Tax Brackets Are Unethical

In: Education| Wealth By: Brian Armstrong

16 Dec 2008

For some reason at the gym last night I started thinking about tax brackets and how totally ridiculous they are.

Sure, I understand the idea that “people who make more should contribute more in taxes”, but do you realize this is already accomplished with a simple percentage? Let’s say everyone paid 20% of their income to the government and this was the only tax bracket. Well, 20% of $50,000 is half as much as 20% of $100,000. It’s simple, it’s fair – someone who earned twice as much would contribute twice as much in taxes.

Photo by Bird Eye

But instead, we have tax brackets. We are in effect telling people that if you work hard, start businesses, own real estate, break free, create jobs, stimulate the economy, and start to earn a lot of money – we (the government) will punish you by taking an even greater percentage of your money. Similarly, if aren’t doing anything currently which people are willing to highly compensate you for – you will be rewarded by the government taking less of your money! How is this any different than punishing success and rewarding failure?

The dirty little secret about tax brackets

Here’s a more subtle point that many people don’t realize. Due to tax brackets and inflation, the government will continually get more of your money even without raising taxes. Allow me to explain…

Inflation occurs each year and makes your money worth a little bit less. Many companies give a standard raise each year of about 3% to each of their employees if they haven’t done anything particularly spectacular or terrible because it is expected. This raise doesn’t actually make them any richer in term of purchasing power – they can still buy about the same amount of stuff they bought last year because everything is a little more expensive.

BUT, while salaries are continually creeping up due to inflation (without anyone getting richer), tax brackets don’t creep up with inflation. They stay set. That means there are millions of Americans each year who get bumped into a higher tax bracket (without being any richer) just due to inflation – and the government gets a bigger percentage of their money.

This means politicians can literally say “I will not raise taxes!” yet still get more of your money even after adjusting for inflation. Tricky!

A problem of marketing

Getting widespread adoption of an idea like this strikes me as primarily a marketing problem. This concept of no tax brackets is currently known as a “flat tax”. They need to come up with a better name for it because the name suggests “no matter how much you earn you will pay the same amount in taxes”. This sounds totally unfair – and of course is not at all how it works (as I mentioned above, under a flat tax someone who makes twice as much would pay twice as much in taxes). But that’s certainly how it sounded to me when I first heard it.

You’d have to make the distinction between the percentage being the same while the actual dollar amount of taxes you pay changes drastically. Unfortunately, I’d venture to guess that a relatively small percentage of the population TRULY understands this concept to the point where it wouldn’t bias them.

Just like the “estate tax” never had widespread opposition until they started calling it the “death tax”, I think the “flat tax” needs a name change. I’m not sure what it would be (the “fair tax”? the “let’s not discourage success and be idiots tax”?). Who knows, all I know is that I can’t think of any real justification for having tax brackets and it seems totally unethical.

I should also mention that I am currently in a pretty low tax bracket and have nothing to gain from a flat tax – in fact I’d probably end up paying more. I do however work like crazy and hope to some day be filthy rich by contributing massive amounts of value to the world (isn’t this incentive the very basis of all innovation and progress for mankind?) and it bothers me that this incentive is being undermined.

So what do you think? Is there any justification for having tax brackets? Are we just rewarding failure and punishing success?

Until next time, keep breaking free!
Brian Armstrong

Tags: flat tax, inflation, tax brackets

37 Responses

Kevin

December 16th, 2008 at 7:42 pm

Two things which I think should be mentioned.
1) 95% of American’s make under 100K a year.
2) The top 1% of American’s control 38% of the wealth of the country (as of 2000, was 10% in 1980).

Those in the second group who actually speak openly about it (like Warren Buffet) say that they should pay a higher percentile in taxes.

Those in the first group will never support a fair tax because they see it as benefiting the wealthy at their expense.

The only people who are fighting for this tax law change are the very small set of people in the 4% between these groups.

As to your actual question, it has nothing to do with rewarding failure. Some people do not want to own a business (for a variety of reasons), to consider them failures because of this is just silly. As a small business owner how many people do you annually hire and pay more than 100K? I’m guessing zero. Do you consider these employees (or potential employees as the case may be) to be failures? I doubt it.

