The Flat Tax thread

[PaloAltoCougar]

This thread has not specifically focused on the "fair" tax. There has been discussion of a nationalised sales tax, which would likely be similar to the sort of vat we see in Europe. It's a bloody disaster and you yanks have little idea of the devil you've chosen to take to the dance.

You're up late, but I can see how a discussion of sales tax would be enough to arouse the faculties, making sleep impossible.

[All-American]

But then of course you get to the argument that an ability to defer still makes it regressive. You know, the old saying "a tax delayed is a tax not paid" and such. Being able to delay a tax is the second best scenario to outright not having to pay, and high income earners would still be a in a better position to do that. Ultimately, it's easy to view this scenario as still being a regressive burden.

So is that really the entire problem? A flat consumption tax would be regressive because the taxes get paid later, when the money is eventually spent, rather than the very same year that it is earned?

I'm not sure there isn't more to it than that. The only thing money is good for is to spend it, whether now or later. When the price for delaying the tax is that you don't get to spend any of your money, there doesn't seem to be much incentive to avoid paying.

[LeedsCougar]

You're up late, but I can see how a discussion of sales tax would be enough to arouse the faculties, making sleep impossible.

I'm in Utah right now. I travel quite frequently.

[Joe Public]

So is that really the entire problem? A flat consumption tax would be regressive because the taxes get paid later, when the money is eventually spent, rather than the very same year that it is earned?

Do you find the GSTT unnecessary?

[All-American]

Do you find the GSTT unnecessary?

Under a consumption tax regime, absolutely. Even in an income tax regime, I don't like it that much.

[I.J. Reilly]

The Fair tax is not a vat tax.

Sent from my SGH-T999 using Tapatalk 2

When I said earlier that I thought DnF was interested in the flat tax, I really meant MRD. Apologies if they are necessary. I knew it was one of those Utes whom we no longer officially acknowledge around these parts. Also, I should have specifically mentioned the fair tax and not a straight flat tax. Not that it matters to anyone.

Anyways, regardless of time horizon, a pure flat tax is regressive. 25% of my income means more to me if I make $40,000/year than if I make $400,000/year. There is a baseline of necessities that between the two earners has a constant cost. It requires much more of the labor of the person making $40,000/year than it does of the other. The burden of providing those necessities falls unequally on the person who can least afford it.

Re: deferring the taxes, the longer you can hold onto money untaxed, the more money you can generate from it, and the less and less the flat tax affects you. A buildup of wealth is worth more than just the sum of what it can buy. There are greater opportunities and power for those with a large pool of cash lying around that reach beyond the tvs and iphones they can buy at retail prices.

One of the things you have to think about if you were to flip the system and incentivize savings over spending is where all of those savings would go. The very first thing I would do if we went to a consumption tax is throw as much money as I could into the stock market, and probably a disproportionate amount of that money into banks and other entities that deal in financial products and transactions. Not b/c the stocks would be suddenly worth more, in fact, stocks like Apple and GE might be worth less based upon "fundamentals" than they are now b/c of depressed consumer demand, but b/c all of those savings that you are incentivizing have to go somewhere. The stock market would explode like a 2 liter of Diet Coke with some Mentos dropped in it. Savers have to put their money somewhere and they aren't likely to leave it under the mattress. This would, of course, drive another nightmare of financialization like we have most recently been through, only worse. Now, in the long-term, an investment-driven economy v. a consumption-driven economy isn't necessarily a bad thing, but is is worth considering what to do to avoid creating asset bubbles.

All that being said, personally I could get on board with something akin to the fair tax with at least a couple of caveats: (1) there would still have to be progressive elements to it. Some of those possibilities have been discussed here. I would add in that regard that I don't think that once-yearly "prebates" are that great of a solution to this, namely b/c the irrational actor in all of us is more likely to irresponsibly spend the one-time lump sum payment, rather than responsibly apportion it out over the year. Any sort of low income discount would have to be given at the register, or at the very least in monthly installments to be best effective, imo.

(2) Estate taxes need to be greater and there needs to be less loopholes to avoiding such taxes. One idea for this that I've kicked around a bit but haven't rigorously tested is what I like to call the "2nd generation 100% tax." The idea is this: say you have Person A who begins life with nothing to her name. At the end of Person A's life she has accumulated a net worth of $200 million. Upon Person A's death, she can apportion that $200 million out to any person in any manner she sees fit, tax free. In this scenario, Person A decides to give $100 million to The Charity and $100 million to Person B. The Charity, being a properly registered 501(c)(whatever) corp, does not now, nor ever will owe taxes on that amount. Charities get free rides. Person B, having been given $100 million now has a $100 million tax bill hanging over his head upon his death. During Person B's life he can do whatever he wants with the money; he may waste it and die with nothing, he may choose to invest it in a conservative manner and die with $105 million or maybe he invest aggressively and it pays off big and he dies with $200 million. Whatever the case may be, upon his death, he owes the government $100 million. If he has less than that, he owes whatever he may have, above a certain baseline of say $5 million that he may transfer in any manner that he pleases. If he has more than that, he gets to, tax free, pass on anything above the $100 million that he owes the government. And the cycle repeats itself.

