Let’s all move to France! 35 hours a week, pensions, the good life.
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 39.6% tax bracket (~$400,000 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!
LET’S STOP DISCRIMINATING AGAINST PEOPLE
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. The first thing we’ll tell the president 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 the government 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.
Tax Progress For 2019
2019 Federal Income Tax Rates
I’m glad that that tax reform in 2018 and beyond has stopped severely penalizing couples who want to get married. In the past, it was 1 + 1 = 1.2. Finally, it’s 1 + 1 = 2 up to each partner making $300,000 a year if you check out the latest tax bracket above.
Despite the standard deduction going up to $12,000 for singles and $24,000 for married couples, the State And Local Tax (SALT) deduction cap of only $10,000 hurts individuals and couples who live in high cost of living areas around the country.
For example, the median home price in San Francisco is $1.5 million, resulting in a $18,000 a year property tax bill. This couple might also pay $30,000 in state income tax for a total of $48,000 a year. $38,000 of their $48,000 in taxes can no longer be deductible. Meaning they lose out on thousands of dollars in tax refund.
This penalty against coastal cities and other high cost of living areas is why everybody should consider investing in the heartland of America. Due to technology, the trend is away from HCOL areas. The best way I’ve found to invest in lower cost areas of the country with lower property valuations and higher net rental yields is through real estate crowdfunding.
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Update for 2019: After leaving Corporate America and making little money in 2012 and 2013 from a lot of money a decade before, and now back to making a decent chunk of change with my online media business and various consulting gigs, I’ve got to say that my feelings about a flat tax have not changed. A flat tax above a certain poverty level by individual and family count is absolutely the fair and simplest way to go to not only collect more tax revenue, but to also simplify the tax filing process.
Well if you want to go this route. Then lets be completly fair. Tax social security all the way to the top dont stop at some arbertrairly bullshit number like the first 137,000 dollars. Also stop this bullshit of making dividends lower they get taxed too. Plus fuck this bullshit of not taxing the firts 11 million of an estate start from the begining. The federal govt taxes about 25% a year in toltal gdp. so make it 25% across the board. Then allow states to take their share see if the rich wont perfer the progressive system. See if the bottom 50% dont rise up and literally eat the rich. Essentially why is a progressive system fair. Well because the rich tend to take more of the pie, so you must pay more than the rest. Plus its disingenous to post things like this considering a billionaire came out with only paying 750 dollars. The tax code is unfair not because its progressive but because the rich can take so many deductions.
I think most people would be OK with paying the Social Security tax on $400,000 of income if the Social Security benefits had no cap.
Let’s see if Donald Trump really did only pay $750 in taxes or not when his taxes are released and done with an audit. At least we know he paid tens of millions of dollars in payroll taxes.
Trump could release his taxes any time. There is no problem with releasing your returns when you are under audit, another red herring. Taking credit for payroll tax is that the new thing now why not take credit for all taxes employees pay? That Hero of the tax cut crowd, Reagan created the income tax on social security while cutting corporate rates. How is it that a family pays sales tax on their kid’s shoes while someone buying stock in the shoe company pays no sales tax. Banks borrow money from the feds at less than 1% and turn around and loan that out to the public at 6- 19%. Why is that? Why not start with all the unfairness the rich and corporations have and then we can a flat tax system later?
A flat tax is certainly simple but not fair. A childless couple with $500,000 annual income paying a 15% flat tax would barely notice the loss. A single mother of three with $30,000 income and 15% tax would wonder if all the electric bill will get paid this month or can she get her car fixed. This woman needs to be able to have some huge deductions before deciding the tax, if any, she owes.
So, your definition of “fair” is that everyone have enough money left over to get their car fixed and pay their electric bill, regardless of what past decisions they have made about
1. getting prepared for a high paying job
2. having a kid, and another, and another
3. not having a spouse
The judgmental assumptions about American families is just wild. Your implication is that this woman is 1: dumb or lazy, 2: has too many kids, and 3: Is a single parent by choice.
What if, instead, this woman:
1. Potentially being born into poverty. Potentially being born into a broken home.
2. Having children is perfectly normal. Baby Boomer families routinely had six children, even.
3. Maybe her spouse died? Maybe they were financially solvent until the breadwinner got sick, injured, or perished?
YES my definition of fair is families being able to survive on the income they have from working a fair day’s labor.
