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## We’re Ignorant Idiots! Please Tell Us Why A Flat Tax Is Not Fair

Can someone please give us a rational argument why implementing a Flat Tax system in America is not fair? We don’t know if we can continue posting without thoroughly understanding this issue first. From a percentage basis, each person pays an equal amount of their income towards taxes, and from an absolute basis, richer people pay more!

Why don’t we just start taxing people according to height? The shorter you are, the more you have to pay! Brilliant idea, thanks.  Here’s a commentary from a site that really got me thinking about the word “comrade” and the phrase “melt your pots for bullets.”

Those of you rich folks in the top 35% tax bracket (~\$380,000 and higher) need to stop whining. You don’t get to whine. I hope this administration taxes the beejesus out of you all…it’s time you paid your fair share and get with the program. It’s only fair the wealthy pay more out of their millions and billions of dollars to subsidize the rest of us who need it the most. We are struggling in this recession and it’s time to fix the problem – by taxing the rich!

Gee whiz, last I checked, we live in America not North Korea. Why people believe it’s fair to tax one class of citizen a higher percentage than another confuses us. Is this not a pure form of discrimination? Fine, let’s agree that anybody below the poverty line of \$25,000 for a family of four (\$10,000 for a single person) are exempt from all income taxation.

#### Here’s a reasonable 15% Flat Tax Example:

“Poor” Man Income: \$50,000 / year.

“Rich” Man Income: \$1,000,000 / year.

How much does the poor and rich man pay as a percentage of their income? 15% each = equality!

How much tax does the poor man pay in absolute dollars? \$7,500.

How much tax does the rich man pay in absolute dollars? \$ 150,000

———-> The rich man earns 20X more than the poor man, but also pays 20X more than poor man in taxes!  Equality!

Let’s put a twist to this example.  Let’s say the rich man is a 50 year old ER doctor who saves lives every single day.  He spent 15 years after high school studying, and \$300,000 in tuition to become a doctor.  Is it right to reward this doctor who studied harder than most of the population with a higher tax rate just because he makes \$1 million a year?

One could argue this doctor deserves a tax holiday, or should spend regressively less on his taxes.  But then, the honorable \$50,000/yr school teacher says she’s helping people too, and should pay less taxes as well.  It gets complicated, but not with a flat tax!

#### CONCLUSION – Let’s Stop Discriminating

Should we tax everybody who makes more than us an even greater amount than we are taxed to help subsidize our own living?  Should I buy the domain name: “Financial Socialist Samurai of America?” We are craving for rational reasons from the personal finance community as to why the flat tax is not fair. Everybody understands racism and bigotry is bad. Why then do we accept discriminating against income levels?

Mathematically, the flat tax makes perfect sense and expunges words such as “should, fair, subsidize” from the tax argument.  What the government has is a serious spending problem, and Obama needs to hire Financial Samurai as an economic advisor.  The first thing we’ll tell him is the mother of all personal finance advice: spend less than you earn!

We have a monster budget deficit due to reckless spending and this must stop. The second thing we’ll tell Obama is: discrimination is illegal! Damn, maybe we shouldn’t have revealed the secrets, for now it’ll be hard to make millions from the government.

#### Recommendations For Increasing Your Wealth

* Do Your Own Taxes. I’ve been doing my own taxes with H&R Block At Home for the past ten years. H&R Block is so easy to use, anybody can do their own taxes with their step by step guide with audit protection plan. The program has consistently found thousands of extra dollars in tax savings I did not realize I could have. Why bother paying an account hundreds of dollars when you can learn more about your financials, find extra tax savings, and do it all from the comfort of your own home? Get the .

Regards,

Sam, Financial Samurai – “Slicing Through Money’s Mysteries”

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1. October 9th, 2009 at 01:14 | #1

Just wanted to say HI. I found your blog a few days ago on Technorati and have been reading it over the past few days.

2. October 9th, 2009 at 05:12 | #2

I’m with you on this one. Then again, I am middle-class so I always feel gypped when I move up in my income and have to pay more.

A flat tax is a good idea, but we live with the society norm that people who earn more should pay more (even as a %)…

Even with charities or donations. Someone earning \$20,000 gives a \$10 bill, then someone who earns \$100,00 should give a \$50 bill.

At least, that’s what I’ve heard from some people.

Great food for thought. I only wish it were real.. :)

Hi FB! Good to hear from you and thanks for your thoughts. There’s one place I know where a flat tax is real, and that’s in Hong Kong with a 15% tax! If you’re a foreigner who lives in HK, the first \$80,000 is tax free too. The last I checked, HK’s budget is doing pretty well, and their economy is rebounding quite nicely!

I’m middle class too and sometimes shed a tear when I look at my bi-weekly income tax bill. Where do my tax dollars go? Hard to keep track. My property tax bill for some reason shot up by 12% this year. How can the city gov’t think property prices really rose that much?

The more people make, the more people become targets by the government. It’s like higher income earners are being targeted and hunted down like animals. I don’t feel bad for rich people. I just feel rich people are unfairly persecuted sometimes and in this case, every two weeks!

Thnx for stopping by!

FS

3. October 9th, 2009 at 07:30 | #3

You are compensated by your workplace with taxes in mind already. Taxes have been around long enough for this to be the case. So really, your boss thinks you’ll continue working for him for (Salary-taxes) rather than (Salary).

4. October 9th, 2009 at 08:08 | #4

@Geek Eh? Don’t get it. If you work in a corporation, the corporation doesn’t pay your income taxes, you do. We should seperate the government’s will vs. the corporations will. Focus on the tax payer first… and then we can focus on the corporation’s tax liability.

5. October 9th, 2009 at 08:48 | #5

In answer to the fairness question: I’m not convinced of fairness or non-fairness of any system so far.

@The Genius
Anywho-
I oversimplified too much. The business you work for (yourself, small business, corporation, etc), over time, is forced by the market to compensate employees based on how much tax the employees pay. Payroll taxes are another matter from income taxes.

When you accept a job offer, do you not take into account all costs, including income taxes? Admittedly, at certain types of employment and certain salary ranges you have a lot less flexibility to negotiate these things, but over time people will leave an area or a company if compensation is not enough to pay all of their costs (including taxes).
The people least able to leave are the poorest, those closest to the poverty line.
Companies compensate based on cost of living and how desirable you are in the job. Cost of living includes taxes. At higher salary ranges, since taxes (a cost) are more, you are compensated more.
This is still too simple, not taking into account things like poorer people having to spend more on necessities, but I think it’s better.

6. October 9th, 2009 at 09:24 | #6

@Geek I agree about what you’re saying regarding what the market does to compensate employees, but I do not take into consideration income taxes before accepting a job. Why? Because income taxes are mandated by the government, regardless of where you work, and is a fixed variable.

Working at McDonald’s for \$10/hr and at Best Buy for \$10/hr, for example is the same from a tax perspective. Instead, I’d focus on the benefits like free cheesburgers or discounted big screen TVs!

7. October 9th, 2009 at 09:31 | #7

This is great! I think a flat tax would also reduce a lot of the costs associated with filing taxes, audits, etc. Plus it evens things out for those who live in higher cost areas, they get better pay but they’re taxed more. (On multiple fronts because of property taxes as well).

Hi Shakela – Thank you! Living in New York City Manhattan for example costs a boat load more than living in Des Moines, Iowa. Hopefully, wages reflect the cost differential, but taxes are still the same for like earners. Don’t get me started about property tax. How did mine jump 15% this year in the great depression is beyond me! FS

8. October 9th, 2009 at 09:57 | #8

@The Genius
I think we do agree :)

9. October 9th, 2009 at 13:37 | #9

I’ve always thought a flat tax was inherently fair! What’s not fair about somebody who nets 10x what you net paying 10x the tax?

Part of me wonders if the voting public is just so bad at math they think taxing people at the same rate doesn’t reflect that.

Hi Dar – Cool, glad to have you on board. The voting public may very well be that bad at math, it is a good theory! I know I couldn’t and wouldn’t do math after pre-calculus. I felt there was no point! What am I gonna do, differential equations while buying groceries?! :) FS

10. October 9th, 2009 at 14:36 | #10

The only fair “flat tax” is a “flat wealth tax” — tax 3% of everyone’s net-worth, and do away with income taxes completely.

11. October 9th, 2009 at 17:46 | #11

BG – just doing the prelim calculation for myself, I love that idea! However, it may be too complicated to calculate one’s “net worth” as I think the entire calculation is a bunch of baloney :)

It’s harder to fake ur income than it is to fake ur net worth too.

12. October 9th, 2009 at 19:13 | #12

You words are music to my ears! But I think you need to clarify your position a little more. Is the 15% the only federal tax we will pay? Or are we still stuck with FICA, excise taxes and corporate taxes (interest, dividends, capital gains and rents). Unless these are included everyone’s total tax rate will be much higher than it is today!

Only to be a devils advocate, there are too many liberals that believe it would be unfair to the lower income population. Relatively speaking (relative to their tax burden today) this may be the case. While you have excluded the “impoverished” in your example there are still thousands above this line that pay a lot less than 15% in taxes.