For the name, I believe the proper term would be “flat percentile tax”, though the nick name is “Fair tax”.

While I personally support an overhaul of the tax codes, including the implementation of a fair tax program, it has about as much a chance of success as dropping our corporate tax rate.

Kevin

Brian Armstrong

December 17th, 2008 at 3:23 pm

Good thoughts Kevin…I like “flat percentile tax”. I would guess others (besides the 4%) could see the value in it though – myself for example – if for no other reason that one day we hope to be in the top 1%.

Btw, I agree with Warren Buffet that people in the top 1% should help those who have less. But there is a big difference in doing this through private charity where you get to decide how your dollars help vs. the government forcefully taking your money through mandatory charity.

Also, you don’t have to be a business owner to contribute value to the world. Even if you had zero employees but your website/service or whatever helped hundreds of thousands of people you would be contributing a large amount of value.

I do believe your income is directly correlated to how much value you are contributing to the world – which might make an interesting blog post. Thanks for your comments though.
Brian

Choy Lay Fut

December 17th, 2008 at 8:27 am

I’m not sure I agree with this post. For one, when looking at taxes on a macro scale, I think it’s safe to say that the average tax burden on the average US citizen is probably over 50%. In addition to the income tax, you have to take into account gas tax, sales tax, liquor tax, and various other taxes that are slipped in on business transactions.

I guess what I’m trying to say is that, if money changes hands in the US, the government wants its cut.

For another thing, a progressive tax isn’t necessarily punishing folks for success. I make over $100K and I don’t mind being in a higher tax bracket. The alternative of living in less than comfortable circumstances is not palatable to me. Believe me, my family at one point was on welfare.

Finally, let’s look at the macro picture. As much as people say that they are in favor of small government, their behavior shows that they want the opposite. Look at the size of the government under the conservative Bush administration…or even the Reagan administration.

I agree that a “fair tax” of 20% across the board would simplify things and probably work out very well. But various factions, for various reasons will be against it.

Brian Armstrong

December 17th, 2008 at 3:28 pm

Hi Choy, good point – btw I should clarify that I wasn’t suggesting lowering the tax rate to 20% in this article (although I would be in favor of this) – I was most suggesting that it should be the same percentage for all people. You’re right that the tax rate is much higher than people’s tax bracket, if for no other reason than the W2 earnings employers withhold from your wages – this automatically pushes most people’s tax rate over 50% as you said.

Btw, Reagan did a great job lowering taxes – Bush not so much.

Chris - Manager's Sandbox

December 17th, 2008 at 10:30 am

Brian, I think you’re over-simplifying the issue and ignoring the numerous socio-economic factors that effect the jobs people work in.

20% of $30,000 has a substantially higher impact on a person’s quality of life than 20% of $90,000 does, even if 20% of $90,000 is three times as much money.

Not everyone CHOOSES to work in a low-paying job because its easier. Many people lack the opportunities and education to move themselves up. I’ve been very fortunate to have the opportunities I have. Not everyone in this world has been.

Sure, there are those from nothing to something stories, but those are rare and most certainly a fantastic combination of hard work and lots of lock.

I like what you’re saying in its simplest terms, but I don’t think it practically pans out as well as you’ve made it seem to.

- Chris

Brian Armstrong

December 17th, 2008 at 3:37 pm

“20% of $30,000 has a substantially higher impact on a person’s quality of life than 20% of $90,000″

I agree with this – I just don’t think it’s fair to take more than one from the other. When we do we eliminate some of their desire to get to $90,000.

Also I agree with you that not everyone is given the same opportunities starting out in life – but absolutely no one is forced to work a low paying job if they don’t want to. You can accomplish anything in life if you want it badly enough including going back to get education, etc – that’s what makes this country great. To believe people are stuck at their current place in life goes against the whole idea of America and the self-made man.

Chris - Manager's Sandbox

December 17th, 2008 at 3:40 pm

@Brian, The American Dream and the self-made man is similar to when people remember “the good old days.” they’re never as good as people remember. Similarly, the American Dream doesn’t come true for some people, regardless of how hard they work, and it does come true for others who do almost nothing.

