Flat Tax Pros & Cons: Arguments for/Against

[DavidSnider]

What are the arguments for\against a "flat tax" where everybody pays a share of the taxes as a share of their income.

$100 total income, $10 taxes
Person 1 Income: $80
Person 2 Income: $15
Person 3 Income: $5

Person 1 Taxes: $8
Person 2 Taxes: $1.5
Person 3 Taxes: $0.5

 

[D H]

The problem is that half dollar paid by the person who makes five dollars hurts a whole lot more than does the eight dollars paid by the person who makes eighty. The person who makes five dollars might well have to forego eating entirely for a few days to pay his share. The person who makes eighty might will have to forego eating the caviar appetizer.

 

[HallsofIvy]

This looks, to me, an awful lot like one of those simple homework problems whose point is to get you to thinking about the possibilities. I don't see how other people giving you suggestions will help you do that.

 

[DavidSnider]

Not a homework problem, just a musing. =) I wasn't even sure what the name of this type of taxation system was (thus the incorrect title). Once I figure it out I had requested to delete it, but someone commented on it so I left it. Sorry.

DHs example assumes that the taxes aren't being used to help the poor I guess.

 

[russ_watters]

DHs example assumes that the taxes aren't being used to help the poor I guess.

I don't see that assumption. However, there can be two ways to look at it: one is looking at only taxes paid on income from a job. Though that's the usual way to look at it, it can be a little misleading, imo. To me, direct cash subsidies are essentially a direct tax rebate.

You didn't specify in your example which way you are looking at the issue, but at least in the US, if you use the first method a very large fraction pays no taxes and if you look at it the second way, a sizeable fraction pays negative taxes. Any "flat tax" plan needs to specify how it deals with those government subsidies to be properly understood/evaluated.

 

[socrunningman]

mostly it is due to what is called the "law of diminishing returns" D. H. eluded to this in his post earlier.

The thinking behind it is something like this. All taxes hurt(because you are loosing your hard work) however not having government can hurt more(everyone has the choice of moving to Antarctica, or another remote place without government, but I digress) so the thinking behind progressive taxation is that the "hurt" should be equal to all, and in that way more money can be collected fairly. Because the hurt of losing 100 dollars to a person who makes 1,000 dollars a year is much greater than loosing 10,000 dollars to a person who makes 100,000, even though this is both an example of 10% taxation.

I could probably explain it better in a more drawn out fashion, but hey this is just a quick answer

 

[DavidSnider]

If there is a "law of diminishing returns" then why do rich people object to high taxes?

 

[socrunningman]

why do poor people object to taxes?

Americans are perpetually hating and trying to get rid of taxes, it's just part of our nature as humans, but we also enjoy the benefits of our military, social security, Medicare, some welfare and education. But without struggle and compromise we would not have a democracy.

 

[mheslep]

... The person who makes eighty might will have to forego eating the caviar appetizer.

Perhaps. Or perhaps person 1 ($80 income/$8 tax) would have to forego creating another job for a person 3 ($5 income, $0.5 tax)

 

[mheslep]

The number of countries with a flat tax rate has been growing:
http://en.wikipedia.org/wiki/Flat_tax#Countries_that_have_flat_tax_systems
The Baltic states in particular have almost all picked it up since the fall of the Berline wall http://www.investinestonia.com/index.php/investment-guide/4-investment-guide/58-taxes" :

"I must say Steve Forbes was a genius," [Estonian]Prime Minister Andrus Ansip declared during an interview in his hilltop office. "

In the US recently we had a candidate (R) for in the NJ 2009 race for governor, Steve Lonegan, calling for a flat tax. He proposed a 2.98% flat rate to replace the current 1.4% to 8.97% scale. Lonegan was beaten in the primary by Christie.
http://online.wsj.com/article/SB124329298290552503.html
(R) candidate for President Fred Thompson proposed an almost flat tax, two tax rates of 10% and 25%, and McCain said he'd sign one if http://www.cbsnews.com/stories/2007/10/05/politics/main3333938.shtml"

 

[russ_watters]

Article today on CNN.com about the fraction of Americans who don't pay income tax:

In 2009, roughly 47% of households, or 71 million, will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center.

Some in that group will even get additional money from the government because they qualify for refundable tax breaks.

The ranks of those whose major federal tax burdens net out at zero -- or less -- is on the rise. The center's original 2009 estimate was 38%. That was before enactment in February of the $787 billion economic recovery package, which included a host of new or expanded tax breaks...

When considering federal income taxes in combination with payroll taxes, the percent of households with a net liability of zero or less is estimated to be 24% this year, according to the Tax Policy Center's estimates.

http://money.cnn.com/2009/09/30/pf/taxes/who_pays_taxes/index.htm?cnn=yes