Poverty is not a choice. America does not provide equal opportunities to all of its citizens. Hard work does not always equate to success and riches. Statistics back this up.
24 countries and 8 US states have flat income tax.
Search “Flat_tax” at Wikipedia
I like knowing exactly what I contribute and what I retain.
Possible example
8% for Country
8% for State
8% for County
8% for Town/City
For those in unincorporated areas, the amount goes to the next level.
Don’t live in a town, that 8% goes to the County, which then receives 16%
No matter where one lives or what their income is, their total tax rate is 32%.
Zero write offs
Who cares if the doctor “deserves” better treatment because he had to study after high-school that shouldn’t factor into how much money you pay in income tax, that idea is ludicrous; I wake up at 4am everyday, can I have a tax break because of that? What about driving a red car? Can I pay less in taxes because of that? No? But why, I’m more likely to get pulled over so I assume more risk in getting to work. because none of that effects my ability to make more money. I don’t care what hardships you endure to get where you are today, you agreed to our tax system when you started working in the country, if you have a problem with an income tax that is proportional to income then you are an incredibly selfish person for thinking you shouldn’t be required to contribute your fair share like the rest of us and I question whether or not you really have a soul. People like that who are only interested in living off the rest of the countries taxes are the reason this country is, and will continue to fail in the future. Atleast until we become a part of China, but then we’ll probably find a way to drag China down too.
A flat tax can take two forms… a flat tax on consumption or a flat tax on income. If the flat tax is on consumption, it is regressive because poor people spend virtually their income on consumption, whereas wealthy people spend a substantial portion of their income on investments. So a consumption flat tax would result in the poor paying a higher tax then the rich.
A flat tax on income will almost always evolve into a regressive tax. The poor derive most of their income from wages. Wages are easy to see and easy to tax. The wealthy derive most of their income from non wages. These other income sources are difficult to identify and therefor tax. Simple example: the poor guy earns $15,000 a year… 10% flat tax = $1,500. The wealthy individual owns a stock portfolio of $50 million, real estate of $50 million and earns businesses which earn $5 million annually. He takes a salary of $1 million.
The portfolio appreciates $10 million (in the following year the market goes down $4 million). The real estate appreciates around 4 million a year, but like stocks the amount varies. The business has been re-investing its profits to grow and adds jobs along the way.
So how much is the income of this guy? Do we tax the appreciation? If not what if he never sells and simply borrows against those assets as they appreciate. Say he borrows $1 million a year against his real estate… but never sells it… Do we tax the borrowing as “income” or do we tax the appreciation? Or does he never pay tax even though he is enjoying the benefits of the appreciation through the loan.
I do support a national sales tax on consumption to replace payroll taxes, since I think it improves the competitiveness of our business by shifting some of the tax burden of entitlement programs on to goods manufactured overseas. The current payroll tax is already regressive… so replacing it with a “better” regressive tax makes sense.
But flat taxes sound good… but they do end up being regressive…
1. Raise the minimum wage to $15 an hour and then a 10% flat tax.
Or better yet, raise it to $100 dollars an hour. Think of it! The poor would make so much money, they would be upper middle class. And also our tax revenues would go up! But … maybe most of those minimum wage workers just are not worth $100 to the companies they work for, and maybe would get laid off (or just not hired in the first place by new businesses). Sounds like the formula for more unemployment.
What makes you so sure that $15 won’t produce the same effects, though on a lesser scale? In the aggregate, how do you know that it puts more dollars in the pockets of the poor (since it will reduce the employment of some)? And for those in industries with inelastic labor demand, won’t the costs be passed on to the consumer as higher prices, and who gets hit harder by higher prices?
You do realize that would only raise the price of everything, and the middle and upper classes would only get paid more. All you did was cause inflation. The reason there’s a minimum wage is because any idiot can flip a hamburger at McDonald’s, which is why it is mostly made up of people who didn’t finish their education or are in high school trying to make some quick cash.
I completely agree. That was actually the point of my last sentence.
Whether a higher minimum wage produces inflation or unemployment depends upon the industry. It certainly does shift the Phillips curve: the tradeoff between inflation and unemployment.
Hi Financial Samurai,
I read your article a few months ago and you raised some really good points. Ever since then, I have been giving it some serious consideration and quite frankly have been stumped on what I believe.