This is the dirty hippie in me coming out! :)

Glenn

December 17th, 2008 at 10:43 am

The biggest problem with tax reform is loopholes.
A flat-percentage tax, in my opinion, would be a fair solution if there were no loopholes to avoid paying the full tax. This is the part that seems to be a political impossibility in this country because our government has been overtaken by the rich and they will not, as a group, support any measures detrimental to themselves (which is just common sense).

My understanding of the purpose of the current system of tax exemptions is to encourage spending in areas that benefit areas of society beyond the personal sphere, such as endowing universities, libraries, public parks, scholarships, etc. The highest tax bracket was once above 90%, compared to something now in the 30% range. If you were wealthy, you could lower your tax bill by making charitable contributions, or other tax-exempt forms of spending. In the days of the Rockefellers, Carnegies, Mellons, and Vanderbilts, the wealthy had a more conscious notion of their role and debt to society and did not need to be coerced into returning some of their wealth to promote the common growth and health of society. Nowadays, with the highest tax bracket much lower, and self-serving tax loopholes so rampant that the very richest people commonly pay no income taxes whatever. Their mindset is this is “THEIR” money and they don’t owe anybody any of it. Actually, they have extracted a disproportionally large amount from the economic system in which they live and participate and this money cannot just be “kept” if the system is to remain healthy and functional. A significant portion of it must be returned to the system or else the flow of money in the system slows and the functioning of the economy is impaired. If these people are not enlightened enought to do this voluntarily, there must be a mechanism, such as taxes, to coerce them into relinquishing enough to ensure the overall health of the economic system.

Brian Armstrong

December 17th, 2008 at 3:44 pm

Hi Glenn, you’re right about the loopholes. Rich people can afford creative high-priced accountants and own real estate etc. This is part of the reason a flat tax makes sense – it is simple. The tax code has ballooned to over 50,000 pages – it is so complex that no-one (not even the IRS) understands it. This is what allows loopholes – complexity.

Also, if you look at what people like Bill Gates and Buffet are doing I think you’d have a hard time making the case that rich people don’t give back. This is what rich people should be allowed to do – choose where their money goes and get the good feeling of helping others (this in itself is motivation enough to get rich). When the government takes rich people’s money BY FORCE, this destroys private charity.

Imagine how charity makes you feel – you get to decide where it goes, you feel good, you can see the results, etc. You are in control. Now when the government takes it from you by force (literally threatening to put you in jail if you don’t pay) and then uses it incredibly inefficiently, it’s not hard to see why rich people don’t want to pay taxes.

I don’t blame them – I use every trick I can to pay less taxes because I think the government is a hugely wasteful organization, and the country would be a lot better off with a pre-WWII tax rate of about 10%.

Steve1776

December 22nd, 2008 at 9:27 pm

“Their mindset is this is “THEIR” money and they don’t owe anybody any of it. Actually, they have extracted a disproportionally large amount from the economic system in which they live and participate and this money cannot just be “kept” if the system is to remain healthy and functional. A significant portion of it must be returned to the system or else the flow of money in the system slows and the functioning of the economy is impaired.”

The rich don’t “keep” their (and yes it is THEIR money). Take Bill Gates. Thousands of people have jobs designing, building, shipping, selling, and repairing computers and computer systems because of what he did. He has done more to help raise the standard of living and to cotribute to the economic system than Ted Kennedy (or any career politician) has. If anyone owes more to society it is the leaches who have lived on the public tit all their life (carrier politicians are at the head of that line).

Brian Armstrong

January 3rd, 2009 at 6:53 pm

Steve you’re absolutely right on that.

Glenn, regarding the “flow of money in the system slows and the functioning of the economy is impaired”, I’d challenge you to find a single piece of evidence to back that up (done by an economist).

It’s actually the exact opposite. Successful entrepreneurs are one of the most important drivers of the economy. They are highly compensated because they took huge risks (where 99% of people failed) to create new products and services which offer value to the world.

caleb

December 17th, 2008 at 11:30 am

All taxes do is move wealth from a higher ROI to a lower ROI, ultimately decreasing the nation’s yield.

