Question of the Day

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By JLP | September 7, 2006

It’s been a while since I actually posted a Question of the Day. I would like to get back into the routine because I like the interaction with you, my readers. So, here’s today’s Question of the Day:

Do you like the idea of a flat tax? Why or why not?

Personally, I like the idea of a flat tax but I would want all income taxed, not just earned income. Steve Forbes believes that dividends should not be taxed, which I think is crazy. His argument is that they are already taxed at the corporate level, which is true. However, if you want to do away with a tax on them, then why not do away with it at the corporate level? I’m sure a nice portion of Mr. Forbes income comes in the way of dividends.

Now I would like you to weigh in.

Topics: Flat Tax, Taxes |

Comments to “Question of the Day”

Steve Heath Says:
September 7th, 2006 at 1:22 pm

The big problem is “zero hour”. With a plan where earnings are only taxed once, it means that that single tax rate must be much higher than exists now, which means people just entering the workforce, perhaps with some student debt, are now faced with much higher taxes than would have been the case otherwise.

Another problem that I see is the inability to use your personal exemption when you’ve only got investment income. Let’s say for example you have $100,000 making 4% in a GIC, for $4000 interest. Right now, that amount is taxable to you, but not taxable to the bank. If they lend it out so someone can get a mortgage at 6%, they only pay tax on the 2% profit. Assuming a 25% tax rate, they pay $500 taxes. Now, however, the entire amount is taxed by the bank, meaning they have to pay 25% on $6000, or $2000. Since they want to make a profit, they’ll lower the amount they pay you from 4% to perhaps 3% (the more they raise what the lender pays, the more tax they pay, so it makes more sense to cut at this end). So now the customer gets $3000 tax free instead of $4000 taxable… but since they’ve already effectively paid the tax, how do they use their personal exemption?

Easy E Says:
September 7th, 2006 at 2:25 pm

I would prefer the fair tax. End the IRS and end income tax, create a national sales tax with a prebate for the sales tax paid on poverty level income. I can’t do it justice here but if you want to learn more go to http://www.fairtax.org or buy the book.

Matt Says:
September 7th, 2006 at 2:46 pm

Ideally I would prefer no tax at all but the current taxation systems are cumbersome and in my opinion not working efficiently. As a Canadian I understand that my tax dollars are spent on a great deal of social services, but I’m sure that a more effective system could be put into place. I’m also certain that this is true of the US system. I’m not sure a flat tax or the existing one is better (I’m still new to this whole financial literacy thing) but regardless the simpler the better in my opinion.

frank Says:
September 7th, 2006 at 3:39 pm

I can never be comfortable with a flat tax. It just doesn’t feel fair, even though it might look that way. If you are being taxed at 20% and you only make $30,000 vs $100,000 that is a huge difference.

Granted, our current system is flawed, I don’t feel that a flat tax really solves the problems.

JLP Says:
September 7th, 2006 at 4:13 pm

Frank,

I don’t have a problem with a tax based on a percentage of income. It’s fair. I like it because the more money you make, the more taxes you pay.

What wouldn’t be fair is everyone paying the same DOLLAR amount, no matter how much they made.

Miguel Says:
September 7th, 2006 at 5:04 pm

Actually, on an ethical level, why should taxes be based on income at all. Seems to me that a flat fee approach would be the fairest. The only problem, of course, being that the “fee” would be so onerous that many people would likely not be able to afford it. Therefore, as a practical matter, upper income earners shoulder a disproportionate share of the tax burden. I understand the practicality of it, but do not see it as fair in any way.

Another question to ponder: Why is income taxed at all. After all, income does not necessarily translate to wealth. Perhaps taxes should be based on assets or net worth, not income.

Admittedly, strange thoughts. I’m just trying to think outside the box.

Foobarista Says:
September 7th, 2006 at 6:00 pm

I generally prefer consumption taxes over income taxes, since income taxes always hit the most productive people - although not necessarily the richest - the hardest. Consumption taxes are harder to game than wealth taxes, and would allow hard-core savers to save that much faster.

There’s lots of gotchas, ie what about poor people, should you pay 25% or whatever in taxes when you buy a house, etc? But in general I prefer these types of taxes.

