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ETpro's avatar

Should the USA switch to a regressive, flat tax?

Asked by ETpro (34150 points ) March 1st, 2010

The USA became the richest, most powerful nation on Earth with a strong progressive tax system. During and after WWII, our top tax rate ran as high as 92%. John Kennedy dropped it to 70%. During the post-war period, we paid down the massive debt of WWII and the Great Depression, built the booming post-war economy, created plenty of millionaires, and developed a strong, affluent middle class.

Now conservatives are calling for a flat tax. There is no question that a flat tax would be much simpler, but is such a tax system really going to build a stronger America or just a wealthier elite, moneyed class. The following nations currently use a flat tax: Albania, Bosnia and Herzegovina. Bulgaria, Czech Republic, Estonia, Georgia, Guernsey, Kazakhstan, Iceland, Iraq, Jersey, Kyrgyzstan, Latvia, Lithuania, Macedonia, Mongolia, Montenegro, Mauritius, Romania, Russia, Serbia, Slovakia, Ukraine. Are they the models we should follow for a better future USA?

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37 Answers

ragingloli's avatar

The Vulcan Science Directorate has determined that a flat tax puts the financial strain on lower income citizens. It will invariably lead to the poor becoming poorer and the rich becoming richer. This is reinforced by the fact that a flat tax means less tax income from the rich, which means to compensate for the diminished returns the tax would have to raised increasing the strain for the poorer citizens even more.
On the bright side of course this may lead to a revolution leading directly to communism.

stranger_in_a_strange_land's avatar

No. It’s terribly unfair to low income earners. Our tax system should be more steeply progressive, not to the 92% level, but I think 70% is reasonable at the $500k + level.

JLeslie's avatar

I want a flat tax. Anything is better than what we are doing currently. Right now the very wealthy pay less, because of all of the write-offs and loopholes. My flat tax will still have no tax paid below a certain income. I personally don’t know any Republicans calling or a flat tax. The ones around me want the rich to be less taxed than the middle class. They say things like they want a “fair tax” which to them is no income tax, and only taxing spending, that is terribly regressive to me.

Check out this article http://www.forbes.com/2009/01/29/irs-high-income-personal-finance-taxes_0129_wealthy_americans.html about the richest 400 people in our ountry and how much tax they pay. It says basically what Warren Buffet has said, that he is taxed around 16 or 17% and his secretary pays out much more.

JLeslie's avatar

@stranger_in_a_strange_land 70% is way too high. I am fine with taxing more. Really, I wish we would, especially temporarily to get rid of the deficit, but 70% is even over my tolerance especially as low as $500K. You might talk me into it at $1 million.

mattbrowne's avatar

Absolutely not.

Besides, the US wouldn’t be able to fund its expensive military anymore. Low income earners would simply go broke having to pay significantly higher taxes.

critter1982's avatar

I believe the conservative idea behind the flat tax, not to be necessarily regressive. I believe the idea put forth by those like Ron Paul call for some sort of a progressive refund for those less wealthy. For example those making under $30,000 a year would obtain a $2,000 check at the end of the year from the government, significantly reducing the amount of actual money paid to the government. Those making less than $40,000 would get a check for $1,000 and so on. So I don’t really buy off at least in this case that its a regressive tax. In it’s simplest form however yes.

I am absolutely in-line with a flat tax. Our tax system is so screwed up not even the most intelligent minded people fully understand it. There are an incredible amount of loopholes and random right-off’s that we are generating a regressive tax like phenomenon in our progressive tax system.

@stranger_in_a_strange_land : Don’t you think a steep (very steep 70%) would stifle peoples inhibitions to make more money? At some point your going to have company CEO’s making slightly more than new hires.

missingbite's avatar

Most millionaires are middle class people who save. Flat tax would inspire people to save. Rich people buy more so they would pay more tax. About 70% of our economy is based on consumption. We need to tax that way. The more you buy the more tax you pay. The more you save the less tax you pay.