Pay yourself less. Warren Buffet only pulls a $100k annual salary. Steve Jobs has a $1 annual salary (yes, one dollar).

Brian Armstrong

December 17th, 2008 at 3:47 pm

That’s true about the ROI. As Milton Friedman always said…you will always spend your own money more carefully than you spend someone else’s.

Btw, are you saying keep the profit in the business instead of paying yourself? The business income gets taxed too, but maybe at a lower rate? Not sure what you mean here…

Rob H

December 17th, 2008 at 1:49 pm

Steve Job’s salary of $1.00 per year is off topic but remember he has something on the order of 5 million shares of options, some as low as $14.00. The stock is trading at $88.00 today. Do the math. For that hefty package, anyone would work for $1.00 per year.

Back to those evil rich people not paying their fair share. Don’t forget AMT (alternative minimum tax). That’s a healthy penalty for being rich, whatever rich means. Add property tax. Charitable contributions are deductible up to 50% of adjusted gross, rate depending on cash/property/other capital assets. That’s a deduction, not a dollar-for-dollar tax reduction.

If making over $100,000 is considered rich then I’m guilty but I worked my butt off to get there. I didn’t steal from anyone, get any hand-outs along the way and I resent being told I’m not paying enough.

Chris - Manager's Sandbox

December 17th, 2008 at 2:11 pm

@Rob, I don’t think anyone here has claimed that “the rich don’t pay enough in taxes,” nor has anyone set $100,000 as the magical bar above which you’re suddenly rich. I think numbers like 50k and 100k are thrown out for mathematical ease.

My personal contention isn’t that the rich don’t pay enough. It’s that I don’t truly believe a flat tax wouldn’t have a significant impact on the poor, or that the poor are poor because they have a shitty work ethic.

Hope that clears up some of what I perceived as confusion, at least on my part.

Cheers,

Chris

Rob H

December 17th, 2008 at 2:19 pm

@Chris, No problem whatsoever. Let’s look at it another way. Let’s say Joe studies really, really hard for a chemistry test and gets a 90%. Sean studies just as hard as Joe but gets a 70%. Should the teacher adjust the scores so both should get 80%?

Chris - Manager's Sandbox

December 17th, 2008 at 2:23 pm

@Rob, of course not. And not I’m not advocating for paying poor people more (which is what your analogy ultimately plays out as if you want to extend it to the real world). I am suggesting that 20% for someone who makes 30k has a much bigger impact on their ability to support themself than 20% does on someone who makes 100k, even though for the 100k earner, that same 20% is a bigger net amount of cash.

Brian Armstrong

December 17th, 2008 at 3:53 pm

I think we can all agree that’s true…I just don’t see that as a justification to take less from the poor person.

Jennifer

December 17th, 2008 at 2:28 pm

The comment that our current tax system penalizes people who make more is nothing more than one parties “talking point” which in my opinion is just bunk. An employee who works for IBM that makes $100k per year in salary will pay more in tax than someone who owns their own business and makes $100k in profits. That is because business owners are allowed to deduct expenses from their income and then they pay taxes on the balance. For the 98% of the population with earned income they pay taxes on their income and then they pay their expenses out of what is left. The earned income earner always pays more in taxes. I own 28 rental units valued at over $2 million and I am flat against the flat tax. With the current tax system I can use my interest, taxes and depreciation write-off to bring the taxes on my $78k/year earned income to zero. With the flat tax I will end up paying more in tax since I will be taxed on repairs, supplies, utilities, etc where as before these were a write-off.

BTW if I get a 3% raise this year I am not going to stop contributing at work simply because I will be paying more in tax as some parties would lead you to believe. In my 20+ work career I have continuously made more year after year and I have never thought of just stop working so I don’t get penalized with more taxes. Nor does any of my co-workers.

Brian Armstrong

December 17th, 2008 at 3:58 pm

Good point…I don’t think you’d stop working, just that’s it’s less fair. The government gets more in taxes without raising taxes.

