The Flat Tax thread

[All-American]

In which arguments will be made to support, rebut, or qualify the presumption that the superior form of national taxation would be a flat tax on consumption, supplemented with special-purpose taxes (e.g., tariffs, gasoline tax, etc.).

I've been thinking about this ever since I read an article on CNN a few days ago in which it was suggested that the current tax system imposes a 120% tax rate on some individuals. Not knowing exactly how that would even be possible, I read on. The article clarified that at a certain point in the lower end of the income scale, earning more money would not only bump them into a higher bracket, but would also disqualify the earner from receiving government benefits, such that earning more money would result in less take-home pay, and thus, a tax rate above 100%. A stretch of an argument, but the basic point was worth noting: there are points on the income scale in which our current tax system disincentivizes earning more money. There are others which make marriage between two individuals who each earn a fair to substantial amount of money a very expensive proposition. Perverse effects abound.

Throughout the election, I heard complaints about the tax code not being fair, with the wealthy paying less than their "fair share".

So why not a flat tax on consumption?

[il Padrino Ute]

I like the idea of replacing the income tax with a consumption tax on goods and services because it would be the most fair to all Americans. I would suggest an exemption on necessities such as food and housing, but would limit it to just one home. This consumption tax would also encourage more folks to save rather than to waste disposable income.

The difficult thing would be to determine what that tax would be. My suggestion would be something close to the mean of the various marginal rates and implement that as the rate to tax goods and services. For simplicity, that would be 25%.

[I.J. Reilly]

iirc, there is a decent thread somewhere on this site about a flat tax, particularly a consumption-oriented flat tax. DnF is a flat tax proponent, I think.

Anyways, b/c I'm too lazy to look it up and link to it, plus I don't think I really contributed to that thread, so I'll throw in my two cents.

I don't really like a basic flat tax, especially a consumption tax b/c of the regressive nature. There are ways around this, but in its most basic form I am opposed to a flat tax for the regressive effects.

Specific to the consumption tax, it would have the effect of depressing spending and increasing savings. Which sounds like a good idea - I mean, we could all stand to save a little more, right? - but on a national scale in an abrupt manner it would be difficult. We have seen some of what would happen recently when following the recent financial crisis families retrenched on a broad scale and switched to paying off debts and building up depleted savings. It's painful and would be worse if incentivized abruptly and broadly. Also, consumer spending makes up something like 70% of our economy. A consumption tax would have a devastating effect on this obviously important part of the economy, and would ripple outward from there.

Finally, a flat tax would further paralyze Washington. The tax code has long been a place where politicians have incentivized or discouraged behavior deemed to be socially beneficial or harmful. It has been the easiest place to do that, since talking tax to the general public generally makes eyes glaze over. As long as a broad base of your constituents aren't experiencing a heavier tax burden, politicians can tweak where necessary. Of course, there's obvious good and bad with that, but without the tax code as a tool, this do-nothing Congress would reach even lower lows.

[Donuthole]

The Flat Tax thread

iirc, there is a decent thread somewhere on this site about a flat tax, particularly a consumption-oriented flat tax. DnF is a flat tax proponent, I think.

Anyways, b/c I'm too lazy to look it up and link to it, plus I don't think I really contributed to that thread, so I'll throw in my two cents.

I don't really like a basic flat tax, especially a consumption tax b/c of the regressive nature. There are ways around this, but in its most basic form I am opposed to a flat tax for the regressive effects.

Specific to the consumption tax, it would have the effect of depressing spending and increasing savings. Which sounds like a good idea - I mean, we could all stand to save a little more, right? - but on a national scale in an abrupt manner it would be difficult. We have seen some of what would happen recently when following the recent financial crisis families retrenched on a broad scale and switched to paying off debts and building up depleted savings. It's painful and would be worse if incentivized abruptly and broadly. Also, consumer spending makes up something like 70% of our economy. A consumption tax would have a devastating effect on this obviously important part of the economy, and would ripple outward from there.

Finally, a flat tax would further paralyze Washington. The tax code has long been a place where politicians have incentivized or discouraged behavior deemed to be socially beneficial or harmful. It has been the easiest place to do that, since talking tax to the general public generally makes eyes glaze over. As long as a broad base of your constituents aren't experiencing a heavier tax burden, politicians can tweak where necessary. Of course, there's obvious good and bad with that, but without the tax code as a tool, this do-nothing Congress would reach even lower lows.

[All-American]

iirc, there is a decent thread somewhere on this site about a flat tax, particularly a consumption-oriented flat tax. DnF is a flat tax proponent, I think.

Anyways, b/c I'm too lazy to look it up and link to it, plus I don't think I really contributed to that thread, so I'll throw in my two cents.

I don't really like a basic flat tax, especially a consumption tax b/c of the regressive nature. There are ways around this, but in its most basic form I am opposed to a flat tax for the regressive effects.