Anyways, the estate tax thing is just an idea I've had, but I think that estate taxes play an important role in our tax system and our democratic ideals. Sorry for the long-winded response. Feel free to poke holes where found.

[MarkGrace]

So is that really the entire problem? A flat consumption tax would be regressive because the taxes get paid later, when the money is eventually spent, rather than the very same year that it is earned?

I'm not sure there isn't more to it than that. The only thing money is good for is to spend it, whether now or later. When the price for delaying the tax is that you don't get to spend any of your money, there doesn't seem to be much incentive to avoid paying.

I don't recall saying it was a problem. The only thing I've said it that any way you slice it, it's regressive to one degree or another. Ultimately no matter what you do, it could be viewed as placing a greater burden on lower income. My only real point is that if you're pushing a flat tax, you just have to accept the fact that it is regressive and hope people accept it on its other merits. And I think that's no small task.

[Joe Public]

Under a consumption tax regime, absolutely. Even in an income tax regime, I don't like it that much.

I'm not sure what you mean by that, but I take it you don't think deferral and the related considerations of the time value of money weigh much in considering whether a tax is de facto regressive?

[All-American]

When I said earlier that I thought DnF was interested in the flat tax, I really meant MRD. Apologies if they are necessary. I knew it was one of those Utes whom we no longer officially acknowledge around these parts. Also, I should have specifically mentioned the fair tax and not a straight flat tax. Not that it matters to anyone.

Anyways, regardless of time horizon, a pure flat tax is regressive. 25% of my income means more to me if I make $40,000/year than if I make $400,000/year. There is a baseline of necessities that between the two earners has a constant cost. It requires much more of the labor of the person making $40,000/year than it does of the other. The burden of providing those necessities falls unequally on the person who can least afford it.

Re: deferring the taxes, the longer you can hold onto money untaxed, the more money you can generate from it, and the less and less the flat tax affects you. A buildup of wealth is worth more than just the sum of what it can buy. There are greater opportunities and power for those with a large pool of cash lying around that reach beyond the tvs and iphones they can buy at retail prices.

One of the things you have to think about if you were to flip the system and incentivize savings over spending is where all of those savings would go. The very first thing I would do if we went to a consumption tax is throw as much money as I could into the stock market, and probably a disproportionate amount of that money into banks and other entities that deal in financial products and transactions. Not b/c the stocks would be suddenly worth more, in fact, stocks like Apple and GE might be worth less based upon "fundamentals" than they are now b/c of depressed consumer demand, but b/c all of those savings that you are incentivizing have to go somewhere. The stock market would explode like a 2 liter of Diet Coke with some Mentos dropped in it. Savers have to put their money somewhere and they aren't likely to leave it under the mattress. This would, of course, drive another nightmare of financialization like we have most recently been through, only worse. Now, in the long-term, an investment-driven economy v. a consumption-driven economy isn't necessarily a bad thing, but is is worth considering what to do to avoid creating asset bubbles.

All that being said, personally I could get on board with something akin to the fair tax with at least a couple of caveats: (1) there would still have to be progressive elements to it. Some of those possibilities have been discussed here. I would add in that regard that I don't think that once-yearly "prebates" are that great of a solution to this, namely b/c the irrational actor in all of us is more likely to irresponsibly spend the one-time lump sum payment, rather than responsibly apportion it out over the year. Any sort of low income discount would have to be given at the register, or at the very least in monthly installments to be best effective, imo.

(2) Estate taxes need to be greater and there needs to be less loopholes to avoiding such taxes. One idea for this that I've kicked around a bit but haven't rigorously tested is what I like to call the "2nd generation 100% tax." The idea is this: say you have Person A who begins life with nothing to her name. At the end of Person A's life she has accumulated a net worth of $200 million. Upon Person A's death, she can apportion that $200 million out to any person in any manner she sees fit, tax free. In this scenario, Person A decides to give $100 million to The Charity and $100 million to Person B. The Charity, being a properly registered 501(c)(whatever) corp, does not now, nor ever will owe taxes on that amount. Charities get free rides. Person B, having been given $100 million now has a $100 million tax bill hanging over his head upon his death. During Person B's life he can do whatever he wants with the money; he may waste it and die with nothing, he may choose to invest it in a conservative manner and die with $105 million or maybe he invest aggressively and it pays off big and he dies with $200 million. Whatever the case may be, upon his death, he owes the government $100 million. If he has less than that, he owes whatever he may have, above a certain baseline of say $5 million that he may transfer in any manner that he pleases. If he has more than that, he gets to, tax free, pass on anything above the $100 million that he owes the government. And the cycle repeats itself.