Of course we would have to get Government spending under control as well. We can’t keep sustaining entitlement programs that are no cost to the participant.

stranger_in_a_strange_land's avatar

@JLeslie I can live with 70% at $1 million. Also national heath insurance and old age/disability persions similarly funded. And a balanced budget amendment operating along Keynesian priciples, to damp out the cyclical “boom and bust”. Government funded for-profit investment in high speed electric rail, green energy (including nuclear).

janbb's avatar

You answered your own question with the word “regressive”. Regressive taxes are inherently unfair.

imccreery's avatar

There is an important variation of the flat tax which is the negative income tax (NIT). Check it out.

missingbite's avatar

I’m wondering if we were all still in school if it would be fair to tax the hard studying students 70% of their grades so the less studying students could have “fair” grades. I’m all for helping those less fortunate but 70% on a million dollar income is crazy. Dare I say stupid. This is also the problem with redistribution of wealth. Relate it to grades in school. How many people would want to study like crazy and make an A only to receive a B so that C students could be brought up to a B and all be “fair”?

I know this was not proper grammar.

ETpro's avatar

@JLeslie As attractive as a flat tax sounds in the sales brohures, there are serious flaws with it. What it invariably leads to is a small elite that owns virtually all the wealth of a nation, and uses their power to shape government so things stay just as they are, with no potential for anyone to rise up to challenge their hold on the money. It’s the blueprint for a banana republic. In fact, Haiti has a 2% flat income tax plus a value added tax of 10%. A handful of families in Haiti hold all power and wealth, and the average working wage is #1.25 a day.

With our current spending level, a flat tax here would need to be at least 30%, That means that someone earning $2,500 per month ($30,000 per year) would pay out $750 a month in taxes, leaving them $1,750 after withholding to pay for food, rent, healthcare, etc. The $2,000 check at the end of the year wouldn’t help much, as it would show up too late to let them keep a roof over their heads.

The person earning $2,500,000,000 a year would pay out a healthy $750 million in taxes, but still be left with 1.75 billion to buy up even more income generating investments. The greater your anual income, the more a flat tax works to your advantage, because you need ever less of your total income to live, and the more you can use to buy up what is around you and increase that income next year.

ETpro's avatar

@critter1982 That’s a common argument, but it ignores the fact that the US produced a booming economy with tax rates of 75% and greater. We also had a very strong middle class with that rate, and produced a growing crop of multi-millionaires.

Reagan promised that trickle-down would compensate the poor for what they gave up to further enrich the rich. He slashed taxes from 70% to 28% on top earners. 32 years and counting, it hasn’t worked. In his own 8 years, it tripled the national debt that we had previously been paying down. And over the last deciade, for the first time in US history, real income is down for the middle class. In fact, we are slowly losing our middle class. We are on a slide toward a banana republic, and a flat tax will just speed up the slide.

cletrans2col's avatar

If we want to be serious about paying down the national debt, its starts with controlling wasteful spending by our government. It is ridiculous that we still pay for military planes like the F-22 only because folks in Congress refuse to acknowledge that it sucks. It’s crazy that the Democrat majority wants to add another “entitlement” when we cannot afford the other ones.

ragingloli's avatar

@missingbite
That comparison is so ludicrous I almost did not know where to start.
Pupils’ grades are immaterial. They can not be used for anything except as an assessment of the pupil’s performance. You can not buy school equipment, pay teachers and staff, maintain the school building, buy pencils, pens, paper, books, calculators or private lessons, all of which boost the pupil’s ability and opportunity to improve their grades.

Money on the other hand can not serve as a reliable indicator of performance. A diligent factory worker who reliably manufactures products year after year only makes a fraction of what a CEO gets for crashing the economy.
But money is used to fund the construction and maintanance of infrastructure (roads, bridges, powerlines, water and sewage, etc), public security and safety, regulators who oversee that worker protection and treatment laws are observed, pensions who enable people to survive after they are too old to work and in civilised countries, public healthcare /insurance that enables people to restore their health without going bankrupt, all of which serve as a direct basis for everyone’s ability to earn money.

Comparing money to grades is stupid.

missingbite's avatar

@ragingloli I disagree. A factory worker can work hard and become a CEO if he or she wants that. What if that factory worker has a second job that earns them millions. Everyone knows money and grades are different. I was not comparing the two. I was comparing the ‘fairness” of making one group of people pay more than others. If you base a flat tax on consumption, rich people will still pay more taxes. They consume more. What we use that money for will be up the the people. I totally believe that hard work, i.e. studying, brings about prosperity. Nowhere in my post did I say grades = money. Reread my post. That is stupid.

JLeslie's avatar

@ETpro I guess I would need to know the real numbers to know where I really stand. I am not saying your numbers aren’t accurate that a flat tax would need to be 30% sounds high to me. Also, I am not talking about getting rid of sales tax altogether, so many variables that can be discussed around this subject. I am not for a very high VAT or sales tax, because I find that to be regressive. In TN there is no state income tax, but there is a state tax on dividends and interest, although very low. And, we have a 9.25% sales tax, even on groceries, I can’t think of anything more regressive than taxing bread.