Also, that’s awesome the deductions you’re getting (congrats on the rental units by the way, I’d like to own a portfolio that big some time soon!) – this is somewhat related to the point someone made above about how rich people can often end up paying way less in taxes because the tax code is so convoluted. You may end up paying more under a flat tax – but again this would probably be more fair.

Chris - Manager's Sandbox

December 17th, 2008 at 3:36 pm

@Brian, the Reagan thing is a myth. He lowered taxes, but also had to raise them heavily at some point to compensate for massive deficits. For some reason, Reaganites like to only remember the lowering bit and not the raising bit.

Brian Armstrong

December 17th, 2008 at 4:00 pm

Good point there…certainly two sides to that story :) I guess if you’re gonna lower taxes gotta spend less too! Bush didn’t figure that one out either.

Jennifer

December 17th, 2008 at 4:36 pm

Another thing to realize about Reagan is that even though he lowered the top tax bracket, both he and Bush the father spent more than any other president in the history of the US except for Bush the son. Reagan and Bush in 12 years quadrupled our nation’s debt! How do you commend somebody for that accomplishment?

Julie

December 17th, 2008 at 10:42 pm

On the face of it, tax brackets do seem unfair, but I think they’re still the best option for running a government. I’m not going to argue fairness, but
rather practical results.

First premise: the government does need a certain amount of money. (I am sure we will disagree on how much and where it is mismanaged, but the point is irrelevant, since some money is certainly needed if we are to remain a part of the civilized world.) The object, then, is for the government to get the money it needs while minimizing the damage to the economy that produces that money.

We have to start with the impact on poorer families: a family making $20,000 cannot pay 10% or 17% of their income in taxes without shorting themselves on such basics as groceries and electricity. (And making them poorer will not improve their decision-making skills, make them get a better job, or make them spend their money any more wisely.)

Let’s say that hypothetical family requires $30,000 to live comfortably. At $20,000, then they are in serious poverty. If they are making $35,000 a year, that means they have $5,000 of disposable income. If they are making $100,000 a year, that’s $70,000 of disposable income. Simple arithmetic, yes?

With a flat tax rate, at the 17% tax rate I’ve often heard proposed, this happens: The family making $20,000 is required to pay $3400 in taxes, which they cannot afford. So they reduce their withholding to zero, and end up going deeply in debt to the government. They will only get out as the statute of limitations wipes out the debt–they can never pay it. The family making 35,000 is being asked to pay $5,950 in taxes….all their disposable income plus some of their basic living expenses. If they actually pay it, it puts them into poverty, too. The family making $100,000 is being asked to pay $17,000, which comes easily out of their $70,000 disposable income. The percentage is the same, but the impact is different. This is because the family expenses do not change in proportion to their income. The poor family makes 20% of the income of their middle-class compatriots, but may pay 30% as much rent and spend 50-60% as much on groceries, and perhaps 80% as much on electricity.

I’m not arguing for the equalization of incomes, but rather for the simple principle that you can’t get blood out of turnips. Poor people are turnips.

So, most flat-taxers argue, let’s just set a minimum amount to exempt….and off we run into tax-brackets. If we simply exempt the first $30,000, it immediately becomes much more reasonable. You’ve established a 0% tax bracket. Keep going, and you’re back where you started.

But there’s another reason for tax brackets, and it has to do with the incentives they create for people in higher income brackets.
For the practical reasons described above, you can’t get any more money out of poor people, nor can you encourage them to do more than pay their rent and buy groceries.

But people who have money to spend can be encouraged to use it in ways which benefit all. Yes, this is social engineering, but without
it we’d still be living in the era of the Robber Barons (or are we already?). Very simply, if taxes would wipe out a substantial part of the benefit of additional earnings, you will attempt to keep those earnings off the books.

As a small business owner (and –full disclosure– I don’t expect to have this problem in the foreseeable future), if I were to earn, say, $300,000, I have a choice. I can keep the money and pay the top tax rate on it….or I can expand my business, hire some employees, reduce my profit into a lower tax bracket. In other words, if I put that money back into the economy, I don’t have to
pay that tax rate. If my business is a corporation, I personally pay tax only on the amount I take home, whether as wages or dividends. If the
corporation spends all the remaining money on its operations, it doesn’t pay taxes, either.