However, if you can benefit from the system you should have to pay into the system, period! A person at or near the poverty line will receive benefits of much greater value than they ever pay into the system, I don’t see how that can’t be fair.

13. October 9th, 2009 at 21:20 | #13

@Greg I’m just talking about the Federal Income tax here, and 15% was just a number I threw out there since Hong Kong has a 15% flat tax, and their economy is doing quite well.

Hard to govern individual states and what they do with their budgets, and all the other tax stuff well, I think that’s more a problem of spending. If we can spend less and more efficiently, taxes should go down.

Best, FS

14. October 10th, 2009 at 07:03 | #14

Morning World! I find it interesting there are at least 4 thumbs downs for this post yet I still haven’t seen a rational comment as to why the flat tax system is bad or unfair. Negative comments welcome!

Also, anybody know what’s up with the Tweet thing? Still says zero, even though the have been a number of tweets and retweets. Ahhhh, technology.

15. October 10th, 2009 at 08:03 | #15

I’m for flat tax rate as long as there are no loopholes, and I mean absolutely zero loopholes.

16. October 10th, 2009 at 08:26 | #16

@stephen
Sounds good man. Gross income pre any deducations X the Flat Tax Rate = Your annual tax bill! No exceptions!

17. October 10th, 2009 at 08:59 | #17

Not too hard to calculate Networths. For property taxes we already have appraisal boards, no big deal there. Most other wealth is in 401ks, or other investment accounts at financial institutions, so those accounts are calculated daily already. For autos or other items of any real value: go by the insurance-coverage amounts. For all the other little stuff (furniture/etc), it might not even be worth trying to tax it, but again, we can go by home-insurance/renter coverages for those items that are included in each policy.

The big issue would be trying to tax people who physically own gold or other similar things, ie; people specifically purchasing gold to avoid the tax. If they don’t “insure” their physical gold, then too bad for them if they get robbed.

Anyhow, if you like the idea of the “fair-wealth tax” idea, then your eyes should be opened to see how “fair” our current system actually is, and how horrible an idea it would be for a flat-income-tax (which would be highly regressive: taxing low-wealth people more).

18. October 10th, 2009 at 09:19 | #18

@BG
Nothing is entirely fair in world, but as I was trying to point out in my article, if there’s a flat tax on a guy making \$50k/yr, and \$1mil a yr, they are paying the same percentage of their income to tax, and the guy making \$1mil a year is paying 20X more. Mathematically, it’s totally fair… a truism if you will.

That said, please help me understand how a flat-income-tax structure is regressive. I have a feeling it’s b/c someone making less, even though they are paying less in absolute income to tax, have it tougher b/c there are basic necessities to spend on, but I’d still love to hear your point. I’m just trying to get educated as much as possible before we move on to another post.

For the net worth tax, there are just too many variables to calculate. Let’s just stick with one variable, people’s gross incomes. Part of the reason for a flat tax is to extricate the waste (time and money) spent to do one’s taxes. I have a feeling the tax coompanies have mega lobbyists.

19. October 10th, 2009 at 09:37 | #19

Poor Man: \$50k income, with networth of \$100k
Rich Man: \$1mill income, with networth of \$2 billion.

Poor man under flat-income tax is paying taxes equal to 7.5% of his networth.
Rich man under flat-income tax is paying taxes equal to 0.0075% of his networth.

A flat-income tax is highly regressive in that people who are least-able to pay, are paying more.

With a flat-wealth tax @ 3%, we would get:

Poor man pays \$3k in taxes instead of \$7.5k in taxes
Rich man pays \$60million in taxes instead of (laughable) \$150k in taxes

If the government only needed \$157.5k in tax money, then of course the flat-networth tax rate should be reduced down to accommodate that. The basic idea though is that the rich person who has 99.995% of the wealth in our two-man country, would be paying 99.995% of the taxes.

20. October 10th, 2009 at 09:53 | #20

@BG
Ah, sounds good. So you are saying the flat tax on NET WORTH is regressive. I can see that from your example. So, in this net worth calculation, if the rich person who owns 99.995% of the wealth is paying 99.995% of the taxes, that sounds pretty darn fair in this two man country, which is exactly your point right?

But, what about just simple a flat tax on gross income regardless of your net worth? This is where I don’t fully understand why a flat tax isn’t totally fair. Yes, a person with a billion in gold bars and a \$20,000 a yr income may pay less taxes than a \$1mil/yr income earner with only \$500,000 in net worth, but at least a flat tax on gross income is a step in the right direction…… no?

BTW, gotta go to a client event at Harding Park and watch the President’s Cup now… so I’ll be awol for the day as they don’t allow cell phones. But, I will get back to you when I return! You bring up some excellent points. Shoot me an e-mail sometime. Perhaps u want to do a guest post! ciao

21. October 10th, 2009 at 10:14 | #21

“…So you are saying the flat tax on NET WORTH is regressive….”
no, the flat-tax on income is regressive, the flat-tax on networth is fair.

“So, in this net worth calculation, if the rich person who owns 99.995% of the wealth is paying 99.995% of the taxes, that sounds pretty darn fair in this two man country, which is exactly your point right?”
absolutely, it is fair for the person who has the majority of the wealth to pay the majority of the taxes — every man pays the exact same rate of taxes based on their personal wealth. How is this not fair? I love to see a rich person try to rationalize / justify this one, though my comment is not directly aimed at you (admin) cause I don’t know if you are rich or not.

“But, what about just simple a flat tax on gross income regardless of your net worth?”
because that is highly regressive: poor man is paying taxes of 7.5% of his networth, while richman gets off with only paying taxes of 0.0075% taxes of his networth. Person least able to pay is paying more == regressive taxation by definition.

“but at least a flat tax on gross income is a step in the right direction…… no?”
No!, a flat-tax on income is a step in the _wrong_ direction. All it will do is increase taxes on poor, while decreasing it on the rich. If anything, we should stick with our current system because it is more “fair” than the flat-tax on income idea.

Good debate, and have fun on the trip!

22. October 10th, 2009 at 10:26 | #22

BG – Typo on my part on whether net worth tax is regressive since I just proved my point the very next paragraph.

Ill have to disagree with ur argument here. We can keep taxes the same for the “poor”, but I don’t think it’s fair to tax people who make more, a higher percentage. You’re making an argument about that taxes on the poor will go up under a flat tax system. That is simply not the case as math will show. It is not fair to tax the higher income people more bc that is discrimination. It seems like you don’t think so, and it’s really about arguing against equality.

I did the networth tax calculation and I will be paying way less in taxes than simply a flat tax calculation. Hence, I’m a proponent of course!

Ciao

23. October 10th, 2009 at 10:49 | #23

I’m not seeing it the way you are. A flat-tax on networth is not taxing anyone more or less than anyone else — everybody would pay the exact same tax rate based on their wealth (3%).

Now, a flat-tax on income will tax people differently / unfairly, when put into the light of the wealth/networth of the people. Of course, if you ignore the networth, then it is hard to see, but with my example, it should be pretty clear methinks. A 15% income-tax on someone earning \$1mill with a networth of \$2bil is only taxing them 0.0075%, while the poor guy is paying taxes at 7.5%. That is a HUGE difference. What do you mean it is not fair to tax people with higher incomes (like our current system). The people with higher incomes have higher networths, so they are not really paying more if you look at their networths.

I am not saying any group should be discriminated against — nobody should pay more or less _relative_ to their networth: looking at just their income only muddies the waters — income means nothing, however networth/wealth means everything.

If we go with your argument (pro flat-income tax), then the poor person who only has 0.005% of the wealth should pay about 5% of the taxes — that is _not_fair_.

24. October 10th, 2009 at 15:49 | #24

BG – Who knows what people’s net worth is? Some could be 31 years old, 3 yrs out of business school making \$500,000 / year at a private equity shop but has minimal net worth due to age and debt. The guy shouldn’t be paying a higher percentage. Progressive tax makes people not want to get more education, work harder, and do more.

A net worth tax is not feasible even though it’s awesome for a high income earner with minimum net worth. A flat tax on income is the best way to go.

25. October 10th, 2009 at 16:11 | #25

@BG
This is absolutely TOTALLY wrong BG. Believe it or not, many people who make \$250,000-\$350,000 in America are just middle class. They’re struggling to get by just like the rest of us b/c it’s most likely they are living in high tax states, and America’s most expensive cities like New York and San Francisco. They’ve got school debt, a mortgage, and their kids education to pay for.

I totally agree with FS that taxing one income level greater than another as a percentage is discrimination. Your \$2 billion net worth example for the “rich man” is totally off. I know you’re trying to make a point, but it fails. Even a multi-millionaire i

We should encourage hard work and freedom, not malaise and sloth. I’m assuming you don’t make much more than \$250,000, which drives your points of view. If you ever do make more, I’m absolutely sure your view will change b/c you’ll realize the more you make the more you feel like you’re going backwards.

26. October 10th, 2009 at 18:47 | #26

@The Genius
The Genius: If someone makes as income \$350k and has ZERO networth, then they would pay ZERO in taxes under a flat-networth tax.