If we tax only on spending, which I don’t think you are suggesting, but anyway if we tax only on spending the rich make out like bandits. If you make $10 million a year, you probably won’t be spending all of it, but if you make $50K you probably will, so basically 100% of the $50K guys income is taxed, and if the $10m spends $6m, only 60% of his income is taxed.

As a middle class person myself, I have been fortunate enough to have had an investment property that I could depreciate on my taxes and when I sold it only paid capital gains. The money my husband and I have slaved for a regular jobs is taxed much higher. People with more money, are able to afford more tax shelters, I think it isn’t right. The rich get richer. Believe me, even if I was going to get taxed more I would have bought the investment property.

It isn’t all or none for me. I want a combination of taxation, but in a simpler more straight forward form, and I would prefer no one get more hurt than the next guy, but I think it is up for debate who is getting hurt more.

My taxes were pretty straight forward this year, I just did the math for my tax return and I am paying 22% of my gross adjusted income, so that is not incuding what I itemized, which was very low this year, I am barely over the standard deduction. But, according to that article I posted, the info is from the IRS, the guy making $200million is paying about 17%. So it back to your assertion of 30%, is that number simply looking at the fed income tax we collect now, and what % it would have to be to come out even if we had a flat tax? Or, is it to also replace sales tax, and other taxes?

And unrelated, but related, we need to think about how taxes and tariffs work on goods that are imported and exported to get an even playing field in that arena.

critter1982's avatar

@ETpro : Yes America did very well when tax rates were 70% however your ignoring a very important fact. The tax rate at 70% was a Kennedy tax cut from a Roosevelt 90% tax rate. It wasn’t because Americans were being taxed 70% of their wage that they were spending and getting jobs, it was because they were making more money than they had in awhile. If what you said is true, “higher taxes equals more productivity”, then why after the Kennedy tax cuts did tax revenues SIGNIFICANTLY increase the next 10 years? Wouldn’t tax revenues have been significantly better at 90%? In fact when you go back and look at historical tax cuts they were almost always followed by an increase in tax revenue.

filmfann's avatar

I am not rich, by any means, but I support a flat tax of 10% on everyone.
It’s the only fair way.

ETpro's avatar

@JLeslie I am all for simplifying the tax codes too. And I totally agree that a VAT or sales tax is quite regressive, especially if it is levied on groceries.

I am basing the 30% number on estimates made by financial experts studying overall spending by the government and our current tax system. It would seem to be pretty acurate. When Reagan dropped the rates to 28% for nearly everyone, we went awash in a food of debt, so that wasn’t enough.

@critter1982 Yes, FDR introduced the 90% rate to finance WWII, but it stuck around till Kennedy called for cutting it, and it actually didn’t get cut till Johnson took over after Kennedy’s assassination. Between 1945 and 1964, it was 91% for most of the time on taxable income above $400,000—which was a lot of money at that time. And people did very well under that. We did not have a real middle class before 1945. In 20 years, we grew a thriving middle class and produced plenty of millionaires.

You are right that putting taxes too high will inhibit economic growth and actually not produce greater revenues, but setting them too low does the same. You get a spurt of growth for a short time, but the debt that the low revenues generate eventually has to be paid.

@filmfann Think 30%. Politicians may tell you a flat tax of 10% would be all that is needed, but that’s a bald-faced lie—something politicians are very good at.

YARNLADY's avatar

A modified flat tax which leaves low income people out of the system; starting at $25,000 and above.

saxon1066's avatar

Flat taxes promote growth and savings. People conserve more because they can avoid taxes by reusing and recycling. Apparently many people consider it a flaw that someone be rewarded for doing well if you can call keeping your own money a reward. The progressive tax is designed to punish the taxpayer for making more money by taxing him at a higher rate. The converse is true, we reward the person who does not do well. This is called Marxism. “From each according to his ability, to each according to his need.” Suddenly, everybody’s need to ability ratio starts to shift. Maybe a better solution is to start with a tax that’s not burdensome for any bracket. If the citizenry feels that they are receiving a return on investment and that each subsequent increase is again linked to that feeling of investment and ownership, we wouldn’t be having this discussion. Obviously, no one feels they have a sense of investment or ownership. On one end of the spectrum, people game the system to receive benefits for not contributing and on the opposite end, people game the system to avoid contributing. Some may argue this, but I challenge you to find a person who doesn’t take the deductions available. In the end nobody wants to contribute to this system. Flat tax based on consumption is a better fix. No deductions, no exceptions.

