Flat tax

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I started a thread dedicated to this topic in reponse to ican711nm from another thread to avoid getting off topic in the other thread.

ican711nm wrote:

This can be achieved with a flat income tax rate on all income (i.e., no deductions) not exempted from income tax. Consider the total net income of all those who are dependent on those filing a joint return (that includes the filers themselves). Supose the exemption is $5,000 per dependent person and the tax rate is 13%. Families of four earning $20,000 or less would pay zero income tax. Families of four earning $21,000 would pay $130. Families of four earning $1,020,000 would pay $130,000.

I never understood the logic behind higher tax brackets cutoffs for joint filers. Seems like its purpose is to simply promote marriage but it doesn't work. It would benefit those with children but a tax exemption like the example you gave would accomplish the same thing more efficiently and we already have child tax credits which work in a similiar way.
Your idea would work preciously because it is essentially progressive. But your idea does seem a lot simplier and God knows we need a simplification of the tax code.
The only problem I see with that would be that single persons below the poverty line still pay quite a bit in taxes! Depending on the size of the exemption you may need to have a family of 3 before it starts to be as progressive as it is today.
I thought maybe you can have a tax exemption up to say $10,000 for every filer and $5000 for each additional dependent but that would encourage everybody to file as independents to take advantage of the higher inital threshold for exemption.
Do you see any way around this?

ican711nm wrote:

I estimate 17% is that tax rate (i.e., the optimum tax rate) which will produce the greatest tax revenue about 2 years after adopted.

It's more complicated than it looks at first glance. You have to consider capital gains taxes too.

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Re: Flat tax

ye110man wrote:

I started a thread dedicated to this topic in reponse to ican711nm from another thread to avoid getting off topic in the other thread.

The concept of a single income exemption per dependent and a single tax rate for all the income of joint filers greater than their total exemption is motivated by my desire to obtain the same tax rules for everyone (i.e., everyone equal before the law). That in turn is motivated by my desire to minimize the ability of politicians to play one faction against another to enhance their own power at our expense (otherwise known as the politician's power to buy votes).

To be consistently even handed in this respect, the tax law should permit any group of people and their children, if any, who desire to file jointly to be joint filers. So whether married or unmarried, children or adults, related by blood or not related by blood, all folks would be free to file jointly and enjoy the exemption and tax rate applicable to married folks and their children. So in the examle I gave previously, whether the "family" of four is the classic family of four, or they are a family of four just because they claim so, they don't have to be married or otherwise related. One person who earns say $120,000 (or $20,000) filing jointly with three others who have zero income would pay a tax (at 13%) of $13,000 (or zero).

I would limit the income tax to personal income. Corporate income tax is after all an implicit sales tax charged by all unprofitable as well as profitable companies, but paid only by the profitable companies.

I would tax only those capital gains not reinvested.

I would not tax any inheritances. I would rather all inheritances be available for new investment or continued investment in the economy instead of being spent by government (e.g., on wealth-transfer-entitlements). More people will benefit more: children, employees, employers, and investors. I root for everyone to live long, healthy, honorably and prosper.

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Re: Flat tax

ican711nm wrote:

To be consistently even handed in this respect, the tax law should permit any group of people and their children, if any, who desire to file jointly to be joint filers. So whether married or unmarried, children or adults, related by blood or not related by blood, all folks would be free to file jointly and enjoy the exemption and tax rate applicable to married folks and their children. So in the examle I gave previously, whether the "family" of four is the classic family of four, or they are a family of four just because they claim so, they don't have to be married or otherwise related. One person who earns say $120,000 (or $20,000) filing jointly with three others who have zero income would pay a tax (at 13%) of $13,000 (or zero).

I don't wanna poke to big of a hole in your thoughts here but this would be a bad idea. I'm not opposed to "alternative families" but if I'm a single person making $100,000 a year the first thing I'd do under your plan is find a bunch of unemployed homeless people (or nursing home residents) and claim them all as my "family members". If I can come up with 19 people my tax liability becomes $0.

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Re: Flat tax

fishin' wrote:

I don't wanna poke to big of a hole in your thoughts here but this would be a bad idea. I'm not opposed to "alternative families" but if I'm a single person making $100,000 a year the first thing I'd do under your plan is find a bunch of unemployed homeless people (or nursing home residents) and claim them all as my "family members". If I can come up with 19 people my tax liability becomes $0.

You can easily remedy that by limiting "family members" as those living under your roof or children away at school.

ican711nm, it would still disadvantage poor single filers like recent graduates with mountains of debt.

I'm trying to think of a way to give single persons a larger exemption without encouraging everyone to file as single persons.

