Taxes

[hrothgar]

Ain't tax time a blast?

 

Every year as the Ides of April draws neigh I am reminded just how idiotic the current US tax structure is. Admittedly, in some ways I have it "good" this year. I'm working for peanuts at a small start-up, so I get to miss out on the joy that is the Alternative Minimum Tax (AMT). Even so, the entire tax preparation process is a drag.

 

It might surprise people, but I think that Steve Forbes was onto something with his whole "flat tax" argument. I'd spin it quite differently than Forbes does. From my perspective, the US needs to dramatically simplify the income tax structure by completely eliminating deductions. If you make "income", be it wages, capital gains, interest, windfalls, (even benefits from work) you should be paying taxes on this. Furthermore, you should be able to shelter income just because you bought a house or are paying high state taxes or what have you. (I'd argue that the percentage that one pays should be progressive. I think that its right and proper that folks at the higher end of the income scale pay a higher percentage of their earning than people at the botttem. However, that's a slightly different debate)

 

Furthermore, I'd guess that if we flattened the tax code like this, we'd be able to generate enough additional income from high net worth individuals to compensate for the fact that the less affluent are losing deductions.

 

I suspect that we're going to see some interesting debate focusing on this topic over the next decade primarily triggered by changes to the AMT. Paradoxically, the AMT is a much flatter tax, however, its one that is specifically designed to place the incidence of the tax on the middle class. I'm not expecting that people are going to stand for it much longer.

[pbleighton]

I'm in favor of a high flat rate (say 40%), no deductions, and high personal and dependent deductions, say $20,000 for a single and $40,000 for a married couple, plus $7,000 per dependent.

 

I'd also eliminate the Social Security/Medicare payroll taxes, and the corporate income tax, and replace them with a 20% VAT.

 

These particular numbers undoubtedly don't add up, but something along these lines will.

 

Peter

[pclayton]

I would gladly play a 40% flat tax, if you eliminated all of the other taxes we pay in our everyday life, including sales, gas, licensing fees, CA income, etc..

 

I'll probably get hit with the AMT this year for the 1st time.

[Al_U_Card]

Just don't wish you had OUR (Canadian) tax structure.....to say nothing of the honest middle class wage earner who takes the brunt of the load.

 

Ideally, here is how it should work.

 

You run the government as a corporation (exactly like it , with the "executives" being elected by the people (share-holders) but being paid based on "profits" (left overs from Taxes-Spending) Talk about balance of power.....

 

You determine the $$$$ needed to run the country and the minimum amount that people need to live on and that becomes the starting point. So, a "salary" of $15,000 per person is allowed without tax (and in some cases is "given" to the "employee" (citizen)). From then on, all income is taxed at the flat rate required to generate the required cash-flow.

 

Your tax return would look like this. "In 2006 I earned $50,000 so I pay 20% of $35,000 so here is a cheque for $7,000."

 

Now all of the government tax dept. employees become "inspectors" and they visit individuals to verify that they appear to have earned the money that they say they did. Eventually everyone would get used to being "honest" and as the "inspectors" die off....who needs 'em?

[jtfanclub]

I'm in favor of a high flat rate (say 40%), no deductions, and high personal and dependent deductions, say $20,000 for a single and $40,000 for a married couple, plus $7,000 per dependent.

40%! My plan would be 20% after $20,000 ($40,000 for a couple), with a $5,000 for each 'dependent' making less than $5,000 a year. No deductions. I don't care if health care is taxed on an individual level or not allowed as an expense for deductions- comes out the same.

 

One option nobody seems to be considering is simply eliminating the standard personal income tax and using only the AMT. I suspect that in a few years (with no changes to the AMT), the amount of personal taxes collected outside of AMT won't equal the processing costs of collecting that money. In effect, that would be a 27% flat tax with about a $50,000 deduction.

[DrTodd13]

Wake up folks. Politicians love a complicated tax code because it allows them to try to engineer society by rewarding or punishing certain behaviors and they also love it because it lets them payback their big contributors. To create a flat tax is the equivalent of depriving politicians of some degree of power. Reducing their own power is not something that politicians generally do.

[pclayton]

I'm in favor of a high flat rate (say 40%), no deductions, and high personal and dependent deductions, say $20,000 for a single and $40,000 for a married couple, plus $7,000 per dependent.

40%! My plan would be 20% after $20,000 ($40,000 for a couple), with a $5,000 for each 'dependent' making less than $5,000 a year. No deductions. I don't care if health care is taxed on an individual level or not allowed as an expense for deductions- comes out the same.

 

One option nobody seems to be considering is simply eliminating the standard personal income tax and using only the AMT. I suspect that in a few years (with no changes to the AMT), the amount of personal taxes collected outside of AMT won't equal the processing costs of collecting that money. In effect, that would be a 27% flat tax with about a $50,000 deduction.

