Simple tax. Thoughts?

[UnknownXV]

This is a hypothetical discussion in regards to tax reform, so I thought I'd put it in general discussion. If it belongs somewhere else please move it and I apologize.

So, I've been sitting here doing my taxes (and since I am a dual citizen of Canada and the US I have to do two sets in addition to reporting my Canadian bank account to the us treasury... fml). I'm a bit annoyed atm so keep that in mind.

Here's the idea,

No credits or deductions. One flat rate of 15%. The exact number is debatable, but let's say 15% for now.

Two brackets. Between $0 and $20,000 earned, no taxes. After, 15%. Regardless of how you earn it. No corporate tax, everything is taxed based on what the individual earned. No payroll taxes. SS is abolished (those currently dependent on it would get an annuity deal). Same for medicare and medicaid.

Under this sort of simple tax, it would take 30 seconds for anyone to complete it, and free up a lot of money for businesses to reinvest. Would be wonderful I think. One can dream right?

[hamchan]

I think that would put an undue hardship on low income people.

[Petunia 100]

You'd also be abolishing unemployment tax, so no more unemployment.

Where does your 15% number come from? Have you calculated the change in tax revenue you are proposing?

Where will the money come from to fund the annuities you propose? What will the elderly and poor do for medical care? If someone is say, 50, what about them? It's kind of late in the game for them to replace the SS and Medicare benefits they were expecting. Will they be compensated in some way, or are they just out of luck?

A big reason that corporations invest in capital improvements is the tax write off. Since they will no longer be paying taxes, capital improvements just got much more expensive. It is reasonable to assume there will be less of them. Have you factored in this loss of commerce?

[UnknownXV]

You'd also be abolishing unemployment tax, so no more unemployment.

Right, people would buy unemployment insurance if they thought they needed it, instead of it being forced through a tax system.

Where does your 15% number come from? Have you calculated the change in tax revenue you are proposing?

I thought 15% seemed reasonable, but I haven't done the math, no. That's why I said the number is debatable. Maybe 20% would be more appropriate, it really depends on what people can stomach cutting from the Federal budget. It's quite bloated as it is, so I think 15% would be adequate on 16 trillion GDP. Bit over 2 trillion $ a year. If we can't make that work, we have a problem.

Where will the money come from to fund the annuities you propose? What will the elderly and poor do for medical care? If someone is say, 50, what about them? It's kind of late in the game for them to replace the SS and Medicare benefits they were expecting. Will they be compensated in some way, or are they just out of luck?

I imagine that money would have to be borrowed initially. But it's better to do that than let SS continue on. It is a generational Ponzi scheme and it's immoral to anyone participating it in now who isn't in their 60s. They'll never see a dime back.

A big reason that corporations invest in capital improvements is the tax write off. Since they will no longer be paying taxes, capital improvements just got much more expensive. It is reasonable to assume there will be less of them. Have you factored in this loss of commerce?

If they don't have to pay taxes to begin with, they'd just use that money that would have gone to taxes, instead of a less efficient credit that only gives them some, not all, back.

[disneysteve]

Another problem is what hamchan alluded to: a flat tax is regressive. It hurts lower income folks more than higher income folks. It is easier to pay out 15% of your income when you make 250K than when you make 40K. The cost of basic necessities doesn't change based on your income. A gallon of gas or a gallon of milk or a loaf of bread or a trip to the doctor is the same price no matter how much you earn but it represents a higher percentage of income when you earn less. I suspect that is at least in part what led to the current tiered tax rates.

[hamchan]

Another problem is what hamchan alluded to: a flat tax is regressive. It hurts lower income folks more than higher income folks. It is easier to pay out 15% of your income when you make 250K than when you make 40K. The cost of basic necessities doesn't change based on your income. A gallon of gas or a gallon of milk or a loaf of bread or a trip to the doctor is the same price no matter how much you earn but it represents a higher percentage of income when you earn less. I suspect that is at least in part what led to the current tiered tax rates.

Exactly.

