To figure out how a flat tax works we need to see what sort of income tax rate that we are paying right now. I'm not talking about payroll taxes (FICA and Medicare) here, just the Federal income tax that is found on line 61 of your Form 1040.

So check out your 2002 Form 1040 and determine what tax rate you actually paid in 2002. Simply divide line 61 on Form 1040 by line 22. For me the result is 20.8%.

Some people suggest that investment income (interest and dividends) should be tax-free. In that case, an excellent estimate for the effective tax rate for non-self-employed people would be the ratio of line 61 to line 7. For me this ratio is 23.0%.

So obviously a pure flat tax of less than 20% would benefit me. If taxes on investment income were excluded, I would be better off with rates as high as 22%. What sort of numbers do others have?

I suspect that I would be hurt by a flat tax, but I support it, putting my country above myself.

I have a rate of 0%, and yes, I did file last year, as well as in 2001. I still don't make enough to pay. Right now, I'm set to make enough to have to pay taxes, but my employer isn't withholding anything. Come next april, I'm gonna be stuck with an IRS bill.

Mike - mine is 9.2% and 14.64% respectively, so screw any flat tax that has yet been proposed.

Pax,

Dave Krein

Originally Posted by AlexMnWi

I have a rate of 0%, and yes, I did file last year, as well as in 2001. I still don't make enough to pay. Right now, I'm set to make enough to have to pay taxes, but my employer isn't withholding anything. Come next april, I'm gonna be stuck with an IRS bill.

I think in your case, Alex, we'd want to look at what rate your parents paid. That is, if you have access to that information. :wink:

~ 22% for me last year. Looks like I win, Mike :cry:

Originally Posted by Justin '77

~ 22% for me last year. Looks like I win, Mike :cry:

22%! How did you manage that? This was the ratio of line 61 to 22? What was the ratio of line 61 to 7?

Originally Posted by Mike Alexander '59

Originally Posted by Justin '77

~ 22% for me last year. Looks like I win, Mike :cry:

22%! How did you manage that? This was the ratio of line 61 to 22? What was the ratio of line 61 to 7?

22.5% (61/22 was 22.2% -- I didn't get much in the way of interest or dividends)

Here is a chart we can use to estimate the approximate revenue a flat tax would raise. It's based in 2000 income distribution and its approximate.



The lines labeled as 10K, 20K and 36K refer to the standard deduction, the first X dollars that is not taxed. Forbes refers to Steve Forbes' plan which had a 36K standard deduction and no taxation of dividends or interest. The actual Forbes plan featured a 17% rate so it would raise about 400 billion, but the line let's you play with other rates in a Forbes-type plan. Finally the 10K (invest option) refers to a plan with interest and dividends tax free, but with a smaller standard deduction of 10K. This plan at Forbes same rate of 17% would raise twice as much money.

Now those whose largest objection to the present tax system is that it places too little of a burden on the lower end of the income range, would favor those plans with the lower standard deduction. For example, a flat tax of 20% with dividends and interest tax free and a 10K standard deduction would raise the same funds as the current tax system. This is only a 3% higher rate than the Forbes plan.

If you decide that interest and dividends should still be taxed and want a fairer tax in terms of burden on the poor, a 15.5% flat tax with 10K deduction would do the trick. The lower income group would pay much, yet actual impoverished people would still pay a low tax.

Then of course there is the question of how much revenue is needed. Federal income tax revenue in 2000 was $950 billion. Social security and Medicare are paid for by the separate payroll tax and so we don't have to pay for them with income tax.

The nondiscretionary items are interest at 220 billion, Defense was 290 billion in 2000 and veterans benefits were 47 billion. Then there is 77 billion for employee pensions. We should add about 60 billion to cover the WOT which wasn't around in 2000. This comes to 694 billion.

What else do we need to fund? Other sizable outlays are 47 billion for transportation infrastructure, 35 billion for Research & Space science (NASA, NSF, NIH etc.). 64 billion for Education, and 6 billion for Commerce and Housing Development and the Post Office. Then there is 15 billion for general government and 27 billion for the justice department. This totals 194 billion of investment and infrastructure support functions that helps business and so we will fund this out of the 192 billion in corporate income taxes. This leaves an extra 2 billion which we will fund out of the 69 billion in excise taxes, leaving a 67 billion surplus, which we can use to reduce the required expenses to 627 billion.

So now were have a minmum of 627 billion to be funded, plus whatever else we want to do.