Anyways, the estate tax thing is just an idea I've had, but I think that estate taxes play an important role in our tax system and our democratic ideals. Sorry for the long-winded response. Feel free to poke holes where found.

Thanks. That makes more sense to me.

I've got a few bones to pick about the relative significance of .25% of wealth to different people, but rather than set up a diminishing returns v. "what is fair" debate, I'll punt on it for now in favor of the following.

I saw two major concerns raised in your response. One is that taxing on spending instead of taxing on earning might allow the wealthy to outrun the tax rate. The other is that it would overincentivize saving. I'm not certain that it follows as a matter of course that another financialization nightmare would follow, although I do see the risk, especially ab initio. But if you think those two concerns are legitimate, would a tax on savings address either or both of them?

[All-American]

I don't recall saying it was a problem. The only thing I've said it that any way you slice it, it's regressive to one degree or another. Ultimately no matter what you do, it could be viewed as placing a greater burden on lower income. My only real point is that if you're pushing a flat tax, you just have to accept the fact that it is regressive and hope people accept it on its other merits. And I think that's no small task.

I'm just having trouble getting it through my thick skull why it would be that making everybody pay the same rate in taxes is actually a very regressive tax system. I'm not trying to be petulant; I just want to know what the defects that make it regressive are, and whether they can be addressed.

[All-American]

I'm not sure what you mean by that, but I take it you don't think deferral and the related considerations of the time value of money weigh much in considering whether a tax is de facto regressive?

I'm not sure how much they weigh, but I feel like it can't be the only reason that flat taxes are so obviously and overwhelmingly regressive.

[I.J. Reilly]

Thanks. That makes more sense to me.

I've got a few bones to pick about the relative significance of .25% of wealth to different people, but rather than set up a diminishing returns v. "what is fair" debate, I'll punt on it for now in favor of the following.

I saw two major concerns raised in your response. One is that taxing on spending instead of taxing on earning might allow the wealthy to outrun the tax rate. The other is that it would overincentivize saving. I'm not certain that it follows as a matter of course that another financialization nightmare would follow, although I do see the risk, especially ab initio. But if you think those two concerns are legitimate, would a tax on savings address either or both of them?

Just so you know, there are many economic heavyweights out there (e.g., Raghuram Rajan, Simon Johnson, inter alia) who identify a global savings glut, particularly a dollar-denominated savings glut, as a prime contributor to our recent unpleasantries. I mention this only so that you know I'm not just flying off the cuff with speculation about what savings might do to an economy.

To be clear, when I'm talking about savings, I'm not just talking about the money in a piggy bank or the dollars in a savings account. It incorporates all investments and other assets in excess of consumer spending.

Just so I can stay on track here, there are a few major purposes I see to taxes:
1. Generating revenue to pay for the things we have collectively decided we want from our government.
2. Incentivizing or de-incentivizing behaviors.
3. Preventing the formation of permanent under- and over-classes from forming.
4. There are probably other reasons that given a little more time and thought I might be able to articulate.

Now, I personally believe that a pure consumption tax injures #2 and runs roughshod over #3, both for the reasons stated, and probably others that I haven't articulated.

By adding a tax on savings (in the way I have defined them), you might partially ameliorate my concerns with #3, but it may be too much of a rough tool considering the disincentives that it would then create. As you continue to tweak and refine, you eventually end up with a tax code that probably looks a lot like the one we have now.

I hope I'm making sense.

[Mormon Red Death]

Re: The Flat Tax thread

When I said earlier that I thought DnF was interested in the flat tax, I really meant MRD. Apologies if they are necessary. I knew it was one of those Utes whom we no longer officially acknowledge around these parts. Also, I should have specifically mentioned the fair tax and not a straight flat tax. Not that it matters to anyone.

Anyways, regardless of time horizon, a pure flat tax is regressive. 25% of my income means more to me if I make $40,000/year than if I make $400,000/year. There is a baseline of necessities that between the two earners has a constant cost. It requires much more of the labor of the person making $40,000/year than it does of the other. The burden of providing those necessities falls unequally on the person who can least afford it.

Re: deferring the taxes, the longer you can hold onto money untaxed, the more money you can generate from it, and the less and less the flat tax affects you. A buildup of wealth is worth more than just the sum of what it can buy. There are greater opportunities and power for those with a large pool of cash lying around that reach beyond the tvs and iphones they can buy at retail prices.

