproduct of our system of democracy-by-lobbyist, which often produces messy, unprincipled outcomes. Every tax preference is in the code because members of some past Congress wanted it there—and current members probably still want it. But, at intervals, public revulsion rises so high that it's time to prune the unruly hedge. Maybe today is such a time.
Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn't one of them. The truth is that 100% of the complexity inheres in the definition of taxable income, which takes up millions of words in the tax laws. None inheres in the progressive rate structure. If you don't believe that, consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple?
Back to the personal tax. Figuring out your taxable income can be quite an effort. But once that is done, most taxpayers just look up their tax bill on an IRS-provided table. Those with incomes above $100,000 must perform a simple calculation that involves multiplying two numbers together and adding a third. A flat tax with an exemption would require precisely the same sort of calculation. The net reduction in complexity? Zero.
As a matter of arithmetic, it is not difficult to make the income tax vastly simpler than it is today. Politicians need only eliminate most of the special deductions, exemptions and tax preferences. The tax code would then be a lot shorter. And so, most likely, would be their political careers.
To illustrate the severity of the political barriers to comprehensive tax reform, consider that the six biggest tax expenditures in the personal income tax code are:
• excluding employers' contributions for health and life insurance from taxable income;
• excluding pension contributions from taxable income;
• making interest on home mortgages tax deductible;
• preferentially low tax rates on capital gains and dividends;
• the Earned Income Tax Credit (EITC); and
• making state and local taxes tax deductible.
Now, some Republicans would like to trim or eliminate the EITC, and some Democrats would like to reduce or end the tax preferences for capital gains and dividends. (In each case, the other party disagrees vehemently.) But do you know any politicians, of either party, who want to cut out the tax deductions for mortgage interest and state taxes, or to make fringe benefits taxable?
Fundamentally, we have met the enemy of tax reform, and it is us. Every tax "gimmick" has an ingrained constituency. I shake my head in disbelief when I hear politicians claim to be able to raise huge amounts of revenue by closing loopholes. Arithmetically, that's easy. Politically, it's almost impossible. On those rare occasions when fundamental tax reform has succeeded—the remarkable Tax Reform Act of 1986, for example—the reform bill was either revenue-neutral or revenue-losing. That way, skillful politicians could arrange things so that the winners from tax reform outnumbered the losers.
So far, we have two conclusions: Accomplishing vast tax simplification is unlikely in the extreme; and flattening the rate structure won't make the tax code any simpler. It would, however, make the tax system far less progressive.
Do the math. For very high-income taxpayers, the lower tax bracket rates are virtually irrelevant—only the top rate really matters. Someone with $20 million in taxable income pays nearly $7 million in taxes under the current rate structure, with its 35% top rate. Replace that with a 23% flat tax, and the bill drops to just under $4.6 million. With a 9% tax (where in the world did I get that idea?), it's below $1.8 million.
What happens much lower down the income scale depends fundamentally on the size of the exemption. Take the example of a married couple with two children and a modest $50,000 gross income. Under the 2010 tax rate schedule, their taxable income (after the standard deduction and personal exemptions) is $23,600, leading to an income tax bill of about $2,700. Under a 28% flat tax with a $50,000 exemption, they wouldn't be liable for any tax. But under a 23% flat tax with a $25,000 exemption, their tax bill would rise to $5,750. And a 20% flat tax with no exemption would leave that family owing the tax collector a whopping $10,000. You get the idea.
One final, and important, point: Advocates of the flat tax, or of regressive tax changes in general, often argue that it's unfair that 47% of American households pay no federal income tax at all. But is it? These alleged "freeloaders" don't get off the taxpaying hook; they pay payroll taxes, sales taxes and many others. The income tax and the estate tax are virtually the only progressive elements in our tax system. If you take away progressivity there, precious little remains.
So the next time you hear the charge of "class warfare," ask yourself which class is waging war on which—and which class is winning.
Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.
By ALAN S. BLINDER
Next year must be divisible by four because the flat tax, one of the hardy perennials of bad tax policy, has come bouncing back like a bad penny. The flat tax is typically marketed as a way to achieve drastic tax simplification—something virtually everyone favors, at least in the abstract. But what a flat tax would actually achieve is a drastic reduction in tax progressivity.
Let's start with simplicity, and with the frank admission that both the U.S. personal and corporate income taxes are disgracefully complicated messes. Throw any insult at them you wish; they probably deserve it. In my view, the loophole-ridden corporate income tax is a bigger offender than the personal income tax. But the competition is fierce.
Why? Sad to say, our ungainly tax code is a logical byproduct of our system of democracy-by-lobbyist, which often produces messy, unprincipled outcomes. Every tax preference is in the code because members of some past Congress wanted it there—and current members probably still want it. But, at intervals, public revulsion rises so high that it's time to prune the unruly hedge. Maybe today is such a time.
Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn't one of them. The truth is that 100% of the complexity inheres in the definition of taxable income, which takes up millions of words in the tax laws. None inheres in the progressive rate structure. If you don't believe that, consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple?
Back to the personal tax. Figuring out your taxable income can be quite an effort. But once that is done, most taxpayers just look up their tax bill on an IRS-provided table. Those with incomes above $100,000 must perform a simple calculation that involves multiplying two numbers together and adding a third. A flat tax with an exemption would require precisely the same sort of calculation. The net reduction in complexity? Zero.
As a matter of arithmetic, it is not difficult to make the income tax vastly simpler than it is today. Politicians need only eliminate most of the special deductions, exemptions and tax preferences. The tax code would then be a lot shorter. And so, most likely, would be their political careers.
To illustrate the severity of the political barriers to comprehensive tax reform, consider that the six biggest tax expenditures in the personal income tax code are:
• excluding employers' contributions for health and life insurance from taxable income;
• excluding pension contributions from taxable income;
• making interest on home mortgages tax deductible;
• preferentially low tax rates on capital gains and dividends;
• the Earned Income Tax Credit (EITC); and
• making state and local taxes tax deductible.
Now, some Republicans would like to trim or eliminate the EITC, and some Democrats would like to reduce or end the tax preferences for capital gains and dividends. (In each case, the other party disagrees vehemently.) But do you know any politicians, of either party, who want to cut out the tax deductions for mortgage interest and state taxes, or to make fringe benefits taxable?
Fundamentally, we have met the enemy of tax reform, and it is us. Every tax "gimmick" has an ingrained constituency. I shake my head in disbelief when I hear politicians claim to be able to raise huge amounts of revenue by closing loopholes. Arithmetically, that's easy. Politically, it's almost impossible. On those rare occasions when fundamental tax reform has succeeded—the remarkable Tax Reform Act of 1986, for example—the reform bill was either revenue-neutral or revenue-losing. That way, skillful politicians could arrange things so that the winners from tax reform outnumbered the losers.
So far, we have two conclusions: Accomplishing vast tax simplification is unlikely in the extreme; and flattening the rate structure won't make the tax code any simpler. It would, however, make the tax system far less progressive.
Do the math. For very high-income taxpayers, the lower tax bracket rates are virtually irrelevant—only the top rate really matters. Someone with $20 million in taxable income pays nearly $7 million in taxes under the current rate structure, with its 35% top rate. Replace that with a 23% flat tax, and the bill drops to just under $4.6 million. With a 9% tax (where in the world did I get that idea?), it's below $1.8 million.
What happens much lower down the income scale depends fundamentally on the size of the exemption. Take the example of a married couple with two children and a modest $50,000 gross income. Under the 2010 tax rate schedule, their taxable income (after the standard deduction and personal exemptions) is $23,600, leading to an income tax bill of about $2,700. Under a 28% flat tax with a $50,000 exemption, they wouldn't be liable for any tax. But under a 23% flat tax with a $25,000 exemption, their tax bill would rise to $5,750. And a 20% flat tax with no exemption would leave that family owing the tax collector a whopping $10,000. You get the idea.
One final, and important, point: Advocates of the flat tax, or of regressive tax changes in general, often argue that it's unfair that 47% of American households pay no federal income tax at all. But is it? These alleged "freeloaders" don't get off the taxpaying hook; they pay payroll taxes, sales taxes and many others. The income tax and the estate tax are virtually the only progressive elements in our tax system. If you take away progressivity there, precious little remains.
So the next time you hear the charge of "class warfare," ask yourself which class is waging war on which—and which class is winning.
Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.
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Comments
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
You're a genius.
Ever file taxes?
If you think it sucks, it's because you're a drain- on society that is.
Thank you, and yes, i have filed taxes (not sure what you're alluding to in your question, maybe you think it's confusing for everyone?). I guess you understand that a flat tax is a huge tax break for the wealthy and will make the working poor more poor. If you're equal to my genius, then you'll be able to tell me what revenue a flat tax will bring in.
Not sure what you were alluding to in your original question, maybe you think anyone who could be for a flat tax HAS to be confused by the by the tax-filing process?
Not sure what you're alluding to in your second question/statement, maybe you think the 51% of Americans who pay NOTHING are being treated unfairly?
Oh wait, now I get it... A flat tax would be awkward for you, when you have to list your address as Zucotti Park on your tax forms.
Save the 1% jive for another turkey, man... I work for a living.
I guess you were implying that I don't have a job. So do you think everyone who is working should support a flat tax? I must be unemployed if I don't support a regressive tax structure?
By the way, the 51% number is the percentage of people who don't pay FEDERAL income tax. The majority of the people in the 51% include retired people, people who have no income, and low income workers. These people also pay local and state taxes. I guess you're saying that group of people should pay more taxes.
Having an opinion on the issue is fine, but you might want to learn a little more about it so you can back up what you're saying.
It's this nanny-state Federal govt.