What's left is
151B Income security (Unemployment, Disability, Housing Assistance and Food and Nutrition)
118B Health Services
32B Agriculture
24B Natural resources (water resources, recreation, pollution control, land management)
17B International Affairs
11B Community Development

To fund the minimum of 627B, the 10% flat tax proposed by Marc Lamb could be used with a 10K deduction.

Interestingly, the Forbes plan, even at a 25% rate wouldn't raise enough revenue. This is why I couldn't take that candidate seriously. Even Marc's off-the-cuff plan was more realistic than Forbes' was.

Well here's the figures. Pretend this is a "god-game" like Sim City or Sid Meier's Civilization and you are trying to run the US government. What sort of tax would you employ, and what would you fund?

Originally Posted by Mike Alexander '59

(snip)

Then of course there is the question of how much revenue is needed. Federal income tax revenue in 2000 was $950 billion. Social security and Medicare are paid for by the separate payroll tax and so we don't have to pay for them with income tax.

The nondiscretionary items are interest at 220 billion, Defense was 290 billion in 2000 and veterans benefits were 47 billion. Then there is 77 billion for employee pensions. We should add about 60 billion to cover the WOT which wasn't around in 2000. This comes to 694 billion.

What else do we need to fund? Other sizable outlays are 47 billion for transportation infrastructure, 35 billion for Research & Space science (NASA, NSF, NIH etc.). 64 billion for Education, and 6 billion for Commerce and Housing Development and the Post Office. Then there is 15 billion for general government and 27 billion for the justice department. This totals 194 billion of investment and infrastructure support functions that helps business and so we will fund this out of the 192 billion in corporate income taxes. This leaves an extra 2 billion which we will fund out of the 69 billion in excise taxes, leaving a 67 billion surplus, which we can use to reduce the required expenses to 627 billion.

So now were have a minmum of 627 billion to be funded, plus whatever else we want to do.

What's left is
151B Income security (Unemployment, Disability, Housing Assistance and Food and Nutrition)
118B Health Services
32B Agriculture
24B Natural resources (water resources, recreation, pollution control, land management)
17B International Affairs
11B Community Development

To fund the minimum of 627B, the 10% flat tax proposed by Marc Lamb could be used with a 10K deduction.

Interestingly, the Forbes plan, even at a 25% rate wouldn't raise enough revenue. This is why I couldn't take that candidate seriously. Even Marc's off-the-cuff plan was more realistic than Forbes' was.

Well here's the figures. Pretend this is a "god-game" like Sim City or Sid Meier's Civilization and you are trying to run the US government. What sort of tax would you employ, and what would you fund?

What about interest on the debt? The Government also has to pay that -- you can't get around that one. Is that included in your "nondiscretionary expenses"? What else is included there? Entitlements such as food stamps? Or is food stamps included in the "nutrition assistance" category?

Originally Posted by Jenny Genser

What about interest on the debt? The Government also has to pay that -- you can't get around that one. Is that included in your "nondiscretionary expenses"?

I quote "The nondiscretionary items are interest at 220 billion..."

What else is included there? Entitlements such as food stamps? Or is food stamps included in the "nutrition assistance" category?

Yes. The outlays do add up to the 1789 billion spending in 2000 (plus the extra 60B I added), so I got everything.

I guess I wasn't clear in my questions.

1. What do you call "non-discretionary items"? Is that only the interest on the debt? Does it include other entitlement programs, such as the Food Stamp Program? Does it include anything else?

2. Does the laundry list of other programs (income security, etc...) include entitlements?

Part of the problem might be your terminology. In Federal Budget-speak, "mandatory" spending is entitlements, whereas "discretionary" spending is for programs that have to be funded by Congress each year in the annual appropriations. Thus, Food Stamps, Social Security, interest on the debt, and other such expenses are "mandatory", whereas a program such as the Special Supplemental Program for Women, Infants, and Children (WIC) has to have Congress appropriate funds each year.

Originally Posted by Mike Alexander '59

Originally Posted by Jenny Genser

What about interest on the debt? The Government also has to pay that -- you can't get around that one. Is that included in your "nondiscretionary expenses"?

I quote "The nondiscretionary items are interest at 220 billion..."

What else is included there? Entitlements such as food stamps? Or is food stamps included in the "nutrition assistance" category?

Yes. The outlays do add up to the 1789 billion spending in 2000 (plus the extra 60B I added), so I got everything.

Originally Posted by Mike Alexander '59

Well here's the figures. Pretend this is a "god-game" like Sim City or Sid Meier's Civilization and you are trying to run the US government. What sort of tax would you employ, and what would you fund?