One of the things you have to think about if you were to flip the system and incentivize savings over spending is where all of those savings would go. The very first thing I would do if we went to a consumption tax is throw as much money as I could into the stock market, and probably a disproportionate amount of that money into banks and other entities that deal in financial products and transactions. Not b/c the stocks would be suddenly worth more, in fact, stocks like Apple and GE might be worth less based upon "fundamentals" than they are now b/c of depressed consumer demand, but b/c all of those savings that you are incentivizing have to go somewhere. The stock market would explode like a 2 liter of Diet Coke with some Mentos dropped in it. Savers have to put their money somewhere and they aren't likely to leave it under the mattress. This would, of course, drive another nightmare of financialization like we have most recently been through, only worse. Now, in the long-term, an investment-driven economy v. a consumption-driven economy isn't necessarily a bad thing, but is is worth considering what to do to avoid creating asset bubbles.

All that being said, personally I could get on board with something akin to the fair tax with at least a couple of caveats: (1) there would still have to be progressive elements to it. Some of those possibilities have been discussed here. I would add in that regard that I don't think that once-yearly "prebates" are that great of a solution to this, namely b/c the irrational actor in all of us is more likely to irresponsibly spend the one-time lump sum payment, rather than responsibly apportion it out over the year. Any sort of low income discount would have to be given at the register, or at the very least in monthly installments to be best effective, imo.

(2) Estate taxes need to be greater and there needs to be less loopholes to avoiding such taxes. One idea for this that I've kicked around a bit but haven't rigorously tested is what I like to call the "2nd generation 100% tax." The idea is this: say you have Person A who begins life with nothing to her name. At the end of Person A's life she has accumulated a net worth of $200 million. Upon Person A's death, she can apportion that $200 million out to any person in any manner she sees fit, tax free. In this scenario, Person A decides to give $100 million to The Charity and $100 million to Person B. The Charity, being a properly registered 501(c)(whatever) corp, does not now, nor ever will owe taxes on that amount. Charities get free rides. Person B, having been given $100 million now has a $100 million tax bill hanging over his head upon his death. During Person B's life he can do whatever he wants with the money; he may waste it and die with nothing, he may choose to invest it in a conservative manner and die with $105 million or maybe he invest aggressively and it pays off big and he dies with $200 million. Whatever the case may be, upon his death, he owes the government $100 million. If he has less than that, he owes whatever he may have, above a certain baseline of say $5 million that he may transfer in any manner that he pleases. If he has more than that, he gets to, tax free, pass on anything above the $100 million that he owes the government. And the cycle repeats itself.

Anyways, the estate tax thing is just an idea I've had, but I think that estate taxes play an important role in our tax system and our democratic ideals. Sorry for the long-winded response. Feel free to poke holes where found.

The prebate would be monthly in the fair tax plan.

Your estate tax plan is horrible. You are suggesting that person A money is not really theirs but . The government's.

Sent from my SGH-T999 using Tapatalk 2

[Mormon Red Death]

Re: The Flat Tax thread

Just so you know, there are many economic heavyweights out there (e.g., Raghuram Rajan, Simon Johnson, inter alia) who identify a global savings glut, particularly a dollar-denominated savings glut, as a prime contributor to our recent unpleasantries. I mention this only so that you know I'm not just flying off the cuff with speculation about what savings might do to an economy.

To be clear, when I'm talking about savings, I'm not just talking about the money in a piggy bank or the dollars in a savings account. It incorporates all investments and other assets in excess of consumer spending.

Just so I can stay on track here, there are a few major purposes I see to taxes:
1. Generating revenue to pay for the things we have collectively decided we want from our government.
2. Incentivizing or de-incentivizing behaviors.
3. Preventing the formation of permanent under- and over-classes from forming.
4. There are probably other reasons that given a little more time and thought I might be able to articulate.

Now, I personally believe that a pure consumption tax injures #2 and runs roughshod over #3, both for the reasons stated, and probably others that I haven't articulated.

By adding a tax on savings (in the way I have defined them), you might partially ameliorate my concerns with #3, but it may be too much of a rough tool considering the disincentives that it would then create. As you continue to tweak and refine, you eventually end up with a tax code that probably looks a lot like the one we have now.

I hope I'm making sense.

Taxes should only be used for reason #1

Sent from my SGH-T999 using Tapatalk 2

[I.J. Reilly]

The prebate would be monthly in the fair tax plan.

Your estate tax plan is horrible. You are suggesting that person A money is not really theirs but . The government's.

Sent from my SGH-T999 using Tapatalk 2

Differentiate that from the current estate tax.