And its nice to wax poetic about old retirees, but that group has always been part of the equation- you act like all of a sudden, America has old people in it.
Nice try, but gubmint tit-suckers and socialist, redistributing politicians will all disparage the flat tax w the same class-warfare rhetoric that you just did, as a "tax break for the rich".
Occupy Individual Responsibility.
Let's try and weed through the usual conservative cliches (nanny state, socialist, individual responsibility, etc.) and help clarify your argument.
A flat tax would mean that the rich will pay less in taxes and the people who earns less would be paying more. Not class warfare rhetoric, but just a fact of how that would play out.
I missed where I was waxing poetic about retirees. I was just clarifying who the 51% consists of. The group you think should be paying more.
I think what I can take from what you're saying is that a flat tax would bring in less revenue, and with less revenue, the government would cut spending. In particular, you'd like to see spending on public assistance be cut significantly (see: "nanny state"). This would be a two-pronged pay off for you, not only would there be fewer people on assistance, but this would also teach responsibility by default and punish the "tit suckers". Am I on the right track? What you wrote sounds more like class warfare than what I wrote.
if the flat tax actually does what conservatives said it would do why has it not been implemented before? why not under reagan or bush I or II?? because they all knew it would be the end of their political careers if they allowed it to happen.
"Well, you tell him that I don't talk to suckas."
and what is the rest of the reason???
take a good look
this could be the day
hold my hand
lie beside me
i just need to say
You have demonstrated above-average cognitive abilities. Unfortunately, the sum of your knowledge is a hinderance.
Let us just say that we disagree.
PS: I love that you called the term "Individual Responsibility" a "Conservative Cliche".
That is PRICELESS. If you don't mind, I'm gonna repost that comment on a few other sites- thank you.
PSS: sorry to hear they are clearing you guys out of the park today.
Is a flat tax regressive, though?
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
I don't feel there should be different tax rates for different people.
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
actually it isn't so much a cliche as it is a contradiction ... conservatives are primarily the ones who do not support conservation nor environmental sustainability approaches ... they don't like to take "responsibility" for their actions which includes pollution and the consequences of their waste ... the whole notion of individual responsibility is a joke considering we live in a collective ...
"Well, you tell him that I don't talk to suckas."
Obama doesn't have the leadership to overhaul the existing system, and a flat-tax proposal by a GOP president in 2013 would probably be as big of a circus as Obamacare. I would rather have them debating on how they can lower spending instead of figuring out how to take money from us.
dude ... the whole thing needs to be blown up ... look at what italy and greece are doing ... it's time to look in the mirror and say ... "buckle up"! ...
Some people have such a sweet way with words, huh? :?
-Eddie Vedder, "Smile"
Yes, in that it hits people who earn less money much harder.
Let's just say that you can't support your argument with anything substantial and that it stems not from good policy and what is good for the country, but instead from a disdain for those who you think don't take "individual responsibility".
I don't give 2 shits about your sweetness.
There is no point in educating some people. I imagine you probably feel the same.
I'm not gonna waste 30 minutes of my life typing out all of the socio-economic reasons I support a flat tax, so that Go Beavers on the Pearl Jam forum might see things differently.
If "payng their fair share" means that "rich people" pay 100% in taxes, so that you and the like-minded can live in a tent on public property and shit on park benches, then I'm happy for you. At least you know what you want in life.
A lesser shit, I could not give...
i am against the flat tax because of the reasons i listed in my prior post...
again i ask, if this is such a brilliant idea why has it never been implemented?
"Well, you tell him that I don't talk to suckas."
You're a genius.
Ever file taxes?[/quote]
Thank you, and yes, i have filed taxes (not sure what you're alluding to in your question, maybe you think it's confusing for everyone?). I guess you understand that a flat tax is a huge tax break for the wealthy and will make the working poor more poor. If you're equal to my genius, then you'll be able to tell me what revenue a flat tax will bring in.[/quote]
Not sure what you were alluding to in your original question, maybe you think anyone who could be for a flat tax HAS to be confused by the by the tax-filing process?
Not sure what you're alluding to in your second question/statement, maybe you think the 51% of Americans who pay NOTHING are being treated unfairly?
Oh wait, now I get it... A flat tax would be awkward for you, when you have to list your address as Zucotti Park on your tax forms.
Save the 1% jive for another turkey, man... I work for a living.[/quote]
For MayDayMalone
Oh your one of those guys who works for a living. I work for a living as well and the flat tax is not a good idea..at all. Do your research. A Flat Tax forces a choice between higher deficits or an increased burden for the middle class. There that sums it up for you. Look another guy with a job made it easier for you.
I was giving you the benefit of the doubt that you were not a "Birther" but after this "ramble"...you Mayday are indeed a Birther.
Well said!
A flat tax is not "regressive". That said, it's not "progressive" either. It's flat. Hence the name: flat or "proportional" tax.
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