Specific to the consumption tax, it would have the effect of depressing spending and increasing savings. Which sounds like a good idea - I mean, we could all stand to save a little more, right? - but on a national scale in an abrupt manner it would be difficult. We have seen some of what would happen recently when following the recent financial crisis families retrenched on a broad scale and switched to paying off debts and building up depleted savings. It's painful and would be worse if incentivized abruptly and broadly. Also, consumer spending makes up something like 70% of our economy. A consumption tax would have a devastating effect on this obviously important part of the economy, and would ripple outward from there.

Finally, a flat tax would further paralyze Washington. The tax code has long been a place where politicians have incentivized or discouraged behavior deemed to be socially beneficial or harmful. It has been the easiest place to do that, since talking tax to the general public generally makes eyes glaze over. As long as a broad base of your constituents aren't experiencing a heavier tax burden, politicians can tweak where necessary. Of course, there's obvious good and bad with that, but without the tax code as a tool, this do-nothing Congress would reach even lower lows.

Well, with all due respect to Wuap, I don't believe in thread bumping, so there's that.

I see three responsive points: 1. a flat tax is actually regressive; 2. the cost of transition from the current system to a flat tax on consumption would exceed the benefits; and 3. a flat tax would take away one of Washington's favorite regulatory tools.

Regarding the first point, I am open to an explanation of how that is in fact the case. I've seen the point made before, but I still don't understand it. What's regressive about a flat tax? Isn't that the point-- that the tax is neither progressive nor regressive? What makes a de iure flat tax a de facto regressive tax, and can those defects be cured?

On point number two, I concede that transition would impose a non-negligible cost. I'll reserve discussion on how best to move from state a to state b after we're done talking about whether we would want to move to state b in the first place.

As for the third point, I admit that I'm not as worried about Washington not being able to do as much as others are, but assuming, arguendo, that we want Washington to be able to do everything with its taxing power that it currently does, what manner of behavior will be left out of the reach of a consumption tax regime which the current system does reach? Any behavior involving a commercial transaction can either be encouraged by a reduced rate or discouraged by an increased rate. Discouraging negative conduct may be easier through an income tax penalty (a la Obamacare), but who's to say that such penalties are superior methods anyway? (Rommney's original vision of Romneycare, after all, was to encourage lower-income individuals to purchase through subsidies, which aren't off the table just because you switched to a consumption tax.) Where much of the regulatory work the current tax code does is just the product of ingenuity operating within the then-existinig framework, who's to say that there such ingenuity wouldn't have just as welcome a home in the consumption tax regime?

[All-American]

(And yeah, welcome back. Good to see you around.)

[ERCougar]

IJR, would you like a flat consumption tax that exempted food/grocery items?

I certainly see the argument about the anti-stimulative effect, but economically, it makes the most sense. If there's an externality to be compensated, it would be the consumption of limited resources, i.e. consumption tax/VAT/whatever. IIRC, doesn't Denmark raise most of its revenue this way? Income taxes make no sense to me, from an economic standpoint, other than maybe working people derive a benefit from having an intact economic system with laws governing property rights and the like?

[Uncle Ted]

In this interesting speech Dr. Benjamin Carson proposes a flat (income) tax with Obama present along with some other good ideas...

[YOUTUBE]PFb6NU1giRA[/YOUTUBE]

Of course, I have zero faith that a flat tax will happen given washington law makers like try influence tax payers decisions with their pet tax deductions and tax credits. For example, thanks to an energy tax credit I got a nice tankless water heater when my old water heater went out for about the same cost as a tank water heater. It didn't seem to save much in the way of our natural gas use given it seemed that my family took longer showers given the unlimited hot water.

[old_gregg]

Regarding the first point, I am open to an explanation of how that is in fact the case. I've seen the point made before, but I still don't understand it. What's regressive about a flat tax? Isn't that the point-- that the tax is neither progressive nor regressive? What makes a de iure flat tax a de facto regressive tax, and can those defects be cured?

i think the argument goes that because those with lower income require a greater proportion of their budget be allocated to items of consumption that would presumably be taxed by a flat rate, they will be taxed at a higher effective rate. as er stated, an exemption for grocery/food items might mitigate this issue.

[MarkGrace]

Regarding the first point, I am open to an explanation of how that is in fact the case. I've seen the point made before, but I still don't understand it. What's regressive about a flat tax? Isn't that the point-- that the tax is neither progressive nor regressive? What makes a de iure flat tax a de facto regressive tax, and can those defects be cured?

It's the idea that the more you make, the less a tax on consumption means to you in terms of a burden. If we both make a $10 purchase, and get taxed $1 each on that purchase, if you make 100k and I make 50k, that $1 is a bigger burden on me than you. For a person making the same purchase and 25k, an even bigger burden. 10k, yet even bigger. And so on and so on.

Washington state was recently declared the most regressive tax regime in the country. But states with a tax base built on consumption and no progressive personal income tax to offset that regression ultimately end up here (FL and NV are also among the most regressive in the country; Oregon the exact opposite, with no sales tax and only a progressive income tax structure). The biggest portion of our state tax base is on consumption (sales tax), and so the less you make in Washington the higher the burden becomes. An awesomely paradoxical result for this state, to be sure.