[Petunia 100]

I thought 15% seemed reasonable, but I haven't done the math, no. That's why I said the number is debatable. Maybe 20% would be more appropriate, it really depends on what people can stomach cutting from the Federal budget. It's quite bloated as it is, so I think 15% would be adequate on 16 trillion GDP. Bit over 2 trillion $ a year. If we can't make that work, we have a problem.

When you do the math, I believe you will find that a flat tax of 15% will be a substantial reduction in tax revenue. Corporations and the wealthy pay the lion's share of taxes, and you have just given them a huge break while creating new taxes for the poor. The thing is, while paying $1,500 in federal income tax will be a hardship for someone earning 30k per year, there aren't nearly enough of those someones to make up for the billions of dollars you have just given to corporations.

I imagine that money would have to be borrowed initially. But it's better to do that than let SS continue on. It is a generational Ponzi scheme and it's immoral to anyone participating it in now who isn't in their 60s. They'll never see a dime back.

Nonsense. The only way those under 60 will never see a dime back is if we do exactly what you propose. Otherwise, benefits will continue to be paid from the payroll taxes collected.

If they don't have to pay taxes to begin with, they'd just use that money that would have gone to taxes, instead of a less efficient credit that only gives them some, not all, back.

A corporation's goal is to maximize value for shareholders. When any project is considered, it is evaluated with that in mind. If the cost of a particular project is 100 million, it generates a tax savings of 40 million. The corporation knows this, and so it calculates whether or not the project is worth 60 million. If the answer is yes, the project proceeds. If the answer is no, the project does not proceed. Under your proposal, the project now costs 100 million. The conclusion is inescapable, fewer projects will be deemed worthwhile. A corporation isn't going to spend 100 million on a project they calculate is worth 80 million simply because they are no longer paying taxes.

[Petunia 100]

While I agree it is an interesting idea to discuss, our tax code will never be simplified to the extent you suggest. Why? Because government could no longer influence behaviour by offering tax incentives. Tax breaks are offered as a carrot, to get you to buy a home, save for retirement, buy a hybrid vehicle, etc. On the corporate level, tax breaks are offered to get you to hire employees, build new factories, spend large sums of money on equipment, etc.

[Petunia 100]

I thought 15% seemed reasonable, but I haven't done the math, no. That's why I said the number is debatable. Maybe 20% would be more appropriate, it really depends on what people can stomach cutting from the Federal budget. It's quite bloated as it is, so I think 15% would be adequate on 16 trillion GDP. Bit over 2 trillion $ a year. If we can't make that work, we have a problem.

I just read this more carefully. Why are you using GDP to estimate tax revenues? GDP does not represent personal income; personal income is the only thing you are taxing.

I agree that government is bloated, it is also intentionally wasteful.

[disneysteve]

Tax breaks are offered as a carrot, to get you to buy a home, save for retirement, buy a hybrid vehicle, etc.

This raises an interesting question, though. Why should the government be incentivizing people to buy homes or buy certain vehicles? Why should anyone need government intervention in order to save for retirement? It isn't hard to argue that the prices of many things are artificially elevated by government interference with the free market.

[UnknownXV]

This raises an interesting question, though. Why should the government be incentivizing people to buy homes or buy certain vehicles? Why should anyone need government intervention in order to save for retirement? It isn't hard to argue that the prices of many things are artificially elevated by government interference with the free market.

That's part of why I dislike credits and deductions. More than just creating loopholes for the rich, it also is government influencing how people behave. Frankly, I don't want a centrally influenced economy.

It creates unstable markets when an outside force creates tilted incentives for certain products or investments like homes. I really don't like that.

I just read this more carefully. Why are you using GDP to estimate tax revenues? GDP does not represent personal income; personal income is the only thing you are taxing.

I agree that government is bloated, it is also intentionally wasteful.

Right, but a large part of it is income, and the rest I just factored in for sales tax (on the few things government imposes a sales tax on).

It's not the most effective way to calculate it of course, it was just a quick estimation since I was a bit busy. I'll try to run down a more accurate estimation later when I get home.

While I agree it is an interesting idea to discuss, our tax code will never be simplified to the extent you suggest. Why? Because government could no longer influence behaviour by offering tax incentives. Tax breaks are offered as a carrot, to get you to buy a home, save for retirement, buy a hybrid vehicle, etc. On the corporate level, tax breaks are offered to get you to hire employees, build new factories, spend large sums of money on equipment, etc.