If someone else has \$2 billion in networth (from an inheritance for example), but ZERO in income, they would still pay \$60mill a year in taxes (3% of \$2bill).

The principle is simple, just like property taxes: if you are hoarding wealth and can’t “grow” it at least 3%, then it will go to somebody else who can. If you own property and can’t afford to pay 3% taxes on it, then the property _will_ go to somebody else who can make better use of the property.

Flat-tax on wealth is taxation that punishes “inefficient hoarders”, and rewards the people who are hard workers or otherwise make better use of the resources — it is pure capitalism.

27. October 10th, 2009 at 20:06 | #27

@BG
Ah, I’m back. Nice to see “The Genius” chime in too. Ok, i think we’re good. A net worth tax sounds quite reasonable, and I would much prefer this over the current progressive tax system. too bad implementing such a system has only a slightly better snowball’s chance in hell to get implemented! :)

Thanks for sharing your thoughts BG. I appreciate the insight. As I strongly believe, education is key, and reverting back to the title of this post, I feel LESS like an idiot at the end of the day, compared to the beginning of the day!

Financial Samurai

28. October 11th, 2009 at 07:37 | #28

I agree, changing our tax-code to be a purely “flat-networth tax” will never happen. But guess what, having property taxes, “progressive” income taxes, and a positive inflation rate is pretty darn close to the “flat-networth tax”, so I don’t mind the current system at all.
:)

29. October 11th, 2009 at 08:43 | #29

Until the government dares to spend less on Military, Medicaire, and Education… our taxes will NEVER go lower than they are now (we’re close to all time lows actually), and the rich will always pay a greater % of their income to taxes. The beast is already in motion, and is impossible to stop.

30. October 11th, 2009 at 09:00 | #30

Alright, in the name of advancing a good conversation, I’ll attempt to play devil’s advocate (or at least, try to punch a few holes in the flat tax is the best system idea). First, attempting to make a tax system fair is tricky, as ‘fair’ is such a subjective word. Rather than being something you can easily measure, it’s a moral judgment, which will depend on an individual’s sense of right and wrong. Depending on your moral feelings and beliefs, what is ‘fair’ to someone else might be completely ‘unfair’ to you.

Let’s look at an example of another ‘fair’ tax system to get a feel for this. Let’s say the government decides to replace all federal taxes with a single per capita tax, set at about \$10,000 (what the government would need from each of us to meet its annual budget, by my back of envelope calculations). It’s ‘fair’ in that everyone in the country will have to pay the same amount, including you, me, Donald Trump, and poor man on the end of the block. But, obviously our ability to pay will be very different. Someone making one million dollars a year will barely notice the ten thousand missing, someone making \$50,000 will feel the loss but still have plenty of money remaining, and someone making \$10,000 will watch as the government quite literally takes his whole paycheck. Even though this system would be fair (by the standard of taking an equal amount from each person), it doesn’t mean it would be an ideal tax system.

Which brings me to my next point: mathematical even-handedness isn’t the only concern when designing a tax system. If it was, I’d gladly concede that it’s hard to make a ‘fairer’ tax system than a flat tax on income from all sources (although, that net worth tax BG keeps mentioning sounds promising, as well). Instead, the designers of the tax system also attempt to: promote desirable behavior (which is why mortgage interest is tax deductible and why IRA accounts exist), drive financial investment (hence the lower long term capital gains tax) and maximize taxpayer utility (the ability of the income to satisfy the [taxpayer's] needs).

This last point, utility, is a major reason that liberals (and for the record, I definitely lean that way, even if I don’t go so far as to call myself a liberal in many areas) support a progressive rather than a flat tax. Taking 15% of the income from a family of four earning \$30,000 a year will have a much bigger negative impact on their standard of living than taking the same percentage from someone earning one million each year. Indeed, because the difference in utility between \$25,500 and \$28,500 is so much greater than the utility between say, \$850,000 and \$750,000, it makes sense to create a tax system where someone grossing \$30,000 each year only pays 5% and someone earning one million pays out 25%.

This utility issue (or perhaps their own sense of ‘fairness’) is one reason why most flat tax plans include a healthy exemption or ‘negative income tax’ that offsets the tax paid by lower income taxpayers. A typical set up is having the tax set at a particular rate (let’s say 15%, to stay consistent) but only applying that tax to income above a set amount (say, \$20,000). A family of four grossing \$30,000, for example, would pay only \$1500 (15%*\$10,000) or 5% of their income in this scheme, while a family earning \$100,000 would pay \$12,000 (\$80,000*15%), 12% of their gross income. Thus, most flat tax plans are actually progressive in nature. (Yours is not, since everyone earning above the minimums you set will pay the full 15% in taxes. However, this means that everyone earning just below your minimum for full taxation has no incentive to earn more, unless they can earn enough to offset the now applicable taxes and still have more income than they had before. That’s another of those goals of a good tax system: not creating disincentives to more work.)

Finally, a brief (no, really) note on discrimination and income. There seems to be a lot of misunderstanding of how tax brackets actually work, and I think that might be the source of some confusion. The tax bracket you are in represents the tax you pay on the LAST dollar of taxable income, not the percentage you pay on all your taxable income. The ER doctor and teacher given in your example both pay the EXACT same amount in taxes on their first \$50,000 in taxable income. It’s only on the first dollar he earns more than the teacher that increases the amount he owes in taxes above how much she owes, which would occur regardless of whether we have a flat tax system or the current progressive tax. If he really wants to pay the same amount in taxes as her, there are ways he can reduce his income to match hers (such as giving \$950,000 away each year to qualified charities), all of which are within his power. (Apologies to those who already understood tax brackets; but this seems to be a sticking point in most people’s minds.)

You might argue that it is not FAIR that the doctor pays a higher percentage of his taxes than the teacher. You might further claim that both teacher and doctor SHOULD pay exactly the percentage in taxes (although, as already noted, no flat tax plan currently in consideration, save for the Financial Samurai’s, would actually cause them to do so). But that goes back to the first point I made; what’s fair is subjective, and it depends on who is doing the judging. I think a progressive tax (a genuinely progressive tax, without all the loopholes and tax dodges inherent in our current system) would be very fair; you are certainly entitled to disagree, and maintain that a completely flat tax is the best system. Hopefully, I’ve at least made a thought-provoking point or two about fairness and taxes (and resisted the urge to call anyone an idiot in the process).

31. October 11th, 2009 at 10:13 | #31

The first problem is that people, for some reason, think that the rich pay excessive taxes. I pay a higher percentage of my income to federal income taxes then the richest Americans.

400 Richest Americans (2006 data):

Adjusted Gross Income \$105,300,000,000 — Average/pp \$263,306,000
Capital Gains taxed at Lower Rate \$67,600,000,000 — Average/pp \$169,020,000

Income Taxes Paid \$18,100,000 — Average/pp \$45,216,000

That is an effective tax rate of 17.2% (45/263)

This is the lowest it has been since 1992.

The next question is: Who derives the most value from what we spend taxes on? For example:

-Military — Largely a protector of corporate interests, someone with a net worth of \$5 billion has a lot more to lose than me
-Roads — People with higher net worths most likely depend on good infrastructure so that commerce can thrive and they can make money. I rely on it so I can get to work and make those people more money.

You can pretty much go line by line and show that the wealthy have a vested interest and more to lose. There are some cases where that isn’t true… and they make sure to vocalize their opinions when that happens.

32. October 11th, 2009 at 10:20 | #32

Oh, and to give a little more data:

When you account for federal, state, and local taxes, in 2008:

The bottom 99% paid: 29.4%
The top 1% paid: 30.9%

Once you get above \$40-50,000 in income, the effective tax rates are virtually flat.

33. October 11th, 2009 at 16:04 | #33

@Roger
Wow, what a great comment and response! Roger, you win the award for longest comment at Financial Samurai! :) I honestly don’t think anybody will be able to beat your post for a while.

First, thanks for pointing out the difference between effective tax rate and marginal tax rate. I agree, too many folks probably think that the highest marginal tax rate pertains to ALL their income, instead of just the income above a certain level. Effective tax rates are often much lower.

Second, clearly, I disagree with having everybody pay a fixed tax bill of \$10,000 as you mentioned b/c that seriously isn’t fair to lower income earners.

Third, your utility argument is spot on, and why I mentioned in the beginning that we should definitely agree to ELIMINATE any taxes below the poverty line (\$25,000 for family of 4, \$10,000 for a single person etc).

Thanks for stopping by, and we really appreciate your thoughts and input!

Financial Samurai

34. October 11th, 2009 at 16:06 | #34

@MLR
Good to hear from you man! I agree, it’s all about protecting big bad corporate interest groups, and therefore the wealthy may very well benefit the most from our tax dollars. The big guys at Citigroup, for example surely are!

I’m going to have to disagree with you on your last statement regarding after \$50,000, effective tax rates are virtually flat. Maybe in massive aggregate, they are, but not for individuals and real life examples such as myself.

I’ve made \$3.30/hr, and I’ve made a lot more than that, and at least from my standpoint, I am paying a lot more in absolute dollars and as a percentage of my income. When I was working for \$3.30/hr, I remember thinking it wasn’t fair that million dollar incomes were being taxed at 50%+ all in (fed/state), b/c I wanted to make a million dollars a year one day myself.