I'm not sure how much there is to debate about a flax tax. Conservatives see it as "fair," libs see it as the opposite of fair. Economically countries that have released themselves from the complexities of a progressive tax structure have typically seen a big boost. The cost of compliance is much lower, much more revenue is raised (less chance to escape through deductions, exemptions, etc.), and the constraints on economic growth are lessened. But ultimately if you want a flat tax system, you have to accept the fact that you're implementing a regressive structure, and I just can't ever seen this country doing that.

EDIT: Here's how it plays out in Washington

People earning less than $20,000 annually pay 17.3 percent of family income toward sales and excise taxes and property taxes, the report said. People making between $99,000 and $198,000 each year pay 7.6 percent toward their tax bill. Meanwhill, people in the top 1 percent of earners – those making more than $537,000 a year – pay just 2.9 percent, the report said.

http://blog.seattlepi.com/seattlepol...ressive-taxes/

[All-American]

It's the idea that the more you make, the less a tax on consumption means to you in terms of a burden. If we both make a $10 purchase, and get taxed $1 each on that purchase, if you make 100k and I make 50k, that $1 is a bigger burden on me than you. For a person making the same purchase and 25k, an even bigger burden. 10k, yet even bigger. And so on and so on.

But if I make 100k and you make 50k, I am going to make more purchases, am I not? If each of those purchases are also taxed at $1 each, then there's no reason apparent to me why the tax should be regressive, unless (a) money earned by the wealthy is not being spent, or (b) purchases made by the wealthy are not being taxed. Are one or both of those two conditions true of consumption taxes?

[il Padrino Ute]

But if I make 100k and you make 50k, I am going to make more purchases, am I not? If each of those purchases are also taxed at $1 each, then there's no reason apparent to me why the tax should be regressive, unless (a) money earned by the wealthy is not being spent, or (b) purchases made by the wealthy are not being taxed. Are one or both of those two conditions true of consumption taxes?

(c) the person making 50K is not living within his means. In this case, it's his own fault.

[Moliere]

A consumption tax (not a flat consumption tax) is the best way to go, IMO. It's easy to determine exactly how much tax you are paying. It can be modified to make it progressive by not taxing essential items like unprepared foods and clothing. It can be used by Congress to try and incentivize certain spending/habits (this isn't always a bad thing) and it releases masses from the tax calculation burden and places it on companies, most of which are already capable of handling sales tax transactions.

Flat income tax proponents crack me up. A flat income tax, given a decade of time, would start to again morph into what we already have in the tax code.

The biggest problems we have with income taxes is that most people have no idea how much they actually pay (instead they are happy to get a refund), the tax calculation is convoluted and prone to errors (even for trained professionals), and taxing income disincentivizes people from earning more income once they reach a certain tax bracket. A consumption tax alleviates a lot of these problems.

[Moliere]

But if I make 100k and you make 50k, I am going to make more purchases, am I not? If each of those purchases are also taxed at $1 each, then there's no reason apparent to me why the tax should be regressive, unless (a) money earned by the wealthy is not being spent, or (b) purchases made by the wealthy are not being taxed. Are one or both of those two conditions true of consumption taxes?

I'm inclined to think this is false. The person making 100k is inclined to save more, but both groups have to purchase certain necessities to live. One way to fix this with a consumption tax is to place a higher tax rate on luxury goods. So the 50k guy purchases a Hyundai and pays 10% tax and the 100k guy buys a Mercedes and pays 15% tax.

[beefytee]

Introducing a consumer facing consumption tax is a great way to destroy political parties.

http://en.wikipedia.org/wiki/Goods_a...es_Tax_(Canada)

In 1989, the Progressive Conservative government of Prime Minister Brian Mulroney proposed the creation of a national sales tax of 9%. At this time, every province in Canada except Alberta already had its own provincial sales tax imposed at the retail level.

The purpose of the national sales tax was to replace the 13.5% Manufacturers' Sales Tax (MST) that the federal government imposed at the wholesale level on manufactured goods. Manufacturers were concerned that the tax hurt their international competitiveness. The GST also replaced the Federal Telecommunications Tax of 11%.

Although the GST was promoted as revenue-neutral in relation to the MST, a large proportion of the Canadian population disapproved of the tax.
....
Despite the tax being lowered to 7% by the time it became enacted, it remained controversial.
...
Despite the opposition, the tax came into force on January 1, 1991.
...
A strong Liberal Party majority was elected under the leadership of Jean Chrétien in the 1993 election. The Progressive Conservative Party fared very poorly in that election, winning only two seats. Although the party recovered somewhat in subsequent elections, it remained the smallest party in the House of Commons until it disbanded itself permanently in 2004, and merged with the Canadian Alliance to form the Conservative Party of Canada.