Saturday, April 16, 2005

About Those Taxes

Yesterday I read an editorial talking about taxes and why we should change the tax code to make it simpler. So far, so good. Then they proceeded to complain about a flat tax and a tax on consumption as being unfair to the poor. They almost echoed the "tax cuts for the rich" screed of the Democrats. They actually said that a flat tax would hit the poor more than the rich. And they said it with a straight face.

During the Presidential campaign, I kept waiting for the Republicans to interject a little sanity to the discussion, but it never happened. Rich and poor are generic terms, but they are descriptive of what people have. The only tax that is determined by what you own is a property tax. The discussion was about income tax, which taxes what you earn, not what you have. Moving from an income tax to a tax on consumption would be a dramatic shift in tax policy and, since it taxes what you spend, not what you have or what you earn, could hit poor people harder than rich people.

But let's look for a minute at the flat tax. It would have some level of income at which the tax kicks in (let's say $20,000 for a family) and some rate at which all income above the threshold would be taxed (let's say 15%). So, here is the low income family, scraping by on $20,000. Zero percent of the income goes to taxes. Or let's look at a family earning $50,000. They would pay $4,500 or 9% of their income on taxes. How about the really productive family earning $300,000? They would pay $42,000 or 14% of their income in taxes. Notice that for those three families, the one earning $300,000 pays in 90.32% of all taxes, the medium income family pays in 9.68% of all taxes, and the low income family pays no tax at all. Does anyone really think that this system favors the rich over the poor?

Obviously, this is a simple example. How do we establish the income below which you get a free ride? How about $10,000 per wage earner and $5,000 per non wage earner in a household?
what do you think?


camojack said...

I like the idea of a National Sales Tax; the people paying it would be the rich folks buying luxury items, as necessities would be tax exempt...

Kajun said...

Yeah, but does that mean that Suzuki's are exempt while Harley's are taxed, Yugo's exempt but Chevys and Fords taxed?

Pat'sRick© said...

The devil is in the details whether you have a National Sales Tax or a Flat Tax. If the rebate works as advertised, I would lean towards the National Sales tax. However, they left out the added impact of state and local taxes. In Montgomery, AL, the sales tax is already 10%. That would make the combination 33% (or 40%, depending on how you calculate and collect the tax).

Hawkeye® said...

A National Sales Tax would be OK if it replaced the Income Tax, but it might affect consumer spending... Lower spending would be bad for business, which results in a weaker economy, which results in more people unemployed that need to be supported by taxes. The best answer is NO taxes... but then there would be nobody in Washington, D.C. to keep us entertained all the tim.

Pat'sRick© said...

Another question in my mind is the way the National Sales Tax would affect Social (in)Security. Current benfits are determined by wages earned. Would the new system be based on what you spent? How would privatization affect the equation?

camojack said...

Kajun News said...
Yeah, but does that mean that Suzuki's are exempt while Harley's are taxed, Yugo's exempt but Chevys and Fords taxed?
Sunday, April 17, 2005 1:46:00 AM

Why exempt imports? I can understand exempting my Harley, as I consider it a necessity...but imports?! No way.

LebenFrei said...

Pat'sRick: Your concept of a flat tax makes the most sense to me. I am a CPA with a passing knowledge of numbers and taxes. Exempting the lowest income earners is just plain common sense - you can't get blood from a stone! Let the middle income earners pay some tax but recognize that middle income earners are really just getting by. Let the high income earners do the heavy lifting. They have more money than they know what to do with. I prepare taxes for some of them. They just let the stuff pile up then pay attorneys huge fees to prepare elaborate estate plans to avoid estate taxes. (Grant a huge contribution to a charitable organization but retain all the earnings during your lifetime and that of your children and they end up with more money than they would have if they kept it all and paid the estate tax). The truly wealthy (maybe income earners over $300,000 as you suggest) also spend their money on mansions with 40 rooms on the Ocean or some major lake but use only a fraction of the space. It is foolishness. It is a fact that these income earners pay something like 90% of all taxes already so it would not cause much of a hardship to them to modify the tax laws to accomplish what you suggest. The current tax laws are so complicated that elaborate tax preparation programs are required to prepare moderately complex tax returns. Elaborate tax research software is required to answer many questions because the tax laws change annually. The tax law is so complicated that most IRS agents don't know what it all means. The one thing that is consistent in the Internal Revenue Code is that logic does not prevail.

Kajun said...

Louisiana State Budget--$100 million short.

Louisiana legislators:

If we just had a lottery, all our tax problems would be solved.

O K'd by voters.

>insert $400 million tobacco settlement here.

Next year: Budget $200 million short.

If we had limited Casino gambling, all problems would be solved.

O K'd by voters.

This year: Budget $400 million short (even though extra 2 billion from oil revenue received)

We need to raise tax on tobacco and beer because only smokers and drinkers are responsible for teachers' salaries.