It’s great you’ve stopped by. Good stuff!

Financial Samurai

35. October 11th, 2009 at 16:11 | #35

@MLR
MLR: excellent point on the effective tax rates for the “ultra-rich”. You can thank good ‘ol George Bush Jr. for that one — through his \$600 billion tax break for the rich in 2003. The “ultra-rich” get the vast majority of their income as dividends, which are taxed only at 15%, hence the effective tax rates for the “ultra-rich” is less than the effective tax rates for people who earn incomes.

http://www.washingtonpost.com/wp-dyn/content/article/2007/06/27/AR2007062700097.html

36. October 11th, 2009 at 21:35 | #36

You can disagree, but the data speaks for itself. Once you get above the \$40-50,000 per year I mentioned, the effective tax rates are all between 28% and 31%. That is counting local, state, and fed taxes as I said.

I don’t really find a way to dispute that.

The lower income group goes as low as I think a 20% effective tax rate. Not sure… the data isn’t in front of me.

Good discussion.

37. October 11th, 2009 at 23:08 | #37

Federal, State, and Local Taxes in 2008

Income Percentile / Avg Income / Effective Tax Rate

Lowest 20% / \$12,000 / 18.7%
Second 20% / \$24,500 / 22.3%
Middle 20% / \$40,000 / 27%
Fourth 20% / \$66,100 / 30%
Next 10% / \$101,000 / 31.5%
Next 5% / \$144,000 / 32.2%
Next 4% / \$253,000 / 32.1%
Next 1% / \$1,445,000 / 30.9%

If you average out all of the bottom 99%:
Average income is \$56,500 and effective tax rate is 29.4%

People make it seem like our tax system is progressive. I just don’t see it once you get past the \$40,000 mark.

38. October 11th, 2009 at 23:24 | #38

@MLR
We can’t just average people out because we all pay a different effective tax rate.

I have to venture to guess the reason why you don’t see a progressive tax rate is because you don’t make over \$200,000, let alone \$137,000 where you really start feeling the pain of higher taxes. Please correct me if I’m wrong, as I mean no offense.

I have gone through every single tax bracket in my career, from \$15,000/yr to over \$500,000/yr and I can tell you straight up from experience that it isn’t a much uglier picture when it was time to pay taxes at the higher end of the income spectrum.

39. October 12th, 2009 at 00:36 | #39

No offense taken. I am currently in the “fourth 20%” bracket and have been in each lower bracket. My parents are in the “next 5%” bracket so I see how their numbers work out, too.

And what do you mean you can’t just “average” people out? That is the only way to make an argument when you are talking about 300 million people. Some will pay less, some will pay more, but in the end.. the average gives us a decent picture of what the -average- person in that bracket is paying.

There really is no disputing the fact that when you look at federal, state, and local taxes… the rich are not being taxed into oblivion. They are being taxed at the same rate as the middle class. You will always have your outliers in every bracket.

When you say uglier picture, I imagine you are talking in absolute terms? Or maybe you are an outlier and are paying a higher tax burden than the average person in your bracket is?

Keep in mind, the tax rate above is taking into account pretty much everything: Federal income taxes, payroll taxes, state income taxes, sales taxes, property taxes, etc.

40. October 12th, 2009 at 02:43 | #40

Flat tax only works in the USA if you can magically get every state & municipality to revoke their income taxes and – more importantly – their sales taxes!

Oh, and let’s not forget the dividend & capital gains concessions for the rich…

41. October 12th, 2009 at 09:44 | #41

Thanks for the compliments; sometimes I just get inspired and write until I run out of things to say. This was one of those times, I guess. And just to clarify, I wasn’t accusing you or anyone else here of advocating a per capita tax to fund the national economy; as you mentioned, it would be horribly, horribly regressive, and almost nobody would support it. I was merely attempting to make a point about fairness: it’s in the eye of the beholder.

Although, it’s worth mentioning that per capita taxes are used, albeit in much smaller sums, and that’s one reason why lower income earners can end up paying a larger percentage of their income toward taxes. A \$100 per capita tax represents 1% of a \$10,000 a year income, but only 0.1% of \$100,000 and 0.01% of \$1,000,000. A few taxes like that, and suddenly the bottom wage earner is paying out a sizable portion of his income while higher earners, even if said higher earners are paying a higher marginal tax rate. Add in the fact that higher income people usually derive a larger portion of their income from investments (which tend to have associated tax benefits), and it’s easy to see how the percentage paid out in taxes is almost the same for all income brackets over \$40,000, as MLR notes.

42. October 12th, 2009 at 11:27 | #42

What you ask has been touched on by many over the years. Steve Forbes has been pushing this as well. A flat tax was calculated to require about 17% rate or so to replace the current revenue. But the questions are opened up, any deductions? Mortgage interest? What do you do with capital gain rates?

Another consideration – VAT tax or a consumption tax. I think there’s an untaxed economy that can be a source of revenue. Illegal activities go untaxed, right. But the drug dealer or prostitute spend like any of us. A consumption tax add revenue right when the money is spent. I don’t know the right percent for this to work and eliminate income tax, but it sure simplifies the system. People who earn under \$X can apply for a credit to offset a portion of this tax. Anyone over that level or who just doesn’t want to fill the form out has no return at all.
Savings is tax free, going in and coming out until spent.
Of course, there are problems with this as well. No doubt.

Hi JoeTaxpayer – Thnx for your thoughts. Funny story. I sat right next to Steve Forbes on Dragon Air from Shanghai to Hong Kong about 5 years ago. We talked a little bit about the Flat Tax, and he’s the main guy to get me thinking about the plan.

It’ll be interesting to see how the VAT tax evolves, as I saw the recent news headlines. I’m a big proponent of mega taxation on the Big Tobacco company’s corporate earnings, as well as the end products they produce. Since demand is relatively inelastic, instead of a \$5 pack of Marlboro’s, why not slap on a \$15 tax to make it \$20? Save lives and reduce polution.

Legalizing marijuana is another thought, and is a whole blog post debate on itself.

thnx for stopping by!

FS

43. October 12th, 2009 at 14:27 | #43

What!?! You want to tax tobacco products out of existence @ \$20 a pack, and in the same breath you want to legalize marijuana? You do realize that the price of cigarettes has grown faster than gold — solely due to taxation. In the past 20 years gold has doubled, yet the price per pack of smokes has increased nearly 8 fold.

I say we start slapping huge taxes on people who attend golf tournaments…
:)

44. October 12th, 2009 at 16:23 | #44

@BG The marijuana argument is just a thought! But taxing the heck out of early death causing products sound like a good idea to me! FS

45. October 14th, 2009 at 10:19 | #45

You may want to tax the hell out of “early death causing products”, but then you better have a _real_good_ plan for fixing Social Security and Medicare since people will start living longer (presumably in your mind).

I wonder how many smokers, eventually end up _not_ dieing of a smoking related illness… My guess is the vast majority of smokers die of something unrelated to smoking anyway. Anyhow, smoking is taboo, so of course it is already taxed into oblivion.

Hey BG – Good point. Yeah, that’s a financially bad unintended consequence if we tax the heck out of “early death causing products.” How ironic causing longer lives leads to greater financial problems for the system!

Smoking is a great topic. Thanks for reminding me of this post. To give you a preview, I think smokers are the strongest people on earth! Whuh? Stay tuned. FS

Oh btw BG – Did you know the greatest savers in America are those between ages 24-34? It’s because this age group doesn’t believe Social Security will exist when they retire, hence, aren’t counting on it! FS

46. October 14th, 2009 at 11:42 | #46

You did great explaining the Flat Tax situation. Thank You for that!

Your welcome John. Now if there would only be more people to join me and fight tax discrimination! Equality for all!

47. October 14th, 2009 at 13:39 | #47

This makes way too much sense to come to fruition without intense and continual war against the current gov’t system.

Arguing that it’s commonsensical to the gov’t doesn’t matter because in doing so you are assuming they care if it makes common sense. They don’t care. Quite the opposite actually, they are doing everything in their power to take as much of our money as they can without us knowing what is really going on.

In the meantime the general American public is concerned with Michael Jackson and Kate Gosselin – and this is no accident either.

Keep uncovering the layers…

48. October 14th, 2009 at 16:17 | #48

@Matt Jabs Awesome! Thanks for the support. You’re right, it’s a lot of smoke and mirrors. The more complicated and convoluted the tax system, the better! It keeps lobbyists and the tax industry gainfully employed.

Who’s Kate Gosselin and MJ? Jk.

Thanks for stopping by Matt!

49. October 14th, 2009 at 16:49 | #49

I am with you in that I am for a flat tax for the most part (I actually am a bigger fan of a national sales tax along with an abolishment of the Federal income tax ala Mike Huckabee but let’s not get started opening that can of worms lol).

However, I do have to say that I can certainly see the merit in the Government doing certain things (aka tax breaks) to incentivize certain types of behavior. Some of these current tax incentives include the deduction for mortgage interest (to encourage home ownership), lower rates for long term capital gains (to encourage people investing for the long term – which by the way is what skews Warren Buffet’s overall tax % so low), etc. etc.