Yes, this I heavily dislike. I support a free market more than planners in Washington D.C. Why do they believe they can run companies better than those who have their own wealth invested in them? It's quite silly if you ask me. Without tax credits but a reduced tax burden (and no taxes for corporations) that money is still there, it's just not influenced by the government in how to spend it.

I like that.

When you do the math, I believe you will find that a flat tax of 15% will be a substantial reduction in tax revenue. Corporations and the wealthy pay the lion's share of taxes, and you have just given them a huge break while creating new taxes for the poor. The thing is, while paying $1,500 in federal income tax will be a hardship for someone earning 30k per year, there aren't nearly enough of those someones to make up for the billions of dollars you have just given to corporations.

Right, when I run the numbers more thoroughly I think that will shape this discussion into a more realistic point of view. Maybe I am just dreaming in the clouds here, although I would say even if tax revenue would go down from this shift, I'd probably still be in favor of it. Depends by how much it would decrease, but I think almost anyone can agree that the Federal government is spending far too much money. Cutting away at a lot of the fat and lessening the burden on the people... that sounds pretty good to me.

Nonsense. The only way those under 60 will never see a dime back is if we do exactly what you propose. Otherwise, benefits will continue to be paid from the payroll taxes collected.

How can you say that when social security alone is unfunded over the next few decades into the tens of trillions of dollars, while projected workforce participation is expected to decrease as more people retire (a large reason for that unfunded nature). I don't see this working, and even if it could go on, it's immoral. It's a Ponzi scheme. Even if it works for a while, eventually the final batch comes in and they're left holding all the worthless cards. I heavily dislike that.

A corporation's goal is to maximize value for shareholders. When any project is considered, it is evaluated with that in mind. If the cost of a particular project is 100 million, it generates a tax savings of 40 million. The corporation knows this, and so it calculates whether or not the project is worth 60 million. If the answer is yes, the project proceeds. If the answer is no, the project does not proceed. Under your proposal, the project now costs 100 million. The conclusion is inescapable, fewer projects will be deemed worthwhile. A corporation isn't going to spend 100 million on a project they calculate is worth 80 million simply because they are no longer paying taxes.

Doesn't matter if it costs 100 million when the corporation no longer has to pay more than that 40 million in taxes that it would of gotten back as a credit. It's not free money you get back from taxes. It's money taken from you first, and given back provided you did a few things the government encourages. I'd say it's more effective to just not take the money in the first place (or less).

[Petunia 100]

How can you say that when social security alone is unfunded over the next few decades into the tens of trillions of dollars, while projected workforce participation is expected to decrease as more people retire (a large reason for that unfunded nature). I don't see this working, and even if it could go on, it's immoral. It's a Ponzi scheme. Even if it works for a while, eventually the final batch comes in and they're left holding all the worthless cards. I heavily dislike that.

How can I say it? I read my annual statement. If SS goes completely bankrupt, it is estimated that 77% of benefits will be paid, with no tweaks at all to the current system.

Here is a fun tool, kind of interesting to play with: http://crfb.org/socialsecurityreformer/

SS has some similarities to a Ponzi scheme, yes, but with an important difference. With a true Ponzi scheme, new investors choose whether or not to invest. SS will only have a "final batch" of taxpayers if our government chooses to stop collecting the tax.

You feel it is immoral to collect the tax, but don't feel any qualms about taking away money and medical benefits from senior citizens, who have paid for the previous generation to have those benefits?

Doesn't matter if it costs 100 million when the corporation no longer has to pay more than that 40 million in taxes that it would of gotten back as a credit. It's not free money you get back from taxes. It's money taken from you first, and given back provided you did a few things the government encourages. I'd say it's more effective to just not take the money in the first place (or less).

I agree that tax money is not free money. I disagree that costs don't matter to corporations. Continuing with my example, if a corporation estimates a particular project is worth 80 million, under current tax law, the project would be approved as it adds 20 million to shareholder value. Under your proposal, the same project would subtract 20 million from shareholder value, and so would not be approved.

