Much is being bandied about by Repub political candidates on tax rates and the old chestnuts about “flat taxes” and “consumption taxes” are once again entering the conversation. For that reason I decided to explain modern tax schemes to those who may not understand them:
The so-called flat tax is a simple levy on every dollar earned, deemed flat because everyone pays the same amount. This may seem much simpler, and it is, but mere simplicity is not a reason to change an entire tax code. Under this scheme, a person earning, say $30,000 per year would pay, say, 18% of his income or $5,400.00, considerably more than he pays now. That same person, earning $300,000 per year would pay $54,000, considerably less than he pays now. Most flat-tax schemes have been set at considerably lower rates than our current tax tables, begging the question as to the motivation of those proposing it. Flat taxes remove a large burden from high earners, who can afford to pay more taxes, and shifts it to low earners, who by their very nature, cannot.
This tax seems to make more sense to many. Rather than tax what a person earns, it would tax what they spend. On its face, it appears to be a fairer system, in that those who make a lot presumably spend a lot and, therefore, the highest burden would be with them. The problem is that those in lower income brackets tend to spend all or most of their incomes on basic necessities such as food, fuel and rent. These people have little disposable income from which to draw taxes, and so it would place an undue burden on them. They are virtually forced to spend nearly all their money nearly all the time, and have little or none to save, making 100% of their incomes subject to this tax.
Those with higher incomes and more disposable incomes can choose when to spend money and when not to. They can afford to save their money, rather than spending it, and would, therefore, be in a better position to keep their tax burden, on a percentage of income basis, lower than low-income people.
There are some who also suggest that this kind of tax would stifle spending-never a good thing for the economy.
The advantage of a progressive tax is that it’s based on the taxpayer’s ability to pay. The more one makes, the higher percentage of income one is able to pay. This premise is based on the fact that there is a baseline for how much it costs to live in modern society, and the further one is from that baseline, the more of one’s income is deemed to be surplus, and, therefore, available for taxation to benefit the greater good. It also allows those who do not make as much to pay less in taxes, thereby leaving more available to pay for everyday expenses like rent and food. It can also assist those in need by adding complexities like earned income credits, allowing low-income workers to receive money from the general tax account in order to help them survive.
It also creates more investment and charitable giving, in that those in the higher tax brackets, wanting to avoid high levels of taxation, will employ “writeoffs” by investing in tax deductible items such as charities or expanding their businesses by paying for factories and risking capital for new innovations. This, by extension, creates jobs and expands businesses. This is why when, during the 1950s when we had a maximum marginal tax rate of 92%, very few people ever actually paid that high rate. They were incentivised by these high rates to use their money for capital improvements in their businesses and expansion of industries, as well as investing in innovation, due to the tax-deductible nature of those types of investments. In this way, the marginal rate of 92%, although not actually paid by many people, may have contributed to the enormous economic expansion he U.S. experienced during the 1950s.
It is the most complex of all tax systems in that many “loopholes” are baked into it for various political reasons, but those loopholes do not mean that the system doesn’t work, only that certain interest groups have been able to get special treatment for themselves. These loopholes are purely political and have nothing to do with the benefits of the system itself. In general, it is the fairest of tax systems across the broad spectrum of incomes.
Some complain about the level of complexity of the current tax system for the average citizen. These issues have been largely resolved by the advent of personal tax software like Turbo Tax and the like. The simplicity of these software packages is such that virtually anyone who has earned their income from simple employment can do their taxes in minutes and avoid the expense of a tax preparer.