All of these types of tax break incentives serve to put out what is in effect the opposite of a flax tax though so I am somewhat torn (although one thing that has always seemed ridiculous to me is when people advocate a progressive tax system so that the rich business owner that makes a lot of money but is the one that creates new jobs for everyone else should be taxed more than the person that makes less money but does little to contribute to the economy except for purchasing a new car every 5 years and a new TV every couple years – i.e. give a business owner a tax break and they use the money to hire more workers and help create wealth for everyone – give a lower income worker a tax break and theybuy a new flat screen TV…)

CC Chaser – Well said! Give small business owners tax cuts so they can hiring more people and allow all to prosper!

I actually would reall like to learn more about the national sales tax argument concomitant with the abolishment of the Feder Income tax! I love learning about new stuff and read new arguments for things.

Without new perspectives, we grow stale and boring!

Thnx for stopping by. FS

50. October 15th, 2009 at 06:27 | #50

I don’t think believing that cigarettes should be heavily taxed AND that marijuana should be legalized is inconsistent. It’s what I believe, for example. My logic is simple: the current system cuts down on consumer choices (often leaving a single, gang-protected provider in a neighborhood), prevents regulation of available product, leads to insane mark-ups, AND sends all the profits overseas. If even ONE of these conditions happened with a product that didn’t happen to make people high, there’d be a hue and cry like you couldn’t believe from all quarters to change the policy, and pronto.

To my mind, it seems much better to legalize all the currently illegal drugs and allow them to be sold openly. You can still regulate where and how they are sold (as is currently done with alcohol and tobacco products), as well as slapping taxes on them to discourage their use/increase tax revenues. But now the profits will go to law abiding citizens (and the government through taxes) rather than to Columbian cartels and other criminal organizations. (I would suggest dividing the drugs into tiers, with the increasingly dangerous drugs (heroin, crack, etc.) requiring higher ages/heavier taxes/a thorough physical before being used, to attempt to limit the number of unprepared youths who end up partaking and perhaps dying needlessly.) For the record, I’m neither a smoker, nor have I ever used any recreational drugs; I’m simply making a few policy suggestions.

Also, the most prominent example of a national sales tax (the one which I believe CC Chaser is alluding to, is the Fair Tax. You can read up on their pitch at fairtax [dot] org, although they are various criticisms of the plan which, as you might guess, are not included on the official site. It’s worth taking a gander before you read the rest of my post, as most of it is directed toward some shortcomings of said Fair Tax.

@Credit Card Chaser
I’m somewhat neutral on the Fair Tax (and related all-sales tax pitches). It’s not perfect (if nothing else, this discussion should highlight that every tax plan, no matter how logical or well thought out, has its flaws), but it has potential. My biggest reservations with it would be that (a) people who earn less have to spend a larger portion of their income to supply food, shelter, heat and light to themselves and their families, so it would tend to be a recessive tax*, (b) it provides even greater incentive for people to go to the black market for their purchases, to avoid the sales tax on items they want, (c) it’s harder to target government incentives, particularly to specific types of income-generating activities (like investing) without an income tax that varies according to how the income is earned, and (d) the plan to not tax business expenses and used goods strikes me as ripe for abuse. (For example, I use my computer to type in my blog, pulling in a small, but real, income. Can I buy my next computer (and all the assorted accessories) tax-free as a result? How do you determine what is and isn’t a business? How do you prevent businesses from buying goods and then selling them to private citizens as used, avoiding taxes altogether? For a plan that promises to decrease the amount of paperwork we need to do at tax time, they’re certainly setting up quite a few promises that will need to be watched carefully.)

Furthermore, the Fair Tax also creates the incentive for persons and corporations to earn money in the US, but then transfer it overseas to spend it, avoiding taxation. (Heck, one of their selling points is that it will make all products, foreign and domestic made, more expensive in the US, but US products will be cheaper elsewhere.) How that would not lead to executives and other high income earners drawing their income from American based companies but live abroad to avoid paying any US taxes (decreasing the tax base and requiring higher taxes if we’re shooting for a revenue neutral plan), I just don’t know. And that’s before we even get into the fact that most other countries aren’t going to be happy if we tax the hell out their products here but expect them to sell our goods at the MSRP without adding their own taxes.

Are these enough to completely overwhelm the advantages of the Fair Tax or another national sales tax? Maybe not, but I’ve yet to hear any suggestions on how to minimize them that I could really get behind. A modified version of the Fair Tax might get my support, but until these issues are resolved, it remains more a curiousity to me than a real alternative to the current income tax system.

(*Yes, yes, the Fair Tax, in particular, includes a ‘prebate’, wherein an amount of money equal to the tax on the current poverty line is sent out to everyone in the country. If you earn twenty-thousand a year and spend it all under a Fair Tax system, you would have spent 23% of your money on taxes (as the Fair Tax people calculate it, which gets a bit funky), so about \$4600. However, you would also get money to cover the Fair Tax equivalent to what would be paid on a poverty-level income. So, if the poverty line is at \$10,000, you would get \$2300 in prebate money from the government, bringing your real tax burden down to 11.5% of your income. Since the prebate amount is the same, no matter how much you make, the Fair Taxers argue that it will make the whole thing progressive.

There is a flaw with this argument, though. Because the tax is decoupled from earnings, there’s no way to ensure that it will be progressive in practice. If high earners are able to spend a lower percentage of their incomes than low earners (a very real possibility, as my comments on utility will testify), the progressiveness of the tax disappears, and it becomes regressive. And that’s before you add in the fact that, as mentioned above, some (or all) of the higher earners’ spending could be moved offshore, decreasing the real percentage that is paid by them. If you want to ensure that a tax is progressive, or even flat, it has to be fixed in some meaningful way to the amount of income earned, not the amount spent.)

Alright, that’s enough of me; I’ve already set the record for longest post here, I don’t want to top it already. Hopefully, my tangent on a point that you didn’t even mention in your post wasn’t too annoying.

Hi Roger – Actually, I think taxing the hell out of cigarettes and legalizing marijuana is perfectly consistent from a tax generation point of view. This will be a good new topic to debate shortly! It’s in the que! :) FS

51. October 15th, 2009 at 07:53 | #51

Nobody has yet countered the flat-networth tax idea from a fairness perspective. As far as I’m concerned, the utopian / fairest tax system would be the flat-networth tax.

I especially want to hear from a “rich” person try to explain why a flat-networth tax is not fair.

Whether we can get it implemented is very questionable: but if it _is_ the fairest system, any tax changes should always move us one step closer to the ideal. A flat-tax on income is a step in the opposite direction, and shouldn’t even be considered.

BG – Let me see if I can get Bill Gates and Sergey over to provide their thoughts! Stay tuned! :)

52. October 15th, 2009 at 09:16 | #52

Aren’t you buddies with Steve Forbes? Heh — anyhow, like your original article asking why the “flat-income tax” in not fair — which I think I have made a good case, I’d like to ask the same question about why the “flat-networth tax” is not fair: please someone educate me.

Thanks.

Nah BG, Steve just sends me a Happy Holidays card now every December with pictures of his entire family. No more presents!

Feel free to e-mail me your Flat-Networth Tax argument and I’ll put it up!

53. October 16th, 2009 at 10:18 | #53

@BG
I can’t speak for anyone else, but I haven’t been attacking the flat net worth tax as I think it sounds pretty fair. My objections would have more to do with the lengths some might go to cut their taxes under such a system; selling stocks in droves right before tax season, giving gifts out to family and friends (perhaps with the intent to take them back after the tax man leaves), and of course, owning more assets outside of America. Attempting to include and tax every Italian villa and every French winery the rich might purchase to escape US taxes will add to the enforcement bill.

And that’d be nothing compared to the sorts of legal trickery that could occur with trusts and corporations, among other nonhuman ‘entities’ created to hold money and other assets. If they aren’t included, it becomes an easy task for a wealthy individual to stash some (or a goodly chunk) of his money in one, in an attempt to make it ‘invisible’ to the IRS (or its equivalent under this new system, which I guess would be the Internal Net Worth Service.

Now, bear in mind that I haven’t actually done any reading on that sort of a tax, so I can’t say for certain that these would be problems (who knows, perhaps the writers of these proposals have thought of these issues and created solutions already), but those are some issues I would want to see considered before switching to an all Net Worth tax system.

54. October 18th, 2009 at 08:40 | #54

Whoa, a lot to respond to! Let me take this one chunk at a time:

I am generally of the opinion that the Fair Tax would be the best, but for the reasons Roger listed, it wouldn’t work – mostly because of the international concerns. We can’t just jump on this bandwagon unless most other countries do, too… and that just ain’t gonna happen!

So yeah, I’m seeing the Flat Tax as the best idea [plausible] idea right now. I do agree also that it should be 17% (or whatever) of income over \$xx,xxx, where \$xx,xxx is determined based on filing status and number of dependents.