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Re: Flat tax

fishin' wrote:

I don't wanna poke to big of a hole in your thoughts here but this would be a bad idea. I'm not opposed to "alternative families" but if I'm a single person making $100,000 a year the first thing I'd do under your plan is find a bunch of unemployed homeless people (or nursing home residents) and claim them all as my "family members". If I can come up with 19 people my tax liability becomes $0.

Two easy solutions:
#1 Limit the number of dependents participating in any joint file to some arbitrary number (e.g., 12).
#2 Set no limit. As long as each person is a dependent in no more than one joint file, then let them form dependent families as large as they want.

There are approximately 300 million people in the US. If they all make one joint file. At $5,000 per exemption that would exempt 300 million x 5,000 = 1.5 trillion dollars tax free. But total income in the US exceeded, in the year 2000, 8 trillion (from Encyclopaedia Britannica, Book of the Year 2003, page 755, year 2000). So at 13% that would be 0.13 x (8 -1.5) trillion = 0.13 x 6.5 trillion = 0.845 trillion. But spending in the year 2000 was almost 1.9 trillion. To obtain that 1.9 trillion tax revenue from the income tax with the tax system I propose, the tax rate would have had to have been 100% x 1.9/6.5 = 29.23%.

There is a practical reason why large dependent, joint files will not be as attractive as one might first think. Folks with little or no income will probably charge the folks with larger incomes a fee for delivering their exemption to a joint file.

I prefer solution #2! :wink:

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Re: Flat tax

ye110man wrote:

ican711nm, it would still disadvantage poor single filers like recent graduates with mountains of debt.

I'm trying to think of a way to give single persons a larger exemption without encouraging everyone to file as single persons.

I want to ponder this some more. My immediate thought is that these folks are best helped by lower spending by government allowing a lower tax rate.

In the olden days, Smile

people like me who had to pay for college on their own, worked about 10 to 12 weeks a summer that produced enough revenue to pay all their college expenses except maybe date money, food and clothing. My folks and Saturday employment during the school year covered that. I was better off than many who none-the-less some how covered their costs.

Thanks to federal aid to education inflationary effect, my kids could earn no more than 50% of their total costs. I doubt that my grandchildren will be able to earn a quarter of those costs.

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Re: Flat tax

ye110man wrote:

You can easily remedy that by limiting "family members" as those living under your roof or children away at school.

What about my poor mother that's living in the nursing home? If I'm paying for her care why shouldn't I be able to claim her?

Any time someone tells you there is an "easy remedy" look again. There isn't. That's why our tax code is as complex as it is to begin with.

ican711nm wrote:

There is a practical reason why large dependent, joint files will not be as attractive as one might first think. Folks with little or no income will probably charge the folks with larger incomes a fee for delivering their exemption to a joint file.

Yup. Probably true. I'd give 'em $200 to let me claim them though. I'd still be getting back $500 for each of them.

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Re: Flat tax

fishin' wrote:

Any time someone tells you there is an "easy remedy" look again. There isn't. That's why our tax code is as complex as it is to begin with.

I think there is an easy remedy, if we steadfastly avoid all attempts to custom tailor the tax code to groups of people all of whom appear deserving to the members of those groups and to those seeking the votes of those groups.

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Make the exception 10,000 per dependent, so a family of four making $40,000 would pay nothing in taxes.

And increase the tax on the remaining to 35%.

Eliminate state tax, local tax, sales tax etc. The federal government would give money to states based on how many citizens they have.

Now, you have an idea I can get behind.

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Centroles wrote:

Make the exception 10,000 per dependent, so a family of four making $40,000 would pay nothing in taxes.

And increase the tax on the remaining to 35%.

Eliminate state tax, local tax, sales tax etc. The federal government would give money to states based on how many citizens they have.

Now, you have an idea I can get behind.

Now, you have an idea I can get behind.

That's two. Smile

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In your plan, you will give each person an exempt that can be used -alone or in combination with others- to pay less tax.

When you mean 'each person', i assume you exclude kids to a certain age. Children -by law- don't have the power to make own decisions. So your tax system would favour people with children because they can use their children's tax exempt without negotiation, where adults forming tax groups have to negotiate before they can use other people's tax exempt.

Also i am curious how you calculated the percentage of 17%? You are right that not all of the tax exempts will be used up, but what calculation did you use to go from 30% to 17%?

Third i think a 'tax exempt business' is not good for society. It could lead to unwanted actions such as violence/crime (i.e. people are forced to give up their exempt, etc, etc). Why not install a flat tax over all earnings? That would eliminate unwanted practices and reduce costs even more.

When i think about it, a tax exempt is not bad (maybe to the level of minium living standards), but the trading of those rights is not a good thing.