(I do have a problem with the SE tax, as currently constituted, but that’s a separate issue. Currently, a self-employed person pays more on his profits than an employee does, because there’s no employer paying half the Social Security, and no consideration for low-income individuals.)

Another example of the same principle: You don’t have to pay tax on cap gains until you sell the stock, which encourages you to keep it in the
market (the current reduced cap gains rates work against this principle).

All that said, the government is always a bit indecisive about this, changing key laws like Sec 179 each year. One year they support small business,
the next year all the breaks go to big corps. But the larger intent is usually clear: Feed the economy or pay the tax.

A couple points of clarification: The tax brackets do not add a significant layer of complexity to the code. The bigger problem by far is determining taxable income. And tax brackets ARE adjusted for inflation. The following chart shows the bottom of each tax bracket

2007 (single taxpayers)
percent 2007 2008
10% 0 0
15% 7,876 8,021
25% 31,851 32,551
28% 77,101 78,851
33% 160,851 164,551
35% 349,701 357,701
The differences between the right and middle columns are inflation adjustments.

-Julie

Brian Armstrong

December 19th, 2008 at 7:19 pm

Hi Julie, thank you for the long and very thoughtful post.

Only a couple thoughts:

1. Regarding your first point about poor people being unable to pay the tax so it’s impractical. I think this is basically amounts to saying “since we having been doing it this way so long, it would be impossible to go back”. We have to be careful not to use one mistake to justify another. In a practical world you would use a transition period to gradually implement an idea like this and ease the blow. It would undoubtedly piss some people off and cause them to adjust – but if it’s best for society as a whole then this isn’t a reason not to do it. Remember, we can’t use one mistake to justify another.

2. I’m not sure if you were suggesting the higher tax rate for wealthy people is justified because it encourages them to spend more (reinvest) and therefore show lower taxable income? If so, I think you’d have to look at this argument very closely. This is actually such a bizarre argument that I’m having a hard time trying to explain why…

Ok, imagine there is a kid who get’s his lunch money stolen every day by a bully. He knows the bully is going to be waiting there for him at school, so instead he tries to spend as much of it as possible on the way to school. That way the bully won’t be able to get as much from him. Basically, your argument amounts to saying that bully’s are justified and we need them because they encourage people to buy stuff.

Do you see why this is such a strange argument?

In a free society, you should have the right to spend it on whatever you feel like without the fear of the government (or anyone else) coming to take it from you.

Julie

December 20th, 2008 at 3:14 am

Not quite. I’m suggesting that it’s both impractical and immoral to tax anyone to the extent that they can’t afford to feed their children. This concept was explored thoroughly in 18th century France, I believe…
As for your “bully” argument–why do we tax cigarettes, anyway, if not to get people to spend their money elsewhere? But if you insist on the analogy, it would be as if the kid can buy lunch or books on the way to school, but buy candy only after getting there (and being robbed).
You seem to be making an argument for elimination of taxation entirely; I’d like to see what you would prefer. There are some interesting possibilities there: In the 19th century, before income tax, the US subsisted mostly on tariffs.

Brian Armstrong

January 3rd, 2009 at 7:15 pm

True…i guess if you want to make the immoral argument, you could argue the baseline $30k or so (as someone mentioned above) would be tax free. But you certainly couldn’t justify tax brackets from this. This would at least be a step in the right direction I suppose although I’m still not quite sure I’d buy it.

It scares me when the government starts to make judgment calls like that about what’s poor and that’s essential, etc. It should just be simple and basic percentage if you want to be a law abiding tax payer living in the US. In a practical sense you make a good point as well that if people have to choose between food or paying the tax, they will choose food and become law breakers. But that’s fine and is basically how it works now too…if you don’t pay taxes but are so poor as to not be worth auditing by the IRS then you just fly under the radar. This is fine…but ultimately people have an incentive to become real taxpayers if they ever want to get loans or buy a house, etc. So the system still works.