For the net worth tax, I’m sorry I’m not a rich person to chime in (actually, I’m the exact opposite!), but I have several reservations about it. First, you haven’t adequately explained how net worth will be calculated. The most common definition of “Net Worth” is Assets minus Liabilities. My liabilities right now faaaaar exceed my assets, so would I pay nothing? Get a rebate? And I don’t like your suggestion of using “renters or home insurance” to value the items in a person’s residence. First of all, plenty of people go without renters insurance. Secondly, renters insurance often has a minimum coverage. The company I use offers a minimum coverage of \$20,000, which is what I have, but I have nowhere near \$20,000 worth of stuff. Should my not-\$20,000-worth of stuff count against my networth \$20,000-worth?

And if we are including debts (as they are almost always counted in net worth calculations), won’t people commit tax evasion just by taking out huge amounts of unnecessary debt? And how would you prevent that without hurting people who just have the plain vanilla house+mortgage+student loans situation?

Hey Steph! Thanks for your thoughts. I’m assuming some of your assumptions are towards Roger, BG, and Larry.

If you have negative net worth, yup, you won’t have to pay any taxes! That’s quite a beautiful thing. You bring up a great point regarding loading yourself with debt to reduce your net worth and avoid tax.

So, yes, you are absolutely right, there are way too many corners to cut if we have a “Net Worth Tax”, hence I think it’s a bad idea.

The flat tax is the EASIEST system to implement. Anybody can figure it out, and hours upon hours of wasted time doing your taxes will be no more.

Thnx for sharing your thoughts and stopping by!

FS

55. October 19th, 2009 at 08:25 | #55

@Stephanie PTY

For the flat-networth tax, It would use both assets and liabilities to calculate networth: If you have \$100k in assets, and \$100k in liabilities: then you have \$0 networth (hence \$0 in taxes due). As for someone loading up on debt to avoid the tax, it doesn’t work that way. If you have \$100k in assets, then take out a \$50k loan, you situations is now: \$150k assets (\$100k assets plus \$50k cash) with \$50k in liabilities (\$50k loan), which is still exactly \$100k networth. Taking out a loan does not change the situation one iota.

You are correct that a large part of the population actually has a _negative_ networth, and hence would not be taxed a single penny under the flat-networth tax.

The chance of getting a flat-networth tax implemented is pretty low, but whatever changes we make to our tax system should be to shift taxation towards the people who own/control the wealth. That is why a flat-income tax is a step in the wrong direction. A progressive income-tax is a much better idea, because the people with the large incomes are more likely to be the same people with the high networths (but not always).

56. October 19th, 2009 at 14:09 | #56

Loading up with debt would not help anyone’s tax situation. Taking out a loan does not increase nor decrease your networth — it stays flat:

Assume you have \$100k networth, you then take out a \$50k loan. You now have \$150k in assets, and also \$50 in liabilities == \$100k networth (no change).

Simple stuff…

BG – It’s not that simple. Let’s say you take out \$100,000 in loans for school to pay for tuition when your assets are 0. You’re saying suddenly your assets are worth \$100,000, and your loan of \$100,000 is a liability hence your net worth is still zero? That might be the case i the ideal world, but your diploma isn’t worth \$100,000 immediately and you need to work at paying it off.

Hence, for all intensive purposes, this person’s net worth is now negative \$100,000, and it will depend on her strea of cash flow to climb back above zero.

FS

57. October 19th, 2009 at 19:21 | #57

@BG
Umm, what are you talking about? It all depends on what you’re taking the loan out for. If the loan is for a depreciating asset such as a car, gold watch, or whatever, your equation doesn’t make any sense at all.

Stephanie is in debt and has a negative net worth b/c of her school loans. Are you going to tell Stephanie she really doesn’t have debt or a negative net worth b/c of her asset of her education? The tax man and computers don’t see that and I agree with FS.

Trust me BG, I’m the Genius!

58. October 20th, 2009 at 10:40 | #58

@BG:

OK, I’m strongly opposed to this “flat-networth” tax idea, for several reasons.

First of all, as others pointed out, individuals with negative net worths wouldn’t pay any tax at all. Personally, I don’t believe ANYBODY should escape paying at least a little tax. If you want to live in this society and take advantage of all the government-provided services (caging up the criminals, policing the streets, defending the borders, ensuring food and drugs are safe, keeping the traffic lights lit, making sure someone answers when you call 9-1-1, and everything else), then I think you should HAVE to have a little skin in the game. Even if you’re a woe-is-me student, with a pile of loans. You’re still a voting citizen, and you should be required to help pay for the system that allows you to live the highest quality of life in the world.

Secondly, again as noted by others, there are many, many problems with establishing someone’s “net worth.” I own a small business. What’s my net worth? How do I value the business? Is it worth the aggregate value of all the assets in the business? Do you include future contracts with clients that haven’t yet paid but have agreed to hire my services? Do you shop it around to interested buyers and see what they’d pay for it? And that’s just one problem with it. Do you count tax debt as liabilities? How do you value real estate? Debt in collections? Timeshare contracts? It would be utterly impossible to calculate this in a way that everyone would consider “fair.”

Thirdly, there’s the blatant socialistic wealth-redistribution element of it. You and I both earn \$50,000 this year. I wisely set some aside to save for my retirement, while you blow yours on vacations and big screen TVs, all the while expecting to live off Social Security when you get old. Yet *I’m* the one who gets punished for being prudent and being a saver? This just smacks of the jealous grasshopper confiscating assets from the ant.

And finally, the biggest problem of all. Say I scrimp and save, and manage to amass \$500,000 for my retirement. At a 4% SWR, it yields \$20,000 in income, supplementing my meager Social Security. However, your greedy socialist administration confiscates 3% of it as a tax. That means I must earn 7% on my capital, just to break even – and that’s BEFORE keeping up with inflation! Fine, so I pay you your 3% (\$15,000). Then next year, you come back, demanding 3% more. And the next year, 3% more. Until what? Until you’ve taken it all? Meanwhile, my bankrupt, spendthrift neighbor happily collects Social Security, oblivious to the tax burden I’m shouldering on his behalf? Don’t you see how incredibly unfair this is?

Bravo Kevin! Great summary of your thoughts. I do believe those at or under the poverty line shouldn’t have to pay taxes though. We are a rich enough nation to help our downtrodden brothers and sisters out, whether it is through their own fault or not. FS

59. October 20th, 2009 at 18:24 | #59

As has been pointed out on this thread, the tax system (due to the FICA cutoff & lower tax rate for investments) is not particular progressive past the middle class.

However, one thing that has not been mentioned at all is the concept of ‘disposable income’. That is, the amount you make above what is required to feed & shelter yourself & provide for basic living expenses. The goal of the tax system should be – and basically is, IMHO – tax your *disposable* income.

That is, the reason it’s unfair for a person making \$40K to be taxed 1/10th the amount of someone making \$400K… is because (lets say we’re talking about a family of 4) the person making \$40K probably has around \$10K in *disposable income*. If you tax him at the ~20% or so rate that a flat tax would require, he has little to nothing left in disposable income…. little to nothing left beyond the bare minimum to live.

If we were to assume that ‘required income’ is something like \$30K in a particular area for a family of four, then the \$40K guy really has \$10K in disposable income, while the \$400K guy has \$370K left in disposable income. So the \$400K guy shouldn’t pay 400/40 = 10x more… he should pay 470/10 = 47x more.

And what about a guy earning the \$30K needed to raise his family? Living paycheck to paycheck to support a family of 4. Are we really going to tax him ~\$6000 and leave him short what he needs? That’s “fair”?

Now, the current tax system is somewhat more progressive than I’ve outlined here, so I guess I wouldn’t call it entirely ‘fair’… but that’s the point, fair is in the eye of the beholder. One thing I can’t sign up to is taxing someone non-disposable income needed to feed their children the same as the disposal money that someone is raking in.

Fredct – Thanks for your thoughts, and I hear where you are coming from. That is why in my post, I highlight agreeing on ZERO tax for anybody at or below the poverty line. There are different income limits for a different amount of people.

My question to you is, if you’re only making a substandard amount of money, and can barely take care of yourself, why have kids? Yes, sometimes it’s unavoidable, so one is fine. But 2, 3, 4, 5? Seems irrational.

No, I do not think the 400K/yr guy, who makes 10X more than the 40K/yr guy should pay 47X more! That is absolutely ridiculous!

FS

60. October 21st, 2009 at 06:28 | #60

If someone making 400K has 47 times the disposable income of someone making 40K… they they absolutely should be taxed 47x as much… at least.

While I agree with you that if you’re not financially secure that having kids isn’t the wisest idea… it’s not a choice I would make… are we really supposed to have the government enforce that? That, to me, is completely inappropriate and very scary. You were talking on the other board about people being ‘discriminated’ against because they can’t contribute to a Roth… but telling people they can’t have kids because their income isn’t high enough? That’s okay? That’s not discrimination?

Besides, what about people who, for religious reasons, are opposed to birth control. You’re now regulating what goes on in their bedroom, and there’s no way I can’t see that being way too far.