Yeah but the day to day taxes take a huge toll. Frankly in California, I'd be getting off cheap.

 

Most people's property taxes alone are at least 5K / year.

[mikeh]

The flat tax is a horrible idea, as are most 'simple' solutions to complex problems. It may end up being a better idea than the current system, whether it be US or Canadian (we have our own complexities and boondoggles as will be apparent to anyone who tries to read the Act), but it is still a horrible idea if there is no element of increasing rates on increasing income.

 

This is not merely a moral choice, in that the wealthy should pay more than their 'share' on some abstract notion of noblesse oblige.

 

High income earners usually use more of the state-funded amenities than do low income earners, including those who are actually dependent on state welfare.. or are you under the impression that welfare rates in any industrialized society give rise to an extravagant lifestyle?

 

For example, high income earners will travel, for business or pleasure, far more than the person with low means. And travel, whether it be by way of car (use of publicly funded highways), planes (use of oublicly funded airports, air traffic control etc, or cruise line (seen how much it costs to build and operate a port?). While some of the costs of these facilities are borne by the user, the capital costs are almost always funded by the taxpayer, while in many cases the state subsidizes the user-pay basis of funding operating costs.

 

High income earners will impose disproportionate loads on the environment, through their waste or through their consumption of energy and other resources. The costs of environmental rehabilitation (not to mention the costs that will arise in the probable absence of real reductions in consumerism) will be borne primarily by the taxpayer.

 

Rich people also generally get more out of state-funded systems such as the civil court structure. As a trial lawyer doing civil litigation, I can assure you that non-personal injury work (which is usually charged on a percentage fee basis) is rarely economically feasible for middle-class or working class individuals. But rich families and corporations can and do use the system, with its state-paid judges, clerks, janitors, etc, not to mention the state-funded courtrooms.

 

It is not that high income earners somehow 'owe' lower income earners.. it is that high income earners derive so much more benefit from the system that they ought to pay more... .

 

It has always struck me as ironic that this consumption factor is rarely ever acknowledged by the right-wingers who lament the availability of welfare to marginalized members of society, while clamouring for tax cuts.

 

And one overwhelmingly powerful demonstration that the average voter (in the US but also, I suspect, in most countries) is woefully ignorant is that the GOP seems to have won at least a couple of elections based on the notion that giving billions of dollars of tax relief to a few hundred thousand incredibly wealthy individuals made sense for anyone other than those individuals, at a time when the consensus of economic opinion was, and seems still to be, that demographic factors will bankrupt the federal government within most people's lifetime.

[cherdano]

If you think US taxes are complicated, try moving to Germany...

[pbleighton]

"The flat tax is a horrible idea, as are most 'simple' solutions to complex problems. It may end up being a better idea than the current system, whether it be US or Canadian (we have our own complexities and boondoggles as will be apparent to anyone who tries to read the Act), but it is still a horrible idea if there is no element of increasing rates on increasing income."

 

Very large personal and dependent exemptions accomplish the same thing.

 

In fact, properly structured, the majority of households will pay no income tax.

 

Peter

[the hog]

There is a flat tax on foreigners here in Laos. Its 10%.

[jtfanclub]

High income earners usually use more of the state-funded amenities than do low income earners, including those who are actually dependent on state welfare.. or are you under the impression that welfare rates in any industrialized society give rise to an extravagant lifestyle?

Well, first off, there's the idea that 'flat taxes' are a single-grade tax. They're actually two levels, 0% and the flat tax #. Using mine as an example, for a two-parent family with two kids:

 

Income real tax level.

$50,000 0%

$75,000 6.7%

$100,000 10%

$250,000 16%

$500,000 18.4%

$1,000,000 19%

 

 

And second of all, do I believe for a moment that a family with an income of $200,000 uses even twice the government resources with an income of $100,000? I don't think that's even close. And yet, with this formula, the family making 200K pays three times as much in taxes.

 

A flat tax is not as progressive as the current system, but it is still progressive.

[pclayton]

The flat tax is a horrible idea, as are most 'simple' solutions to complex problems. It may end up being a better idea than the current system, whether it be US or Canadian (we have our own complexities and boondoggles as will be apparent to anyone who tries to read the Act), but it is still a horrible idea if there is no element of increasing rates on increasing income.

 

This is not merely a moral choice, in that the wealthy should pay more than their 'share' on some abstract notion of noblesse oblige.

 

High income earners usually use more of the state-funded amenities than do low income earners, including those who are actually dependent on state welfare.. or are you under the impression that welfare rates in any industrialized society give rise to an extravagant lifestyle?