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TradingWise wrote:

In your plan, you will give each person an exempt that can be used -alone or in combination with others- to pay less tax.
When you mean 'each person', i assume you exclude kids to a certain age.

No, I meant all persons born.

TradingWise wrote:

Children -by law- don't have the power to make own decisions. So your tax system would favour people with children because they can use their children's tax exempt without negotiation, where adults forming tax groups have to negotiate before they can use other people's tax exempt.

True! But that at least is better than limiting tax exemptions to actual dependents.

TradingWise wrote:

Also i am curious how you calculated the percentage of 17%? You are right that not all of the tax exempts will be used up, but what calculation did you use to go from 30% to 17%?

Here's another sample calculation. There are approximately 300 million people in the US. Assume they all make one joint file. At $5,000 per exemption that would exempt 300 million x 5,000 = 1.5 trillion dollars tax free. But total income in the US exceeded, in the year 2000, 8 trillion (from Encyclopaedia Britannica, Book of the Year 2003, page 755, year 2000). So at 17% that would be 0.17 x (8 -1.5) trillion = 0.17 x 6.5 trillion = 1.105 trillion. But total federal spending in the year 2000 was almost 1.9 trillion. To obtain 100% of that 1.9 trillion tax revenue from the income tax with the tax system I propose, the tax rate would have had to have been 100% x 1.9/6.5 = 29.23%.

IF in 2005 total income in the US were to equal, say, 13 trillion, total federal spending were to equal, say, 3.1 trillion, total population were to equal, say, 350 million, and the exemption were to equal $5,000,

THEN again assuming they all make one joint file, the tax rate would be calculated as follows:

{3.1 trillion / [13 trillion - (350 million x 5,000)]} x 100% =
{3.1 trillion / [13 trillion - 1.75 trillion]} x 100% =
{3.1 trillion / 11.25 trillion} x 100% =
{0.2756} x 100% = 27.56%

TradingWise wrote:

Third i think a 'tax exempt business' is not good for society. It could lead to unwanted actions such as violence/crime (i.e. people are forced to give up their exempt, etc, etc). Why not install a flat tax over all earnings? That would eliminate unwanted practices and reduce costs even more.

I don't understand why unwanted practices would be the consequence of zero tax on businesses. Remember all business profits distributed to owners or share holders would be taxed. That which was not so distributed would be available to each business to invest in its own growth. Sensible investments wouild thereby increase a business's employment as well as its profits. More profits would produce more income that gets distributed to owners or shareholders. That in turn with the consequent increased total employee income, would lead to more taxable income. If expenditures did not increase as fast as such taxable income increased, then the required tax rate could be less.

TradingWise wrote:

When i think about it, a tax exempt is not bad (maybe to the level of minium living standards), but the trading of those rights is not a good thing.

I disagree! I think trading of tax exemptions would be a good thing because it reduces (but does not necessarily eliminate) what would otherwise be a significant tax bias against those who do not have children.

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woah this topic is still alive?
Anyway in search of the perfect tax plan, I've decided that we should scrap income tax altogether in favor of a federal sales tax. If we assume a federal sales tax of 20%, each household would get a monthly tax rebate equal to that paid up to the poverty line which depends on the number of dependencies. I don't like the idea of give every American (dependent or not) an equal tax rebate since that disadvantages those without children. A household shares the fix costs (rent, utilities...). They don't need a huge tax break.

No corporate income tax either. No dividend or capital gains tax. Dividends withdrawn or capital gains are going to be spent to buy things anyway. They'll be paying a sales tax at that point.

To add to my theoretical economic plan, we should scrap the minimum wage and instead peg welfare to 50% of the poverty level (which depends on the number of dependents). People who work but makes less than the poverty line, would receive at least some welfare.
So say that the poverty line is $10,000 for a person with no dependents. If he doesn't work at all, he'll receive $5000 per year. If we have a 20% sales tax, he'll also receive a $1000 rebate for a total of $6000 per year.
Say that he gets a job that pays $5000 per year. He would also receive 50% of that portion by which he falls short of the poverty line. So he would receive $2500 in welfare. His total income is $7500 and would receive a $1500 tax rebate for a total of $9000. If he gets a job making $10,000/year he would receive no welfare checks and would receive a $2000 tax rebate. For him to get off welfare completely he would need to get a job paying about $5/hour. The great thing about this, IMO, is that it's dependent on the number of dependencies. A single mother with 1 child would receive more welfare and would need to make $6/hour to get off completely. Works better than a minimum wage which isn't sufficient for those with dependents. This would work well with a flat income tax as well. In fact it would work better with a flat income tax as opposed to a sales tax. One of the benefits of a sales tax is that you don't even have to report your income, my welfare plan would require you to.