JLeslie's avatar

@ETpro I don’t want you to think I am arguing here as I continue with my thought process on the 30% number, just thinking it through and looking for your knowledge on the subject. What Reagan did might not be valid because I don’t know what other spending he did, of course there is two side to the equation of a balanced budget. I think Clinton was able to do a lot of government spending cute. Although, I would guess right now we do need more money because of the war and this TARP stuff, but I think adressing those should be a temporary tax hike to pay those debts off. Obviously, our tax structure right now is not paying for those things.

So, my basic curiosity would be if we took the total revenue the IRS collected in 2005 maybe, befor everything went bad (or maybe there is a better year) and how many tax payers there are, and figure out if we spread the percentage equally among all tax payers what is the % we need, just to even with what we collect already. Not, what we need to balance the budget. Is that what the financial experts you mention are calculating? And, are they talking about getting rid of all loopholes? And, is the percentage on adjusted gross income? Or, your actual gross income (which I guess is Medicare wages?) I guess it matters what number we are starting with, if it is before IRA and 401K etc. Once we start talking about changing the tax system drastically, I guess we need to know all of the changes to keep it apples to apples. What do you think?

ETpro's avatar

@YARNLADY Exempting just the poor will not preveent the very rich from accumulating so much wealth so rapidly that they and their families end up buying up every income generating enterprise there is. Unless the government slats deeply into socialism, which many of the Flat Tax countries do, then a flat tax invariably results in an oligarchy. It is the blueprint for a banana republic.

@saxon1066 A flat tax set high enough to just collect recent revenues, not to mention covering the current deficit and starting to pay down the $12.6 trillion National Debt, would leave nobody but the wealthy able to save a dime. For most of us, it would mean a big tax HIKE!

@JLeslie The 30% number is just to raise revenues to the level we had back in 2005 and 2006, and we were awash in borrowing then! Read more about the flat tax at http://www.csmonitor.com/2003/1201/p13s01-wmgn.html

JLeslie's avatar

@ETpro That article says:

But at the top, the tax system has already become regressive. The super-rich pay proportionately less in federal income tax than the merely rich. In 2000, the nation’s 400 richest taxpayers, making an average $173 million, paid an effective tax rate more than 5 percentage points lower than those making $1.5 million to $5 million, notes economist Martin Sullivan in Tax Notes magazine.

That gap has probably shrunk a bit since then. In 2000, the peak year for stock market prices, the super-rich probably saved some taxes on their huge capital gains. (Capital gains are taxed at a lower rate than ordinary income.) Since then, stock-market capital gains have diminished. But Congress also cut the capital gains rate from 20 to 15 percent – a provision especially beneficial to the rich.

That basically supports what I said. And I disagree that the country is going towards a flat tax. This shows again that the super rich are not even taxed flat to the middle and bottom part of the upper class. Over the last 20 years it seems like we have been going towards an inverse tax where the superrich are taxed the least, and right wing republicans (not to be confused with what I would call Conservative Republicans) think it is ok. They have convinced themselves the country will go over a cliff if you tax the rich the same as the middle classes, meaning if you increase the capital gains tax, and getting rid of some of the loopholes. I believe they have been terrorized and terrorfied.

Also, on page 2 they write Prior to the 2001 tax cut, the richest 1 percent of households, making an average annual income just above $1 million, paid 42 percent of their income, or $431,800, in taxes to all levels of government. Under current law, they would pay 36.1 percent, or $371,200, in 2010 (see chart). Under current law, the rate would jump back up to 42 percent the following year. This shows rates, not actual taxes paid. I think it doesn’t include the tax breaks people in those higher income brackets utilize. Remember, the article I posted are figures reported by the IRS that the top bracket _actually pays an average of 17%.

I would want to see the actual taxes paid for all income brackets. The tax law is too complicated to just look at a tax bracket and make assumptions.

JLeslie's avatar

Check out this link…see table 1 part way down the page, and look at the column to the far right. http://www.taxfoundation.org/news/show/250.html that shows actual percentage paid in varying income levels.