I tried. Really, I did.

Unfortunately, a world of free men makes a really boring "god game".

Originally Posted by Jenny Genser

I guess I wasn't clear in my questions.

1. What do you call "non-discretionary items"? Is that only the interest on the debt? Does it include other entitlement programs, such as the Food Stamp Program? Does it include anything else?

2. Does the laundry list of other programs (income security, etc...) include entitlements?

Part of the problem might be your terminology. In Federal Budget-speak, "mandatory" spending is entitlements, whereas "discretionary" spending is for programs that have to be funded by Congress each year in the annual appropriations.

OK I see. I labeled the following as nondiscrentionary (manadatory) in two groups

Group A: Interest on debt (220B), Federal pensions (77B), Veterans benefits (47B)

These are necessary because they reflect obligations that if neglected would have serious consequences for the government itself.

Defaulting on interest payments would mean insolvency or inflationary destruction of the economy. Either way the governemnt falls. Defaulting on pensions means the government would cease to be able to hire or retain workers and would have to cease operation. Renenging on veterans benefits means the government would cease to be able to hire soliders to defend it from foreign enemies and so would fall to one of them.These promises have to be kept.

Group B is Defense (290B in 2000) to which about 60 billion is added to cover the WOT. We do not have to spend as much as we do on defense. But, those who wish to slash government spending and promote flat taxes almost unaminously do not want to reduce the Defense budget from its 2000 levels. Almost nobody advocates spending less in the wake of 911.

All other spending is not mandatory. Some can be considered as investments or as good things for business. I picked a set of these to be funded by corporate taxes.

What is left are things that citizens fight about. I'm sure most of the conservatives here would do away with many of the entitlement programs funded through general taxes (not payroll taxes) if they were running the game.

The objective of this exercise is for people who advocate things like flat taxes to check out what world their statements create. The graph shows how much money a particular tax program raises. The list gives an idea of what things cost and how much money is needed to do whatever. It's a way to "keep it real". To inject just a little rigor into one possible discussion.

And if nobody takes up this discussion, that too says something. It says that discussions here are not to be taken seriously as rigor is not expected nor even desired. Folks are just shooting their mouths off like Cliff Claven.

Originally Posted by Justin '77

I tried. Really, I did.

Unfortunately, a world of free men makes a really boring "god game".

There is no need for you to play--I already know how to play your hand. You are right; it's pretty boring.

Mike,

I'm uncertain about your use of the "standard deduction" in this case. Is that a personal or family number? If it's personal, your percentages seem a bit optimistic.

Originally Posted by David '47

Mike,

I'm uncertain about your use of the "standard deduction" in this case. Is that a personal or family number? If it's personal, your percentages seem a bit optimistic.

It's per household. Married or single head of household. Single people who do not live alone and are not head of household would get no deduction at all. There are no additional deductions for children or anything else.

Originally Posted by Mike Alexander '59

Originally Posted by David '47

Mike,

I'm uncertain about your use of the "standard deduction" in this case. Is that a personal or family number? If it's personal, your percentages seem a bit optimistic.

It's per household. Married or single head of household. Single people who do not live alone and are not head of household would get no deduction at all. There are no additional deductions for children or anything else.

Well, I can see that generating some legal action. Let's see:

• If they actually consituted a real aggregation of self-supporting single adults, the cast of Friends would receive ... what, exactly? Sharing accommodations, but maintaining yourself as a uniques tax-paying entity could prove a better alternative than marriage, or just another technique for saving money with one hand and paying it out to Uncle Sam with the other. Logic says that they either all get exemptions or none do. I don't see how they can be expected to split one or two among them, since they have only a tentative relationship to one another.

• Since singles living at home would not get a deduction, even though they are living in a similar circumstance to the aforementioned Friends, would they only get a deduction if they could show that they are contributing to the maintenance of the household. If so, do they only get a share, or is the Flat Tax concept really flat.

• Returning to the anti-marriage concept, would this tax regime force seniors into single status for financial reasons? If so, how can the arbiters of morality, who are often part of the same group as the Flat Taxers, live with forcing Grandma and Grandpa into an immoral status?

Since all of this is speculation, these may be questions that may have no answers, but it's fun to ask.

Flat tax is dead, won't happen. Sorry, Mike.



Reasons it'll never fly:

(1) Regressive. Currently, low income people pay little or no tax. A move to a more regressive taxation system would be seen as unfair to the poor.

Also, the guy earning 20,000 can ill afford to cough up 4,000. That might cut out a visit to the doctor, or glasses for his kid, or a car.