Today, I finally came across a brief article that I believe presents a really good argument for the problems with a flat tax:
Namely, I think the “diminishing utility of money” is what really convinced me. In summary, a salary increase from $50k to $100k has a huge impact on quality of life for a family. Whereas a salary increase from $100k to $200k only has a marginal improvement on quality of life.
Now say the flat tax was 50% (I know this is absurdly high). That would have a much bigger impact on quality of life for a family making $100k as opposed to a family making $200k.
Sometimes I find extreme examples are best to determine what you don’t want.
It’s harder for people to live in the lower brackets. Excluding deductions, you are always going take home more money than those in lower brackets. The incentive to make more money is still there. Government should be about the pursuit of happiness, and a flax tax would just shift more of the burden to the people who are already having the hardest time. That’s the basis of how I see it.
But those of us who don’t make much money are at fault because we are lazy. We don’t work hard like NBA players who make a big contributions. Those who pick fruits and vegetables are lazy and don’t contribute much to society and don’t make much money and it’s all their fault.
I enjoy your sarcasm but I feel like the majority of people on the internet are so far up their own asses with their own opinions that they’ll knowingly take your obvious sarcasm as you telling them in all seriousness that they were right, don’t give them the satisfaction to think that they aren’t selfish garbage for complaining about the rich being asked to pay more in taxes since they make more. In this country of America we tax your income proportionally, so if you have a problem with paying more when you make more in the first place, get out. This country has too many citizens who are all too happy to let someone else pull their share of the weight for them.
The other unfair thing that needs to be fixed are taxes that are not a percentage of your net profit, but rather a set fee, so that you can end up losing money AND still have to pay taxes on top of it.
I live in California and the business taxes here are insane. Things like sales tax, LLC tax and city taxes etc are often flat fees that don’t take into account if you’re profitable or not.
So if you’re starting a business and have to run into the negative for the first few years, you can still get hit with $10,000 of taxes while the big internationals get away with paying $0 by claiming they are based out of Ireland.
Just my $0.02
Hi,
I don’t see a ‘contact me’ section so I hope you get this. I need help. Ok here we go, I’m a loser, and make $15 an hour, oh yeah and I’m 49 yr old. Should I do Roths or Reg IRA’s. I have one of each now with about $10ishK in each.
Thank you,
Craig
I can agree with a flat tax if there is a standard deduction as well, a deduction that is high enough, that would take into account how lower income people need more of their money to pay for their living expenses. Something like a flat 50% tax on everybody with a standard deduction of $50,000 would be just about right.
If you tax net wealth % it would be great since it incentivizes wealth hoarders to spend all their income each year and never own anything. With our current economy being 75% consumption-based this would keep the bull market going forever!
Then just get rid of all other taxation except a national sales tax of 2% on everything you purchase (which will all be leased or rented anyway to avoid owning anything).
I still think Sam is correct in his original post…the real problem is the government spends more than it makes. Taxation without representation still exists and all citizens should be able to vote on their tax returns the top ten budget categories they want to apply their taxes towards.
flat tax sounds good only because you had it at 15% in the example. wouldn’t sound so good if everybody had to pay 30% or more. you should look at it the other way around. people who don’t make much money cannot afford to pay all the taxes they should pay (i.e. 30% or more) but wealthy people can, so they do. it’s not socialism, it’s just living in a society and equally distributing resources and wealth. if you are making a lot more money than others, it means you are also using a lot more resources from the country where you are living, so you should pay more taxes percentage-wise. it’s basically like saying you have a bigger overhead because you are a larger company.
@Max, I agree. People earning less that are just workers do not benefit as much from the tax funded government business supporting infrastructure. Business owners and wealthier individuals should pay more in this system because they can buy more political access and they benefit more from the infrastructure.
A flat tax seems fair to me and it would incentivize those at the bottom to work more and harder because no matter where you are in the wealth ladder, every $1 of income is taxed at the same rate. ALL people regardless of the character of the income (wage, cap gains, dividend, rents, etc) get to take home the same percentage of income earned (in the general sense not the tax accountant definition). The current tax system has too many distortions which incentivize and rewards certain lobby connected pockets of society and sometimes it does not take into account the income level of the individual receiving the income; see cap gain (carried interest) and divs rate for billionaire hedge fund managers vs. an upper middle class high earning W-2 accountant, attorney, or doctor (23.8% vs 33-37%). How is that equitable? It simply rigs the tax system in favor of the wealthy, politically connected capitalists. No payroll taxes or automatic income tax withholding (on divs or interest) for passive investment income…WOW, the house wins again!!!…how does this keep happening? Fair capitalism works better than tilted taxation systems. No wonder income inequality in the U.S. is broadening year after year.