ETpro's avatar

@JLeslie It doesn’t support the need for a flat tax, it supports the need for a simplification and removal of the loopholes in the current tax system and for a MORE rather than LESS progressive scale. The folks earning 1.5 million pay about 22% now, where they are supposed to be paying 35%. Those tip-top earners pay about 17%. The average wage earner pays about 28%. Dropping the rate to 20% across the board would mean that 400 people would pay 4% more and everybody else would pay less. That would NOT balance the budget.

Believe not or not, Republican Steve Forbes put forward a plan dropping the rate to just 17% but having no taxes on investments or capital gains. That would have meant that the very, very wealthy would pay nothing. Taxes would only apply to wage earners, not owners. Whatever they tell you about why they are selling the snake oil, it is all about helping the elite rich get richer at the expense of everybody else.

JLeslie's avatar

Well, I think Capital Gains should be taxed like everything else, as I mentioned above, the people who have the money to invest get tax breaks, and the guy working 9–5 every day gets screwed. The rich get richer. Flat tax everything. The table says the average tax for all tax payers is 12.68%. Even if you give people under $50K no taxes owed at all, I still don’t think we are up at 30%. Maybe that is where Forbes gets the 17%? I figured the mean average if you take away the bottom three categories, and that was just under 16.85%, but my calculation does not weight how many people are in each category, so my number is flawed to some extent. I am guessing it would be a little higher.

For this question I am not thinking of balancing the current budget, I think that needs a temporary assessment tax. Like when you have hurricane hit a building and the maintenance fees go up for 2 years to take care of repairs.

YARNLADY's avatar

@ETpro I believe that a true Social Democracy society is the most efficient type of society.“From each according to his ability – to each according to his needs.”

ETpro's avatar

@YARNLADY You surely know the problems in implementing that egalitarian thought while keeping the productive people in society moticated and the lazy from just hopping on the backs of others for a free ride.

@JLeslie If there are no loopholes, then the rate needed may be in the 20s somewhere. Problem is those who can afford to influence legislation in their favor will just buy themselves a new set of loopholes. There is simply no way short of pure socialist redistribution of revenues to leep a flat tax from being highly regressive and devastating the middle class.

JLeslie's avatar

@ETpro ok. If you think it impossible I will go with a progressive tax. :). I still hate all of the loopholes though.

ETpro's avatar

@JLeslie No argument at all about the loopholes. I just fear than, since they get instered by a congress in the back pockets of big money interests, they would go right back into any new system instituted.

JLeslie's avatar

@ETpro Sometimes I think about it too hard, and I can change my mind ten times. Maybe the system we have works with the tricky loopholes, because psychologically people think they are getting a “deal” because of tax breaks when they buy stuff, and that keeps the economy moving. I don’t know. But, if they keep the loopholes and write-offs in then I think the tax should be progressive, more than it is right now, so that the tippy top in the end winds up being kind of a flat taxed anyway. So I think we actually agree after all of that discussion. :)

ETpro's avatar

@JLeslie The rare time when after a debate we can agree to agree. :-)

Hypocrisy_Central's avatar

Fact from fiction, truth from diction. A totally honest flat tax would not work. I know many less than wealthy people who seem to want to try it because they believe having the rich pay more and they will, is the way to go. In actual practice many don’t know they would get hit harder. If you have someone making $350,000,000 with a 25% flat tax (as some friends and family believe should be) that would be $87,500,000 leaving them $262,500,000. If that person can live like they please and still handle all their expenses that 87 mil will seem like a lot but it won’t break them, they can still have a reserve if they can live off say $110,000,000 a year. But a person earning $70,000 would end up with $52,500 after $17,500 gets clipped off of him. That would be like busting him back one tax bracket in actual spending power. If it takes most of that $70,000 to live comfortable and pay the expenses a lot of extras might have to be cut, like vacations, riding lessons for the kids, bass fishing junkets, etc. That $17K is almost another vehicle depending on the model and make, in some instances a whole semester at the UC or CS level. And it will be worse the less you make below that. Pound for pound the less than wealthy will feel it harder even though they are actually paying less, that is, unless you want to have a pseudo flat tax that don’t really tax everyone at the same rate straight across the board no exceptions.

ETpro's avatar

@Hypocrisy_Central Where the flat tax would truly kill is the many people now working at or around minimum wage. That’s a rapidly growing class, as high paying manufacturing jobs evaporate and jobs at Wal-Mart and Starbucks replace them. That’s $14,790 a year or $1,232.50 a month. Knock 25% off that and the poor sap has to get by on $924.37 a month.

The solution to the rich paying lower actual rates than their secretaries is to simplify the tax codes and yank out all the loopholes.

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