Unless you enforce it in a China-like way (thinking of their one-kid policy), people are going to do what they want to do anyway. And then your only choice is to allow the children to suffer afterward. And for what gain? To allow someone making \$500K to contribute to a Roth and having a “feeling” that the system is more fair?? I’m sorry, while I would like to see lower taxes at the higher end of the spectrum, I don’t think a society that willingly allows children to suffer for it is a ‘fair’ society.

(and I’m talking actually suffer, not ‘suffering’ by not being able to contribute to a Roth as you argued elsewhere)

Fredct – I never said we should implement a kid policy based on your income. I’ve just questioned the validity of having multiple kids when it’s hard for parents alone to get by.

China’s one child policy interesting. I wrote an entire thesis paper on it, which maybe I’ll post here one day, but not now.

Please feel free to do the math and share with us what someone who makes 10X more in absolute dollars over someone above the poverty line would have to pay in taxes if they paid 47X more b/c their disposable income was 47X more. Thnx.

61. October 21st, 2009 at 07:54 | #61

Looks like it was a small typo… I meant 37… as I posted earlier (with typo fixed)

If we were to assume that ‘required income’ is something like \$30K in a particular area for a family of four, then the \$40K guy really has \$10K in disposable income, while the \$400K guy has \$370K left in disposable income. So the \$400K guy shouldn’t pay 400/40 = 10x more… he should pay 370/10 = 37x more.

Fredct –

First, check my post for the link with regards to what the poverty line is for a family of 4. \$40,000 is not too far off, and I am against taxing those at/near/below the poverty line. Something else needs to happen.

Second, if you can provide actual tax figures on how much two sides would pay in your example, using say a 15% flat tax assumption, pls do so. Your ratios are one thing, but the actual figures are MUCH DIFFERENT.

Ok, ok, I’ll do it for you because you aren’t catching my drift. \$40,000 X 15% = \$6,000. You think the person making \$400,000 should pay first 47X that or \$282,000 (70% of their gross), and now 37X that, or \$220,000 (55% of their gross)??? Come on now. You’re going to punish the doctor who is saving lives in NYC, where the cost of living is at least 5X higher, 37-47X more than a family making \$40,000 in Des Moines? Please.

62. October 21st, 2009 at 08:32 | #62

@fredct Who are you to determine what constitues “disposable income”? Like FS says, the higher income earners are generally in higher expense areas. You can’t even buy a reasonable 2 bedroom condo in Manhattan for less than \$850,000.

Flat tax is a flat tax. There’s no way around it. You can’t slice it up to say this or that. It’s the easiest system to understand and implement, and it’s too bad you don’t feel that way, b/c you’d be saving more too.

63. October 21st, 2009 at 09:31 | #63

A flat tax actually isn’t easier to implement. It’s not a tax brackets that makes things complicated… it’s deductions & credits & exclusions, etc.

And if you literally mean a flat tax with from the first dollar (which is *NOT* what most flat tax proposals are, by the way – they all include at least a significant standard deduction) – one with no deductions & credits (not even home interest deductions or charitable deductions or college deductions, etc), then we may as well be discussing what type of pig would fly more efficiently. In other words, it’s a completely intellectual debate with no basis in reality.

Disposable income could be determined the same way that ‘cost of living’ is. To be truly fair, yes, it would have to vary per state or even metro area. It would depend on cost of food & shelter & energy & other core needs.

But the question wasn’t what’s easiest. The question was why isn’t it the most ‘fair’. And if you’re telling me it’s ‘more fair’ to tax away money that one person needs to eat, in order to tax less of someone else’s entirely disposable income, I think it’s not difficult to say why that doesn’t meet some people definition of ‘fair’.

64. October 21st, 2009 at 10:09 | #64

> Ok, ok, I’ll do it for you because you aren’t catching my drift. \$40,000 X 15% = \$6,000. …
> You think the person making \$400,000 should pay… 37X that, or \$220,000 (55% of their
> gross)

No, no, I’m not being clear.

Let’s say a flat tax percentage would need to be about 20% (I think most numbers are around that, usually a bit higher I think).

Let’s further stipulate that \$30K is the required income for a family of four. That would be the ‘standard deduction’ So the guy making \$40K would pay (\$40K-\$30K)*.2 = \$2000. And the guy making \$400K would pay (\$400K-30K)*.2 = \$74K, which is 37 times more. Not \$220K or \$280K.

Fredct – I’m fine with that proposal. \$2,000 is a 5% tax on \$40,000 gross income. \$74,000 is 18.5% of \$400,000 gross income.

Currently, someone making \$400,000 is paying an effective tax rate of 28% (federal only). Win win. Thnx for clarifying and sharing.

FS

65. October 21st, 2009 at 11:55 | #65

Actually, let’s take a real example. These numbers are not exact, but are done to get an order-of-magnitude estimate. Someone making \$400K for a family of 4, for starters, has 4 personal exemptions of \$3650, for a total of \$14,600. Taxable income is now down to ~\$385K

They’re likely also living in a house with a payment of around \$5000*12 = \$60,000 (that’s 15% of income, housing costs are typically up to 30%). Lets further say that % of that is deductible (i.e. not principal), so that’s \$45,000. Lets add back on at least \$10K of property taxes (it’s probably a lot more in many high-cost areas), so back to \$55,000. Taking that deduction, their taxable income is now ~\$330K.

Assuming their state tax is, oh, say, 3% (it’s probably higher), then they get another \$9K or so of state tax deductions. Now we’re down to \$321K of taxable income.

At that income level, they’re probably maxing out their 401K. Actually, they’re likely doing it for two jobs. Let’s say \$30K total. We’re now down to \$291K.

Finally, lets say they’re real cheap and only give \$1K to charity. That gives us \$290K of taxable income.

They are now in the 2009 33% *marginal* tax bracket. Their formula for that bracket is “\$41,754 plus 33% of the income between \$171,550 and \$372,950″.

So that’s 41,754 + 33%*(290K-171K) = \$81024, for an overall average tax rate of 81/400 = 20.25% . Turns out it’s not that far off afterall, is it??

Actually, we’re forgotten their \$1000/child tax credit, for a new tax total \$79,024!

I think most flat tax numbers I’ve heard tend to be 22 or 23%, which would be pretty darn close to the same, if not a little bit higher!

It’s actually remarkably similar to the numbers I had in my last post. Granted, it’s a heck of a lot more complicated way to get there, but that’s not an issue of the tax brackets. Tax brackets only came into play in one line. Rather, it’s an issue of all the deductions, credits, exclusions, etc. So while I would probably be on your side if you suggested eliminating a lot of those deductions & replacing them with a large standard deudction to simplify things… I can’t pretend I think it’d ever happen. Deductions for homeownership, charible giving, etc. are far far too popular.

66. October 21st, 2009 at 13:51 | #66

@fredct You mention that a flat tax is not easy to implement, yet it is so simple. Gross Income above a cerain poverty level X Flat Tax = tax!

Your 10 paragraph explanation, while appreciate, just goes to show what you are proposing is too complicated!!

67. October 21st, 2009 at 14:45 | #67

The Genius, but that’s only true if the *only* deduction you get is the standard deduction. If you still allow deductions for charitable giving and home costs and college costs and kids and retirement plans, etc, etc, etc… then it’s just as complicated.

And, by the way, you could do the same thing with a non-flat tax! Take the 6 or so brackets we have no, drop all the specialized deductions and replace them with a large standard deduction, and you have just as simple of a result!

It has *nothing* to do with how many brackets there are!

68. October 22nd, 2009 at 01:53 | #68

@Kevin,

Many good points regarding the flaws in the flat net-worth system, many of which I was not considering beforehand. That said, I think you’re going to have a hard time finding too many people who believe that absolutely everyone, from a minimum wage earning family of four to Bill Gates, should be paying taxes. All the plans we’ve been discussing, from the current income tax to a flat tax to the flat net worth tax, include some sort of exemption for low income earners. (Well, my ‘\$10,000 from everyone’ tax didn’t, but that was admittedly a straw man to attack the idea that making a tax fair is the best policy.)

The best you’re likely going to get is a welfare system that attempts to link benefits to work, at least for able-bodied, sound-minded adults. While it’s impractical to expect everyone to be able to pay into the system (at least, pay in more than they get out in the form of benefits), it is possible to at least nudge people toward being productive members of society.

@The Genius,

I think you’re confusing the simpleness of the flat tax plan itself (at least, one with no deductions) with difficulty in getting Congress to pass it. Yes, the plan itself could make it very easy to calculate your taxes (was it Forbes who quiped about doing it on the back of a post card?), but Congress is unlikely to go along with it. Besides the opposition most liberals would have to a flat tax in principle, there’s also the problem fredct brings up: you’d have to convince people to give up all the ‘loopholes’ in the tax code they currently enjoy. To give you an idea of just how many loopholes there are, go back and read fredct’s post #3 again; that’s not describing any proposal from him, that’s describing the current US tax code! Unless you get people to willingly give up ALL deductions in a flat tax plan, you’re going to run into the same problems of complexity all over again. And if you can get rid of all the deductions, why do you need to go to a flat tax, anyway?