Would you be incentivized to work a W-2 salary capped job if you knew that you would be receiving pennies on the dollars in the form of a bonus for hours worked over 40 in a given week? People in general are lazy, but the incentive structure drives the behavior.
The “power” of money increases exponentially, not linearly, as you become more wealthy, and therefore some kind of marginal tax system represents this power curve better. This makes a flat tax regressive, which is “unfair”. Gross oversimplification, but: the person who makes $10MM has more than 200x control of his or her surroundings, life, politics, etc. than someone making $50k.
Perhaps my views will change when my income significantly spikes in <1 year, but it didn’t change after I had a large spike 4 years ago. I’m not convinced by the “fairness” of a flat tax, although I am by its simplicity.
I definitely feel a strong affinity for the non-linear effect of disposable income. The explanation to me for the reason that a flat tax is net regressive is by considering that money is a medium of exchange (i.e. power).*
Under any tax system the government collects funds (dollars) and then spends those funds on particular goods and services (guns and/or butter). The balance sheet can be one of three scenarios: surplus, balance, deficit. Surplus governments are just flatly inefficient: the surplus chokes off production at best. The balanced budget is effectively impossible, and is growth neutral. Budget deficits are situations where government spending is putting more money into hands than they are demanding: the end result is that there will need to be someone paying for this in the long term. A flat tax assumes that the state will treat all contributors without discrimination…AND has always done so. Racism and bigotry are bad: They have negative economic consequences for the affected. A progressive taxation system SHOULD result in higher churn of high income earners–this has not happened. The reason is that spending does not benefit rich and poor alike.
Sam’s argument regarding the doctor and teacher ignores the structure of government spending and its resulting effect on compensation. Doctors receive more patients that are subsidized through the state at a deficit; the additional result of subsidized medicine is that medical costs are more expensive for those that are not subsidized through some government program/mandate. (ie HMOs) The three Ms industry–medicine, military, and manufacturing–are heavily propped up through: tariffs implicit and explicit, social safety net programs, wars, and systemic corporate welfare.
Taxation and expenditure will always create an aggregate class of those who benefit economically from government spending and those who are disadvantaged. Our system curbs the benefit to the advantaged–it does not eliminate it.
*Arguments can and have been made that if the tax system were truly flat that the government would be more efficient. Another plausible and well researched position by smarter people than me is that natural trends towards charitable giving would be more efficiently distributed to individuals in society at the more granular level through individual donation. (To douse that notion–consider the Carnegie Library in Atlanta, GA. A valuable public funded resource for learning to ALL MEN–therefore, no Negroes allowed.) None of this changes the fact that money is analogous to power: Taxation is elected representatives exerting power over citizens, government spending is giving power to citizens, and governments will never be able to allocate that power in an evenhanded way.
Treating people the same is no longer considered “fair”. It says a lot about the state of our society what people consider fair these days. Fair is judged by the outcome, and not by the action. It should be judged by the action, but it isn’t. Here is an illustration.
Suppose a poor village in the middle of nowhere receives word that their volcano will erupt and they have a couple of hours to get clear of the blast radius. It’s a foot race for survival, but many are ill equipped because they are old, young, and in poor health. Is it fair to ask the strongest to carry those who can’t save themselves even though it may cost them their own lives? Don’t try to change the facts either, everyone isn’t going to make it. I say it’s not fair to punish the strong for the sake of the weak. Those who can save themselves have every right to do so, and that right comes from nature or God or wherever you want it to come from. It’s what the founders of this Nation meant when they talked about liberty. Liberty is using your property as you see fit, not giving it all to a government that takes too much and redistributes it to others.
Christ, what an a-hole.
Your volcano analogy is actually a quite apt description of what a flat tax would do to society. To so easily come to the conclusion that the strong and healthy should abandon all children, infirm and elderly is an indictment on you and your morality, not an indication of how flawed a progressive tax system is.