The cigarette tax is a “sin tax”…equally ridiculous for the government to try and legislate morality. They don’t have any business telling you how to spend your own money, as long as you aren’t hurting anyone else.

Anyway, I’m certainly not suggesting we eliminate taxation. We need a government. But really only for about 3 things: protect the border from invasion (military), keep the peace (police), protect property rights (courts). By the way, environmental issues would fall under property rights. There are a few others which I think we could make a case for, but probably about 80% of the government is unnecessary. By eliminating the rest of the government we could get away with probably a 10% tax rate or less.

Caroline

December 18th, 2008 at 8:35 am

The gym is a strange place to be thinking about taxes, you obviously haven’t been working out hard enough.

You are never going to get a fair tax system as this would mean everyone agreeing on what was fair. whatever government of the day is in, they have to come up with a balanced taxing system.

Bill in Detroit

December 19th, 2008 at 2:27 pm

A flat percentage tax is ab initio unfair –unless– you start by establishing a baseline, adjusted for inflation, that is fully non-taxable. Everyone would get to use the baseline of, say, $30,000 and just drop it out of their gross.

The reason it is unfair is that a very high percentage of that first $30,000 is chewed up in baseline living expenses. Progressively less of amounts above that are consumed in this non-discretionary spending.

Allowable deductions would include uninsured losses from disaster and medical care in excess of insured amounts. (Note that the rich can no longer claim deductions for the wages of household help, depreciation on the yacht and so on … they only get the two deductions the rest of us get. Period. Then, too, the perpetually fertile would lose the deductions for having large families.*)

From that point, hit everyone with a 15% tax … and that includes corporations … right across the board.

Let the government find a way to live within that.

With that $30,000 shelter in place, I would call it the “Safe Haven Tax”.

And I would assign it a ZERO percent chance of ever seeing light of day.

* I also support limiting child-based welfare payments to the number of children already born at the time of initial application plus one born within 12 months of the date of application. Free surgical sterilization upon request. Reversal at personal expense.

Brian Armstrong

December 19th, 2008 at 6:57 pm

Hi Bill, I understand the argument and it’s similar to what someone else mentioned above. I just don’t think it’s fair to say one person’s money is more important than another’s.

Who’s to say that “rich” person making $100,000 doesn’t have an equally or more important use for it. Maybe he has to pay the health care bill for his terminally ill (uninsured) parents – and that’s why he worked for years to earn it. Or maybe he is using his money to build a school or fund malaria research (like Bill Gates). Everyone has their own dreams and goals and what they consider an “essential expense” and it’s not fair to say one is more important than another.

The government is basically saying “you don’t need your money as much as this other person so we’re going to take more of it”. Who are they to make that decision? Government should be about treating everyone equally – they should act toward your wealth the way they do toward your religion, race, and sexuality. In other words, they shouldn’t discriminate based on it or make rules based on it. Aside from the fact it undermines the whole economy by punishing success – it doesn’t treat everyone equally.

Steve1776

December 22nd, 2008 at 10:12 pm

The government uses taxes to influence behavior. If they want you do more of something (buy a house) they give you a deduction for doing it (mortgage deduction). If the don’t want you to do something they raise taxes on it (cigarettes).

If I was Cesar this would be my tax plan:

a) Corporate tax rate of zero. This would make the U.S. the tax haven of the world for business. No more unemployment since there would be more jobs than you can count.

b) A 2% transaction tax. A transaction is any time money exchanges hands for any reason. This would be payed by both the buyer and the seller for a total of 4% on all transactions, no exceptions. The feds get 1%, the state gets 2%, the city and county split the remaining 1%. All other taxes except the tax on gasoline are eliminated. The gas tax would be capped at 1% for a total tax of 5%. The gas tax can only be spent on highways (Concrete, asphalt, and steal. If the state wants to landscape the road they can pay for it out of their 2%.)

c) The U.S. congress can only fund and authorize money to be spent on items authorized by the constitution. All appropriations bills MUST state the section of the constitution that give the government the authority to fund that program (want to fund public radio, show me the section of the constitution that authorizes the government to be in the entertainment business and to use taxpayer money to compete against private businesses that are doing the same thing).

d) If you are receiving government assistance (not retirement or social security) or if you have received government assistance in the past 12 months you forfeit your right to vote (if you don’t feed the horses you don’t get to guide the wagon). If it has been over 12 months since you’ve received government assistance you are eligible to vote. Rome fell because the people found out they could vote themselves “bread and circuses”. I believe we are close to doing the same thing since the taxpayers are barely above the 50% level of the population.