@fredct

Good comments on disposable income and that. I was sort of hinting at that with my own comments about ‘utility’, but you helped to spell it out pretty succintly. Also, you mentioned my personal favorite idea for tax system simplification: cut out all the specialized deductions, leave a single large deduction (tied to say, how many people are in the household) and then use the resulting number to figure out the owed tax in a progressive tax table. I would just add cutting down the number of tax brackets for simplification and possibly adding a ‘cost of living’ adjustment to make things a bit fairer for those in expensive areas, and you’d have a perfect system.

69. October 22nd, 2009 at 06:53 | #69

@The Genius
If Stephanie has \$100k in loans, with no assets, she would have a negative networth and hence pay \$0 in taxes under a flat-networth tax.

@Kevin: As for calculating the business’s networth, you set the price you think it is worth — and if you set it too low, then the state should call you on it, and buy the business for the amount you state. How you like them apples?

Should work both ways, by the way. If the state appraises your property too high (in your mind), you should be able to force the state to purchase your property for that amount.

70. October 25th, 2009 at 15:54 | #70

I don’t know in what kind of world some people think they live but 50k a year is NOT a poor man’s income.

50k a year is at least middle class, a poor man’s income is \$10k-20k a year. This is what alot of people make who work at retailers, and they don’t make a penny more. P

Poor people are disadvantaged in many ways. Poor people who earn don’t have money for car repairs or car optimization or access to good transportation. A flat-tax doesn’t take in account that when you have more money, it’s much easier to cut back on your expenses. If you make \$10k a year you won’t even be able to afford a car and would need to spend 3 hours a day on the bus versus 1 hour in the car. This is another 2 hours lost in productivity for the poor, which a poor person could have used to make another \$15 a day.

Without a car, how big is the chance you can save money going to walmart or other discount retailers without wasting huge amount s of time walking or taking the bus? If a car was not a luxury, I would all be for a flat tax. In nowadays america is car is very much like a necesity, and the people on minimum wage can barely afford one.

71. October 26th, 2009 at 06:35 | #71

Here’s why I would argue against a flat tax.
Let’s say I earn 25,000 a year, and 15% is the rate of the flat tax.
That 25000 breaks down to 2083 dollars a month. Of this lets estimate a low 500 for housing, 200 for food, 350 for student loans, and 150 for auto insurance and gas. That leaves me with 833. 312 a month would go towards taxes. That leaves 521 dollars of not accounted for income. All other expenses would come out of that 521, including health expenses, electricity, water, and all kinds of fun. That’s also assuming I am making any contributions to a savings account or 401k.
Now assuming all other expenses stay the same, lets increase my income to 35,000. 2916 becomes my monthly income. Instead of 833 left over after my expenses, I have 1666. 437 would go towards taxes. This leaves me with 1229 left over for all other expenses.
My point is that a higher percentage of my monthly usable income would go toward taxes. The cost of living is a set amount (in my example), the only changing variable is the amount of income. Why should I have more than double the amount of spendable income if I am not doubling my income? What I am trying to show is that a flat tax has a larger impact on a lower income, as a higher percent of that income is already spent on necessities.

72. October 26th, 2009 at 15:40 | #72

I’ve never been much of a fan of the flat tax from a fairness standpoint. Clearly there’s more to “fair” than just mathematical equality.

Now, from an efficiency standpoint, a flat tax would beat the heck out of our current system (so long as it was kept simple–no deductions, exemptions, credits, etc).

As to the legality of discrimination, there are all sorts of legal discrimination that occur. Price discrimination, for example, is both legal and (generally) beneficial economically.

Hi Mike – Good to hear from you man, and thanks for your thoughts. Fairness is subjective, but once you use math, everything becomes objective. Again, I’m suggesting a flat tax for those above the poverty line.

Efficiency is better with a flat tax (how easy it is to just multiply by 15% and weed out all exclusions?).

I will fight discrimintion and perceived discrimation forever, whether I’m poor or rich. Nobody should be discriminated against in this day and age.

Best, FS

73. October 27th, 2009 at 05:19 | #73

Once you say that it only applies to those above the poverty line, what you have is now a progressive tax system. It’s no longer a truly flat tax. It seems to me that you only want a “less progressive” system, not a flat system.

Also, how would you define poverty line? Should it be adjusted by geographical location? (NYC obviously requires more income than rural Iowa.) What about by age? (Older taxpayers have higher health care costs.) Should it account for whether a person has kids?

In short, once you start accounting for these things, you have a progressive system. It’s just a disagreement on how progressive the system should be.

By putting in an exclusion for income below the poverty line, you’re discriminating. You’re discriminating on the basis of ability to pay (which, admittedly, I think is entirely fair…which is why I support a progressive tax system).

And as to fighting against all discrimination, would you say that price discrimination (generic brands, for example) is a bad thing?

Hi Mike – Thanks for bringing up some points.

First, a progressive tax by definition is higher tax on progressively higher amounts of income. This is what we have now in America as evidenced by the higher marginal tax brackets, so I’m not sure whether you used your argument properly when you write “Once you say that it only applies to those above the poverty line, what you have is now a progressive tax system.” We’re already here, and that’s the point of this post, to debate against the progressive tax. The poverty line definition is in the link to the post.

Second, thanks for bringing up geographical location, because this DEFINITELY should be included in the debate on top of the poverty line determination. It is punishment that a Manhattan residence has to pay the same amount of taxes as a Des Moines residence if they have the same income because Manhattan is so much more expensive. I think you are inadvertently fighting for a flat tax system, which punishes the Manhattan residence LESS. Higher incomes are usually more concentrated in more expensive cities (NYC, SF, LA etc), yet they people the same as the higher income person who lives in Austin. That is egregious and there needs to be a geographic adjustment.

Finally, I don’t understand your generic brands argument as a bad thing. We consumers have the ability to CHOOSE whether to buy generic or brand name goods. Whereas we tax payers DON’T have the ability to choose how much taxes to pay. If we did try and “choose” we’d go to jail eventually.

Things should never come to “HOW” progressive a system should be. We should fight for equality every single day of our lives.

Thanks for the debate. I really enjoy it!

Best, FS

74. October 27th, 2009 at 06:14 | #74

All I’m pointing out is that what you’re arguing for is in fact a progressive tax–albeit one that’s less progressive than the current system.

75. October 27th, 2009 at 06:19 | #75

What I’m trying to point out is that what you’re proposing is a progressive tax system–albeit one that’s less progressive than the current system.

Gotcha Mike. Yes, we’ll never have a perfect system, but I’m definitely a proponent of more equality/less progressive. :)

76. October 28th, 2009 at 00:07 | #76

Do what Hong Kong did for 99 years uder the British rule and is still doing under Chinese governance which allowed it to prosper – 15% flat tax above certain level (whatever the gov’t's annual determination of poverty level is), and no deductions. Somehow the system works.

Apprenticeoflife – It works well indeed, and HK has a nice balanced budget because they aren’t overspending. Good to see you back from your travels!

77. October 30th, 2009 at 02:38 | #77

@ApprenticeOfLife
The system works because the government earns much of its revenue on two “hidden taxes.” The HK Jockey Club is the only legal gambling in town and contributes a huge chunk of change to the HK budget (and charity funds too – about 1B HKD per year).

Meanwhile, the property cartel imposes its own unofficial tax by restricting available land and jacking up rents on shoebox apartments with net floor space routinely around 70% of stated area.

AoL – Hmmmm, very good to know! I had no idea the HK Jockey Club was that big of a contributor to the HK budget!! Don’t know if that’s good to encourage so much legal gambling on the ponies.

I hear you on the land. I wonder what is the year when all the developable runs out in HK. FS

78. October 30th, 2009 at 05:27 | #78

comparing USA to HK? HK doesn’t have a space program, or an army. Also, HK has compressed infrastructure, while USA has alot of roads to nowhere. There are alot of reasons why a 15% tax won’t be enough at all, to keep USA stay as a global superpower.

Jon – You’re right. And that’s one of the key, focusing on the OTHER side of the equation. The US gov’t has a spending problem!

79. November 3rd, 2009 at 21:39 | #79

very interesting argument, I’m in favor of a flat tax for all, zero deductions, so we’re all essentially paying the same – according to how much we make. 100% of Americans benefit from the services provided by government, so we should all pay in.

That said, the idea of a ‘flat’ tax for the more thick headed seems to assume that this is really a ‘head tax’. The British impose head taxes on items such as television ownership. Our federal government does the same on cell phone taxes, and the states do it with car tabs. These are not sliding scale taxes, based on annual income, but lump sum fees.

If nothing else, we need a ‘flatter’ tax, and eliminate most – if not all – of the line item deductions. Just pay and get on with your life as you see fit. Enough of the government social engineering trying to get you to donate to charity, buy a house, buy a car, etc. But most of the deductions are just pandering to voter groups.

Jana – Well said! Too much complication, too much pandering by politicians. Let’s just keep things simple, wipe away the deductions and have everybody pay their flat tax! Looking forward to hearing more from you in future posts! FS

80. November 10th, 2009 at 20:05 | #80

You’re right when you say that 100% of Americans benefit from the services provided by government,” however, it seems that you are saying they all benefit equally? Just asking, because that is definitely not the case.

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