 

For example, high income earners will travel, for business or pleasure, far more than the person with low means. And travel, whether it be by way of car (use of publicly funded highways), planes (use of oublicly funded airports, air traffic control etc, or cruise line (seen how much it costs to build and operate a port?). While some of the costs of these facilities are borne by the user, the capital costs are almost always funded by the taxpayer, while in many cases the state subsidizes the user-pay basis of funding operating costs.

 

High income earners will impose disproportionate loads on the environment, through their waste or through their consumption of energy and other resources. The costs of environmental rehabilitation (not to mention the costs that will arise in the probable absence of real reductions in consumerism) will be borne primarily by the taxpayer.

 

Rich people also generally get more out of state-funded systems such as the civil court structure. As a trial lawyer doing civil litigation, I can assure you that non-personal injury work (which is usually charged on a percentage fee basis) is rarely economically feasible for middle-class or working class individuals. But rich families and corporations can and do use the system, with its state-paid judges, clerks, janitors, etc, not to mention the state-funded courtrooms.

 

It is not that high income earners somehow 'owe' lower income earners.. it is that high income earners derive so much more benefit from the system that they ought to pay more... .

 

It has always struck me as ironic that this consumption factor is rarely ever acknowledged by the right-wingers who lament the availability of welfare to marginalized members of society, while clamouring for tax cuts.

 

And one overwhelmingly powerful demonstration that the average voter (in the US but also, I suspect, in most countries) is woefully ignorant is that the GOP seems to have won at least a couple of elections based on the notion that giving billions of dollars of tax relief to a few hundred thousand incredibly wealthy individuals made sense for anyone other than those individuals, at a time when the consensus of economic opinion was, and seems still to be, that demographic factors will bankrupt the federal government within most people's lifetime.

I've never believed in 'the more I make', the higher my tax rate should be. Why should I pay more on the Nth dollar? In the USA, FICA taxes at least are capped at a certain amount.

 

Mike, you don't mention all of the public services that the poor use that the wealthy do not. Even if you throw out all of the entitlement programs, the poor get subsidized public transportation, and have a higher need for police, fire and social workers.

 

Those miles I put on my car? I get hit with a nice gas tax at the pump. Air Travel? Many airports have landing charges. Cruise Ships? Its those ports that provide everyone jobs in warehousing and distributions.

 

Burdens on the environment? This is mixed. Wealthy folk tend to drive newer cars with less emissions, and many drive alternative fuel vehicles. Its the older vehicles that are subject to smog checks.

 

Court Systems? Certainly the wealthy get to use them more, but the prison system is a heck of a lot more of a drain on public funds.

[luke warm]

i wouldn't mind a flat 15% for everyone making over a certain amount (say $25,000), but i'd want that flat rate to apply to buisnesses as well, no deductions... since i've not studied this in depth, i don't know how feasible it would be to tax, say, exxon or microsoft 15% of their gross, but i'd like to see something like that

 

i also see no reason some high deductible MSA can't be an across the board solution to our health care problems, though we'd have to do something about illegal immigration... as a side note, mikeh said he favors a progressive rate, but not on moral grounds... those are the very grounds i use in opposition... as long as such a system is in place, politicians will always be able restructure society in such a way as to insure their survival

[mike777]

Thought I read somewhere that more than 50% of the USA does not pay any income taxes. Now if we can get that majority to vote to raise the taxes on the minority who do pay, we got something here.

 

Going to be tough to vote out property tax deductions, but if that raises taxes on those that pay income taxes it might work.

 

"....as long as such a system is in place, politicians will always be able restructure society in such a way as to insure their survival...."

 

 

As for all this politician bashing, who or what do you want to replace them with?

[pbleighton]

"Thought I read somewhere that more than 50% of the USA does not pay any income taxes."

 

Source?

 

Peter

[mike777]

http://www.taxfoundation.org/news/show/1410.html

 

 

http://www.taxfoundation.org/blog/show/341.html

[pbleighton]

"Thought I read somewhere that more than 50% of the USA does not pay any income taxes."

 

Then, from your link,

 

"Adding to this figure the 15 million households and individuals who file no tax return at all, roughly 121 million Americans—or 41 percent of the U.S. population—will be completely outside the federal income tax system in 2006."

 

I think remedial math courses for the mature individual would be a great use of tax dollars :D

 

Peter

[Echognome]

All I'm going to say on this subject is that it's much, much more complicated than people seem to think. I don't personally view a flat tax as a viable alternative. The number of tax brackets currently is not very many. Also, when you discuss any proposal consider not only the tax rate, but the tax base (what part of your income is taxed and who is exempt entirely). Whether you allow for deductions and what you allow to be deducted is certainly up for debate.