I am puzzled by your belief that corporations should earn huge amounts of money, yet pay no tax. Meanwhile, a working person needs to pay more tax, buy unemployment insurance, and buy their own medical insurance in their old age (when it is most expensive). And somehow, this system would be more fair than the system we have now.

[UnknownXV]

How can I say it? I read my annual statement. If SS goes completely bankrupt, it is estimated that 77% of benefits will be paid, with no tweaks at all to the current system.

If it ever reaches that point, there will be massive civil unrest and protests, if not riots. It will be clear to people how unstable and underfunded the program is, and that it's not a retirement fund where the government takes your money, invests it wisely, and gives it back to you in your late 60s. No, it's just passing along money from the young, to the old.

People won't accept that. Most just don't realize that's how it currently works.

Here is a fun tool, kind of interesting to play with: http://crfb.org/socialsecurityreformer/

SS has some similarities to a Ponzi scheme, yes, but with an important difference. With a true Ponzi scheme, new investors choose whether or not to invest. SS will only have a "final batch" of taxpayers if our government chooses to stop collecting the tax.

Correct, government can use force to keep collecting, but that only applies provisionally. It's a government by the people, for the people, yes? If one generation recognizes how flawed the program is and wants out, there's a good chance they will vote in politicians who will change or abolish the system. It really just isn't well designed even if you believe that government should forcibly invest some of your money for you.

You feel it is immoral to collect the tax, but don't feel any qualms about taking away money and medical benefits from senior citizens, who have paid for the previous generation to have those benefits?

I do, which is why I think it's important that those who are currently dependent on SS and medicare to get some form of annuity deal. Those who have paid into it, but aren't yet collecting, would lose out. Terrible yes, but if not now, it'll just happen in the future to another generation. At least we can end it now and stop this flawed system from getting even worse.

I agree that tax money is not free money. I disagree that costs don't matter to corporations. Continuing with my example, if a corporation estimates a particular project is worth 80 million, under current tax law, the project would be approved as it adds 20 million to shareholder value. Under your proposal, the same project would subtract 20 million from shareholder value, and so would not be approved.

Sorry I don't think I was very clear before. It's not that costs don't matter to shareholders, of course they do. If they can do something for less money, they will. What I am saying is, what matters to shareholders isn't only the direct cost, but the net profit. Right now, something might cost 100 million to complete, with a 40 million tax credit. So the net cost is 60 million. If corporations paid no taxes, they'd start off with more than the 40 million tax credit would return; usually substantially more. Thus the net cost is actually much lower.

I am puzzled by your belief that corporations should earn huge amounts of money, yet pay no tax. Meanwhile, a working person needs to pay more tax, buy unemployment insurance, and buy their own medical insurance in their old age (when it is most expensive). And somehow, this system would be more fair than the system we have now.

I'm just trying to look at the broader scope of things. The more we incentivize business and encourage success, the more jobs and general prosperity there is for everyone. That is the goal. Even if it means I pay a small 15% tax and corporations don't, if it means there are far more jobs, and I really do think there would be MANY more... I think that's a very fair trade.

[corn18]

On average, ~ 40% of US households pay no federal tax. In 2008, that spike as high as 61% and in 2011, it was still at 46%. One might say that the Democrats did that to get more people hooked on the dole, but in reality, the number increased dramatically due to tax CUTS implemented by Reagan and Bush. I don't like that answer because I want to berate the dolers, but the data is factual.

That being said, while the federal tax burden is progressive, the total tax burden for all workers (federal, state, FICA, sales), are less progressive and might be generalized as more onerous on the lower 20th percentile.



Regardless, we all pay a lot of taxes. Federal, state, local, real estate and sales tax. Any that I forgot?

As for a flat rate, won't happen. Too many special interests. Remove all the loopholes and just pay on your gross income. No deductions for anything at all. If you are paid $100,000 gross income, you enter that on line 1. Look up the progressive tax on $100,000 and enter that on line 2. Then write a check for that amount. Easy peasey. Single, married, one kid, 10 kids, own or rent, daycare or not, blah, blah, blah, blah. 2 lines and you're done.

Wonder what wasteful thing the government would spend all the extra revenue on?

Tom