We should also scrap social security as we know it. Instead require that everyone contribute to an individual retirement plan administered by private investment companies. Say a required contribution of at least 5% of income or $500/year whichever is less.

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ye110man wrote:

So say that the poverty line is $10,000 for a person with no dependents. If he doesn't work at all, he'll receive $5000 per year. If we have a 20% sales tax, he'll also receive a $1000 rebate for a total of $6000 per year.
Say that he gets a job that pays $5000 per year. He would also receive 50% of that portion by which he falls short of the poverty line. So he would receive $2500 in welfare. His total income is $7500 and would receive a $1500 tax rebate for a total of $9000. If he gets a job making $10,000/year he would receive no welfare checks and would receive a $2000 tax rebate.

I think the math needs work here again. Counting a rebate on taxes you paid as income is double counting of the income. If you make $5,000 and pay $1,000 in taxes and get that same $1,000 back have you really made $6,000?

If I make $20,000 in a year and put it all into a bank account and then take it out a month later have I made $40,000 that year? If so I'd like to know where that other $20,000 comes from because I have some bills to pay! Very Happy

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Without reading the above, I will just say, every flat tax scheme I have examined in the past raised taxes for persons in my economic niche. Natuarally I am against it.

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fishin' wrote:

I think the math needs work here again. Counting a rebate on taxes you paid as income is double counting of the income. If you make $5,000 and pay $1,000 in taxes and get that same $1,000 back have you really made $6,000?

If I make $20,000 in a year and put it all into a bank account and then take it out a month later have I made $40,000 that year? If so I'd like to know where that other $20,000 comes from because I have some bills to pay!

I counted the rebate because everyone gets it no matter what. It doesn't matter how much you paid in taxes, you get the same amount. But you're right. It approximates a full refund at or below the poverty line and is not usually additional income.

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edgarblythe wrote:

Without reading the above, I will just say, every flat tax scheme I have examined in the past raised taxes for persons in my economic niche. Natuarally I am against it.

Well, that depends on your actual gross income for a flat income tax, or total purchases for a flat sales tax.

I prefer the flat income tax to a flat sales tax because the flat sales tax will generally cause the less wealthy to actually pay to the feds a greater percentage of their income than will a flat income tax.

By the way Edgar, a greater marginal income tax on the more wealthy costs the less wealthy more than you think. Instead of that extra tax going to the feds to be wasted on give-a-ways that do little for employment levels and incomes, a flat tax would permit greater private investments that are more likely do more for employment levels and incomes. Allowing and even encouraging politicians to buy votes by placating the envious costs us all.

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ican711nm wrote:

I prefer the flat income tax to a flat sales tax because the flat sales tax will generally cause the less wealthy to actually pay to the feds a greater percentage of their income than will a flat income tax.

With a tax rebate, a flat sales tax becomes almost as progressive over a person's lifetime as our current income tax.
I just think that a consumption tax is much fairer and efficient than an income tax. Most economists today seem to favor it.
The biggest drawback that I see is the huge price differential that would exist between domestic and foreign goods. It would hurt the tourism industry and people close to the Mexican or Canadian borders may cross the border just to go shopping.

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ye110man wrote:

I just think that a consumption tax is much fairer and efficient than an income tax.

I don't like the uniform tax rebate idea because I think that's too easy to defraud. To receive that rebate a person must enroll himself as a tax rebatee. I bet it would be easy to enroll oneself under multiple aliases. Policing this would be a costly Fed operation, but certainly less than the Fed cost of policing the current system.

Furthermore, the collection of the consumption tax would require businesses to correctly report their sales to the Feds as well as make timely payments of owed consumption taxes. Policing that would be expensive too, but not as expensive as the current system.

A uniform income tax rate for all persons and a uniform income exemption for all persons filing an income tax form (joint or individual) would be far easier to police. Zero taxes on corporations and other businesses, zero taxes on estates, and zero taxes on reinvested capital gains seems to me to require relatively little policing.

I think privatizing federal retirement, education and health programs is also a necessary step to cut federal entitlement expenditures down from what amount now to 60% of current federal expenditures. Besides, current entitlement programs generally cause rising prices, and/or declining quality, and/or a scarcity of services.

Back in the early 50s when I went to college 50% of my fellow students including me earned 100% of the cost of our tuition, books, supplies, room and board during our summer vacations. My children working harder and longer than I did during summers earned hardly 50% of these costs. I expect that my grandchildren will earn less than 20% during their summers.

My health insurance in the late 50s cost me less than $60 per year. Now it costs 100 times that. A private retirement insurance program, paid into it the same amount as I paid into Social Security over the years, would have provided me a greater retirement income.

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