OTOH, the guy earning 2,000,000 a year can easily afford to pay 400,000 or 700,000, no problem. Nobody's going to die, nobody's going to be unable to commute to work, no kid will flunk out of school.

(2) We love our tax breaks. ESPECIALLY the home ownership one!

One of the reasons America is so wealthy overall is our incentive to buy and build on property. Huge tax breaks for a primary residence. Try to get that one voted out and you'll see that 80% of the people are against you.

Plus, each and every congressman is beholden to one set of special interests or another, each of which has their own set of tax breaks. Farmers, unions, energy, doctors, automakers, pharmaceuticals, insurance. They all get breaks, some by making consumption of their goods or purchase of their stock tax deductible.

(3) Charities and religions would scream bloody murder! Tax breaks are a solid motivator for charitable giving and religious tithing/fees.



Nice pipe dream, but it won't happen.

Originally Posted by Justin '77

Originally Posted by Mike Alexander '59

Well here's the figures. Pretend this is a "god-game" like Sim City or Sid Meier's Civilization and you are trying to run the US government. What sort of tax would you employ, and what would you fund?

I tried. Really, I did.

Unfortunately, a world of free men makes a really boring "god game".

But it's an interesting challenge to try to play Civilization in democracy mode - I found it hard... but never boring

Originally Posted by David '47

Well, I can see that generating some legal action.

I am not advocating this as a structure. The method of calculation is based on this simplified model. The standard deduction used in the calculation is the average deduction per household. Exactly how you detail it out is irrelvant to the calculation of how much revenue would be raised by such a tax. Simply put, the higher the household deduction, the more households escape taxation altogether. The lower the household deduction the smaller the flat rate needs to be to raise a given amount of money.

What I am trying to get at here is to show that such simple-minded nostrums as the 10% flat tax are nonsense. It is also to disabuse the idea that the rich avoid taxation. They don't. They paid a hell of a lot of taxes under Clinton and even under Bush they still pay a lot.

I am trying to show that facts can be used to make discussions, but that one has to dig out the information. If we throw up our hands and say it is too hard, then we give up our rights as citizens because we will rely on biased analyzes (advertisements really) put forth by interested parties who are trying to sell us something.

So we can simply believe that more guns means less crime because a guy at AEI has done a complex scientific-looking study that says so (and we like what the guy is selling). Or we can believe another guy at AEI who said that the Dow was going to 36,000 by 2005 (because we want to believe that we can save enough for our retirement so we won't need social security). Or we can believe the folks who raised the spectre of thousands of American casualties in Iraq (because we are opposed to the war).

Or we can try to do some of our own thinking and research.

Originally Posted by Mike Alexander '59

Originally Posted by David '47

Well, I can see that generating some legal action.

I am not advocating this as a structure. The method of calculation is based on this simplified model. The standard deduction used in the calculation is the average deduction per household. Exactly how you detail it out is irrelvant to the calculation of how much revenue would be raised by such a tax. Simply put, the higher the household deduction, the more households escape taxation altogether. The lower the household deduction the smaller the flat rate needs to be to raise a given amount of money.

What I am trying to get at here is to show that such simple-minded nostrums as the 10% flat tax are nonsense. It is also to disabuse the idea that the rich avoid taxation. They don't. They paid a hell of a lot of taxes under Clinton and even under Bush they still pay a lot.

I am trying to show that facts can be used to make discussions, but that one has to dig out the information. If we throw up our hands and say it is too hard, then we give up our rights as citizens because we will rely on biased analyzes (advertisements really) put forth by interested parties who are trying to sell us something.

So we can simply believe that more guns means less crime because a guy at AEI has done a complex scientific-looking study that says so (and we like what the guy is selling). Or we can believe another guy at AEI who said that the Dow was going to 36,000 by 2005 (because we want to believe that we can save enough for our retirement so we won't need social security). Or we can believe the folks who raised the spectre of thousands of American casualties in Iraq (because we are opposed to the war).

Or we can try to do some of our own thinking and research.

I've never thought that we would dramatically alter the tax system, except to clean-up the worst of the excesses. Every option has drawbacks, and once each is identified, it scares the hell out of somebody.

I'm in the tax-the-lazy-poor part of the country, where everyone favors a national sales tax. Again, the assumption is a 10% tax will do the job, becasue we're going to eliminate wastefraudandabuse. After you do even a little simple math (and I'm surrounded by engineers more than capable of doing it), they either refuse to believe it, don't talk to me for a week ... or both.