Jennifer

December 22nd, 2008 at 10:55 pm

Why if we repeal the tax exemption for religious organizations? Make them pay taxes at the same rate that businesses pay? They are required to pay property taxes and income taxes.

sarah

January 22nd, 2009 at 8:33 pm

They’re not for profit organizations. If we repealed their tax exempt status, then to be “fair” we’d need to repeal all not for profit organizations tax exempt status. This would result in a smaller percentage of the donations actually being put to good use.

Rob H

December 23rd, 2008 at 11:52 am

<<>>

In the case of cigarettes, maybe they want us to quit smoking but I have a different spin:

The government sees taxes on cigarettes as an unlimited source of revenue just as they do with gasoline, alcohol, phone usage (they are kind enough to label the tax a ’surcharge’ or ‘usage fee’)and sales tax on cars, etc. They seem to have forgotten that a 10% additional tax placed on luxury boats valued at over $100,000 killed that industry.

Sales on new cars are down 25% or more. We are consuming less gasoline. Oops…where’s that revenue going to come from?

All of us. Even if income tax for low wage earners goes to zero they will pay more taxes elsewhere. They just won’t realize it.

Matt Thomas

December 24th, 2008 at 1:08 am

Brian,
Interesting post. I appreciate (as per your comments) viewing both perspectives.

If I’m not mistaken, I think they call the current tax system a “Progressive Tax System” where those that make more money are taxed more. However, like you said, a simple flat percentage works the same way. Therefore, I think the same “Progressive Tax” should apply for a fixed percentage. It actually might, I’m not sure.

As per your argument on having a fixed percentage tax…I do see the merit in the argument, however I feel like the extremely wealthy (like Warren Buffet, as Kevin pointed out) can afford to pay a higher tax bracket. A professor of mine told me a story about a hedge fund manager who had made $300 million dollars and was taxed $100 million of it. My professor was against it, but I felt as if, well if he still has $200 million, he can certainly afford a $100 million tax.

So I can’t say I entirely disagree with your idea of a flat percentage, but I believe that in at least some extreme circumstances, certain individuals with a LOT of money can afford the high tax bracket anyway, and it certainly wont seem that punitive. After all, the $100 million in tax wont seem to be nearly as much to the individual netting $200m in take-home pay as $10k in tax would be to someone netting $20k.

Steve1776

January 2nd, 2009 at 1:53 am

The trouble with having a higher tax on those who make a “lot” of money is who decides who makes a lot of money. When the income tax was started it was a very low tax (I believe it was 1%) on the wealthiest (top 1% or 2%). Guess who is considered wealthy now?

With a consumption or transaction tax Warren Buffet would pay a tax on everything that he spends. And sooner or later he (or his heirs) will spend every dime he has made. With a flat tax or a progressive tax the money is not collected until it is considered income. As long as Buffet keeps moving it around in the stock market and keeps it from being declared income there is no tax. With a transaction tax there would be money collected on every trade, unlike today where you can declare a loss and not pay any tax.

vincent

January 20th, 2010 at 12:36 pm

Hi. Im not from usa I live in UK. Although I come from a working class background, I am a young man who still has aspirations to better myself. I think that a lot of money that gets paid in welfare as its called in usa or what we call benefits is wasted on people that dont want to work. They get more money for having more children subsidised by taxpayers. I commonly see people of my age 24 with 3 or 4 young ones living on welfare having never had a job. if there was no welfare wouldnt the government be forced to find work for them. Also, the fact that the minimum wage is very low in the uk means that poorer people are actually better off on benefits than they are working. Is this the case in some parts of America?

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