 

When you consider total taxes paid (from all sources including property, state, and sales tax) and divide that by income you will find that taxes are regressive. I have seen a paper presented on this subject, but I cannot recall the source. (sorry!) The logic is that sales tax and property tax are regressive.

 

I'm also not going to spend a lot of time discussing DrTodd's assertion, I see no reason a flat tax makes life any more difficult or any easier for politicians. I'm not really sure I want him to elaborate.

[Winstonm]

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actually reward saving and penalize spending would be the last thing the Fed would want to happen.

 

Of course, inflation is another hidden tax that sends money to the rich while exposing the poor - or in bridge terms, a Taxes Transfer. :D

[Echognome]

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.

 

Of course, inflation is another hidden tax that sends money to the rich while exposing the poor - or in bridge terms, a Taxes Transfer. :P

Minor points I know, but the treasury department is in charge of taxes (with the IRS being enforcement and many policies actually determined by Congress). The Federal Reserve is in charge of money supply and interest rates. You may have heard the terms fiscal and monetary policy which are related to the two departments above.

 

Inflation is a hidden tax in that the government is a net debtor to its people. Thus as inflation rises, the real value of debt the government owes is lowered. When used as a policy it is called seignorage. It is said it is useful in economies with large black markets as although some can avoid government taxation, no one can avoid inflation!

[helene_t]

In Germany, the Christian Democrats had a minister-of-finance-to-be on their election list. A professor of economics with no political experience, he favored a flat-tax structure and scrabbing of all subsidies.

 

The disapointing elections results of the Christian Democrats were (rightly or not) attributed to the unpopularity of said professor. The main concern was from house owners. Hardly surprising, his ideas were soon forgotten and he left politics after the elections.

 

We see the same in many other countries. For some historical reason, most Western countries subsidize owned houses, often through tax deductions of mortgage interests.

 

Sweden and UK finallymanaged to get rid of that treasurry drain. Eventually it will happen all over EU.

 

Whether other aspects of the tax system will move towards simplicity is difficult to say. Todd has a good point but I'm an optimist. I think reason will prevail at the end.

 

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.

Consumtion tax does not favor saving. You save because you intend to spent the money in the future so you will end up paying your taxes anyway. VAT versus income taxes is largely an implementation issue. (Edit: if savings are subject to taxation, whether by mean of a fortune tax or by means of taxation of the interests earned, then you're right. )

 

Unfortunately, VAT is often used as an instrument to penalize people for spending money of imoral things (like candy, fashion and electronics) while awarding people for spending money of moral things (like housing and books). Whether food is considered moral or imoral varies by country. In Denmark, everything except for training, housing and newpapers is imoral, while in the Netherlands, books and food is only partially imoral.

 

I think politicians should stop using the tax system for their arbitrry crucades. First, because it's social engineering, AKA Stalinism. Second, because it makes it impossible to discuss tax reforms. TAX might be a better (or worse) implementation of the same tax as compared to source tax, but politicians always focus on the crusade aspects of alternative implementations.

[Al_U_Card]

The only real problem with any taxation system is......avoidance and exemption.

 

IF all pay fairly and according to the requirement where is the problem? Only the avoiders and the cheats gain from excessively complex or unenforceable methods. Black markets and under the table dealings reduce the tax base and transfer the burden to those that "honestly" submit.

[helene_t]

The only real problem with any taxation system is......avoidance and exemption.

I disagree. The administrative overhead, the effects on income distribution, as well as the stimulation of behavior favored by the tax scheme, are important as well.

[cherdano]

In Germany, the Christian Democrats had a minister-of-finance-to-be on their election list. A professor of economics with no political experience, he favored a flat-tax structure and scrabbing of all subsidies.

 

The disappointing elections results of the Christian Democrats were (rightly or not) attributed to the unpopularity of said professor. The main concern was from house owners. Hardly surprising, his ideas were soon forgotten and he left politics after the elections.

I think a little more general, Germans actually cared more about fairness than simplicity - and what they (we?) perceive as fairness is of course biased by existing practice. If a teacher needs to have a separate office in his home (because he doesn't get an office in school), then in effect he has a lower salary, because he has to spend some of his income towards his home office.

Well, if you accept that, there is a similar reason for every other deduction or subsidy...

 

(Of course, the reasons the Christian Democrats failed are more complex than that. There are even a few more related to Kirchhoff (said professor): unfortunately, he hadn't written part 2 of his book yet, which would have explained how his tax cuts would have been financed; he not only favored killing all subsidies, but also a very flat tax structure, which just won't sell in Germany; finally, he just acted badly as a politician, and while the Christian Democrats chose him as future minister-of-finance, they (or at least some of them) also made it clear they don't agree with his tax plans, which made it hard for them to make it clear what they actually did want...)