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Monday, April 25, 2005

The Flat Tax is Progressive

The Skeptical Optimist has a good post up on why a flat tax is 'progressive.' It has a pretty graph too so go read it already.


Blogger honestpartisan said...

An assumption this writer makes about the flat tax is that there will be an exemption of income. Depending on how much this exemption is, the curve can be significant or not. You can jimmy the numbers any way you want because this is all hypothetical at this point.

Which makes me wonder something:

if you think that everyone should pay the same percent of their income in taxes, why bother having the exemption at all?

And if you think the ostensible progressivity of the flat tax is a good thing, why not just have graduated marginal rates? (That is, have the rates increase with income).

4/25/2005 02:27:00 PM  
Blogger Dave Justus said...

As he said, and I agree, I have never seen a flat tax propossal that didn't have some type of excemption it in. Inacting one would be politically impossible as well.

Basically, this is because most people agree that the very poor, at least those who have barely enough (or in some cases less than enough) to get by should not be taxed.

I think pretty much everyone agrees that this is a good idea.

What is more controversial, and something I tend to disagree with, is the idea in the variable rate schemes that richer people should pay a vastly more proportionate share of their incomes than middle class people. Progressive taxation with marginal rates seems to me to be an effort at wealth transfer, albiet one that through Government inefficiencies doesn't seem to actually achieve much results at transfering wealth. Admittedly, part of this failure is becuase rich people are, by definition, powerful and are able to get loopholes built into tax codes.

However, the attraction to me of a flat tax is the elimination of excemptions, loopholes, tax shelter schemes. IF it is done properly, these will go away and it will be politically very difficult to establish them again. IF it is done poorly, we end up in the same, or possible a worse situation.

Obviously how progressive you want taxes to be will very. However, saying that some is good does not imply automatically that more is better. The ultimate progressive scheme I suppose would be have everyone above a certain point pay all their income in taxes and everyone below that point pay nothing. Few liberal would advocate that I believe.

So basically I want a system that is on paper less progressive than what we have now. In reality I think it would be about the same in aggregate, but far fairer in individual cases. Everyone should pay a similar percentage exept the poorest who should pay a far less percent, down to zero for the very poorest. That strikes me as fair. It would also remove built in inefficies caused by a tax code that is difficult to understand.

4/25/2005 03:29:00 PM  
Blogger Greg said...

I've said all along that the flat tax (as proposed) is progressive.

Why bother having the exemption? It's reasonable that people who are struggling to make ends meet shouldn't be paying taxes. Exempting the income needed to survive and have a minimal standard of living is reasonable.

One reason to avoid increasing marginal rates is that it discourages investment. An investment that would have a 10% return in a flat tax environment may have a 9% return in a progressive tax environment (since profits are taxed more than losses will reduce taxes). That may make the difference between going ahead with the investment and keeping your money at home.

4/26/2005 07:30:00 AM  
Blogger honestpartisan said...

I've gone back and forth with both of you about this issue and I don't want to be repetitive. Dave, you raise a couple of interesting issues for me, though:

You say that some, perhaps small, measure of progressivity is OK, even if you don't endorse an extreme version of progressivity. Which is a fair point.

But to the extent that this is desirable, it raises a political question for me. It seems to me that it's easier, politically, to dilute the asserted progressivity of the flat tax by building in exemptions and deductions rather than by raising rates. To the extent that one may foresee exemptions and deductions introduced at some future point, the higher rates that would offset that would be gone by then and harder (politically) to reinstate.

This happened after 1986, when rates were lowered in return for reducing the complexity of the tax code. The code eventually became more complex. (And rates did go back up).

And one other thing:

Someone who has expenses that they have to spend in order to earn income gets to deduct those expenses from their income. And this makes sense to some extent. Livery cab drivers in New York, for example, have to pay for gas, insurance, a medallion, etc., that they would not have to pay if they were not in that business, so the income they get should be offset by those expenses.

How does your ideal flat tax deal with business expenses? Would the livery cab driver have to pay tax on an income that looks a lot higher than it really is because of expenses that eat up almost all the income? (which happens sometimes; I use this example because I represented someone once who was in that position). Or if the livery cab driver would be able to deduct business expenses, doesn't that introduce a lot of the complexity back into the code that a flat tax is supposed to eliminate?

4/26/2005 11:59:00 AM  
Blogger Dave Justus said...

Fair Questions.

First off, my ideal flat tax would probably be a sales tax, not an income tax. In your taxi driver example, I would presume that the taxi driver would pass on any costs of buying gas, etc. into the fares of the customer.

IF we were to have a flat income tax, than you would tax income, which is gross revenue minus expenses. That is not the sort of deduction I am talking about. I am talking about all the 'tax credit' things, like home mortgages, buying an SUV instead of a car because of the tax credit, etc. I think it is a pretty clear distinction between the two. Politicians of course are able to 'break' anything, but I think it will be more difficult under such a system than it is a present, where excemptions are widely used, and to an extent considered 'fair' since wealthy people have a higher marginal rate.

Some of the complexity is still there of course, and there will still be questions as to what constitutes a legitimate business expense.

My biggest concern with the current system is that 2 people that make the same amount (after business expenses) don't pay the same taxes. This means that the progressive taxes arn't soaking the rich, they are soaking SOME of the rich. They also soak SOME of the middle class, depending on how savvy people are at taking advantage of tax loopholes and how availible they are for them.

4/26/2005 12:15:00 PM  

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