My current favorite argument is the imbalance in the economy when you encourage investment but suppress demand. It's pretty easy to demonstarte, on a very simplistic level, that relying soley on a consumption tax is a prescription for deflation and depression.

Normally, I just start the argument along, shut up and go away. It makes for interesting conversation ... at a distance.

Although I personally favor a national sales tax, a true flat income tax has much to recommend it. The benefits of serious tax reform are less about debates over class conflict (admittedly an important 4T issue) and more about increasing fairness and economic efficiency. If we take $1 trillion as Federal tax revenue (rounded up from $950 billion) we get the approximate additional annual monetary benefits from a flat tax:

Note these estimates are my own and subject to significant variation either up or down.

$40 billion (4%) savings in tax advice and preparation. This includes CPAs, lawyers, IRS agents and other tax preparers as well as self-prepared returns.

$40 billion (4%) savings by eliminating tax shelter vehicles and professionals. This includes Wall Street banks, commercial banks and other tax avoidance activities.

$50 billion (5%) Increased economic efficiency as a result of eliminating assorted distortions in current tax code.

$50 billion (5%) Increased revenues due to greater incentives to work and less under the table transacting due to lower marginal rates.

Priceless. The knowledge that we're not getting as badly ripped off in taxes.

Total $180 billion in annual net benefits as a result of tax reform. A national sales tax would add substantially more in benefits but that is a different story.

What about replacing both the income tax and FICA with a single flat tax, after a standard deduction equal to the poverty level based on household size? Most current estimates peg the latter at about $8,000 for a single adult - then you could merely double this for a married couple even though the poverty line for a married couple with no kids is less than twice that for a single adult, so no one could scream "marriage penalty." As far as further deductions for children goes, there shouldn't be any; we should officially adopt the Malthusian view of encouraging families to have as few children as possible, to protect both middle-class lifestyles and the environment too. And with no deductions for children (none currently exist under FICA), the rate could end up being quite low - maybe less than 20 per cent even with it replacing both the income tax and FICA.

This would be an improvement over a national sales tax with a rebate, since the rebate would have the unwanted side effect of enabling non-working drug addicts and alcoholics; and with FICA being eliminated, Dick Armey's vision of everyone having the right to support themselves before they begin supporting the government can be realized.

Originally Posted by Buster Brown

What about replacing both the income tax and FICA with a single flat tax, after a standard deduction equal to the poverty level based on household size? Most current estimates peg the latter at about $8,000 for a single adult - then you could merely double this for a married couple even though the poverty line for a married couple with no kids is less than twice that for a single adult, so no one could scream "marriage penalty." As far as further deductions for children goes, there shouldn't be any; we should officially adopt the Malthusian view of encouraging families to have as few children as possible, to protect both middle-class lifestyles and the environment too. And with no deductions for children (none currently exist under FICA), the rate could end up being quite low - maybe less than 20 per cent even with it replacing both the income tax and FICA.

This would be an improvement over a national sales tax with a rebate, since the rebate would have the unwanted side effect of enabling non-working drug addicts and alcoholics; and with FICA being eliminated, Dick Armey's vision of everyone having the right to support themselves before they begin supporting the government can be realized.

Now here's an example of a specific proposal which can be looked at. Combining FICA and the income tax would mean the this new flat tax should raise the 950B from the old income tax plus the 650B from FICA&Medicare for a total of 1600B. The graph suggests that a flat tax of ~26% with average household deduction of 10K would raise this revenue. A flat tax of ~32% with 20K deduction would also do it. Buster's plan is in between these two, so let's say 15K average deduction with 29% flat rate.

Our household federal income+FICA taxes is about 28% of our line 22. So we would come off slightly better with this scheme.

Eliminating the employer contribution for FICA should increase average incomes by about 7%. The law could require that companies pay their employees these savings. A near-median household making 45K today, would make about 48K under the new law. Of this, they would pay 9.6K in taxes, leaving an after-tax income of 38.4K, which corresponds to a combined tax rate of 14.5% based on the curent income of 45K. This corresponds to a ~7% rate for current income (this is the ratio of lines 61/22), which doesn't seem to be so much of a burden on the median household.

Based on the 48K income, the overall tax rate of 20% is larger than the rate such an income currently pays. This is a larger tax burden than before by this income group and so this should result in an increase in the amount of tax paid by the bottom 50% of taxpayers, addressing Mr. Lamb's concern. Mr. Brown, what is your current ratio of line 61 to 22? How would you fare under your plan?

All around, this plan seems like a fairly sound idea.