The Polite Liberal

A rant-free discussion of liberal philosophy and policies.


The Polite Liberal is the pseudonym of a "nontraditional" graduate student in mathematics (for nonacademics, "nontraditional," is a polite way of saying, "older than 25.") The Polite Liberal is an attempt to spur real policy debate, instead of partisan insults and conspiracy theories. Conservatives (and liberals, of course!) are welcome.

Tuesday, November 16, 2004

On flat taxes

The federal tax structure is, as I've said in a previous post, progressive. This means that the wealthy are taxed at higher rates than the poor. This structure, perhaps of the greatest liberal triumphs of the last century, attempts to tax people according to their ability to pay. Progressive taxes attempt to take into account the fact that the fraction of a person's income that they can afford to pay in taxes gradually increases with income---that is, taxing someone making $30,000 at 20% (leaving them with $24,000) is in effect a much harsher tax than taxing someone making $300,000 at 20% (leaving them with $240,000).

This structure strikes many conservatives as unfair. They see it as contributing to the overwhelming complexity of the tax code (which it does--consider the simplicity of paying the flat social security tax in contrast). They also complain that it punishes hard work by increasing taxes on higher-income Americans. To fix these problems, they frequently propose replacing the graduated income tax with a single, flat tax rate (frequently coupled with an exemption for some initial amount of income, as with the current tax code).

What's wrong with flat taxes? Let's look at 2001 tax information (the most recent complete information that I could readily find) to see:

In 2001, Americans with the highest 1% of incomes (that is, with incomes over $238,000 in 2001 dollars) paid an effective tax rate of 24.5% (that is, once deductions were accounted for, they paid on average 24.5% of their income in taxes). Because their incomes were very high, they paid about 30.3% of income taxes in that year.

If we were to flatten taxes, we could do it in one of two ways. We could either flatten taxes at the 24.5% they paid (which would ammount to a huge tax increase for most Americans), or, more likely, we'd flatten it below that level. If we flattened it below that level, we'd immediately reduce the government's revenue by a sizable amount (remember, this income group pays almost a third of all income taxes!) To make up the lost revenue, we'd have to either increase taxes on lower wage groups (which would hurt the economy badly--remember, it's consumer spending that's currently driving the economy, and consumer spending doesn't rise linearly with income), or go further into debt.

I simply don't see how to resolve this without a tax hike on most other Americans. (The tax rate I've seen bandied about on conservative sites is 17%, with most deductions eliminated. This would be, on average, a tax cut for people earning $80,300 or more, and a tax hike for everyone else. Remember that your average rate isn't your "bracket"--see the post below--but the amount you actually pay in taxes as a fraction of your income.)

Comments from conservatives on how this could work are certainly welcome.

Figures in this report are from Effective Federal Tax Rates, 1979-2001 by the Congressional Budget Office.

Update: The income figures in this article aren't family incomes, they're "adjusted incomes." To find yours, take your family's income and divide it by the square root of the number of people in your household. Thus, if your family income is $70,000 and there are three of you, your adjusted income is about $40,415. For a family of four to be in the highest 1% of incomes, that family must make at least $476,000.


Blogger Key said...

I wish I had more time to spend over here!

...I'm not saying that we should switch over to flat taxes tomorrow. Obviously, transition would a bit rough, and frankly, I don't see it EVER happening. But from a "fairness" standpoint, it does makes sense.

It's not truly a "flat" tax IMHO, although I get the use of the term. It's not like everyone, regardless of income is getting an invoice for $20,000 at the end of the year. That would be flat.

Taking the same PERCENTAGE out of everyone's check? That's just the right thing to do.

Sure. I'll be envious of those taking home $400,000 plus. But, they have it. I don't. That's not their problem. Their still paying $100K as opposed to my $25K.

I'd be willing to pay a little more for the sheer joy of eliminating my dependency upon my accountant!

11:21 AM  
Blogger The Polite Liberal said...

This is one of those issues that's hard to argue, because it depends on each arguer's personal definition of "fair."

It doesn't strike you as fair to increase tax rates as people earn more income. It doesn't strike me as fair not to do so, as your first $35,000 is generally more important to your survival than your next $35,000, and so forth.

I should point out, though, that it isn't the progressive increases in rates that makes it worth hiring an accountant (I do my own taxes, and generally just look up my final taxes in the table). You probably need an accountant either because you have a complicated series of deductions, or to figure out exactly what your capital gains were after stock sales. Neither of these would necessarily be solved by a flat tax, or couldn't be removed from the current progressive tax code. Tax simplication and flat taxes are really separate issues (as Andrew Sullivan pointed out on his blog a few days ago.)

2:19 PM  

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