One thing I don’t like are any sort of hidden or implicit tax - my most un-favorite example is the “employer’s share” of SS taxes. People would be far more interested in SS taxes if they saw the entire SS component of their payroll - and saw a “jump” of 7+% in their paycheck - all in tas - not just “their half”. Hidden or implicit taxes are done to hide costs from the people and are fundamentally undemocratic.

Miguel Says:
September 7th, 2006 at 6:30 pm

Speaking of relatively hidden taxes, how about the annual tax increase in SS Tax for high income earners. They keep raising the income base - effectively raising taxes for anyone who earns more than the prior year’s base. If the general population saw their SS taxes increasing every year for the past 10 years, they’d start to take notice.

S/100/30 Says:
September 7th, 2006 at 7:01 pm

I think flat taxes are immoral and unfair. I would be happy with scaled consumption taxes which in the age of digitized registers is quickly becoming feasible.

byrd Says:
September 7th, 2006 at 8:36 pm

I don’t think there is a worse idea than taxing wealth. Then you would hit those that are responsible and save a portion of their income instead of spending every penny. As badly as the government misuses the tax code currently, even politicians wouldn’t want to punish saving.

JLP Says:
September 7th, 2006 at 8:40 pm

S/100/30,

Flat taxes are immoral and unfair? I respectfully disagree. I don’t see anything immoral in asking everyone to pay their fair share. I look at it like tithing. Tithing, which represents 10% of your income, is paid by all those who have agreed to tithe, whether they make $10,000 per year or $1,000,000 per year.

As long as EVERYONE is paying the same percentage, then the flat tax is the most MORAL tax.

Matt Says:
September 7th, 2006 at 9:20 pm

How would a flat tax ever be immoral and unfair? I think if anything it would prompt those who are making $30,000 to try to make more so they have more in their pocket. The current system (Canadian or American) is flawed and unfair to everyone mostly because of the huge costly bureaucracy that it causes.

Brian Carr Says:
September 7th, 2006 at 9:29 pm

A flat tax is fair, especially when you consider that most “poor” people pay less in taxes to the Government than the rich, yet they receive more benefits from the Government (welfare, food stamps, etc.)

S/100/30 Says:
September 7th, 2006 at 11:18 pm

That last sentence is orthogonal. Yes, a sprawling, complicated tax system costs money. No, a sprawling, complicated tax system is not inherent or limited to a progressive tax system.

A progressive tax system isn’t inherently complicated; it’s complicated because of the amount of deductions and exceptions the legislature has built in. A flat tax could easily become just as complicated, and most likely would as taxes are one of the few ways the government can encourage desired behavior (e.g. home ownership).

Establishing fairness is about more than just stating it or drawing an analogy to religion.

This is, in fact, flat-out wrong. You’re confusing direct benefits with overall government spending; the former is a small fraction of the latter, and the latter is primarily about protecting private wealth, which benefits one in proportion to the amount of wealth she possesses.

John M Says:
September 8th, 2006 at 10:04 am

A Flat Tax makes sense if you believe that the only purpose of taxes is to pay for government services. (Defense, Schools, Public Works, Infrastructure, etc.) Everyone should pay an equal percentage of their income in order to fund government services.

The conversation gets complicated when we debate over the other main purpose of taxes.

Redistribution of Wealth - I personally think that taxes CAN BE effective in the redistribution of wealth. I believe that wealthier citizens have an increased obligation to make sure that the working poor have a reasonable standard of living. People will argue that it is more effective to let wealthier people invest in business and that will increase the standard of living of everyone. While this may be true, I believe that it is our nature to achieve as much wealth as possible and that without a system to redistribute wealth the working poor will have living condition that society finds unacceptable.

JLP Says:
September 8th, 2006 at 10:20 am

John M.

Thanks for the comment.

Why must we have to redistribute wealth? The fact that we must continually redistribute wealth should tell us that it doesn’t work, right?

Wolf Says:
September 8th, 2006 at 11:26 am

There is a german saying: the devil always sh**s on the biggest pile, meaning that the wealthy tend to get more wealthy over time. I belive that census data confirms that. A progressive tax provides a counter balance to this natural tendency. The real inefficiencies in the tax system are caused by gross overregulation, which is a result of congressional pandering to various groups (be they the wealthy, the middle class, or the poor), and by the use of tax brackets. In my mind, an ideal system would have a smooth, mildly progressive tax curve (i.e. increasing tax percentage with increasing income), exemptions for household members, and the greater of a standard deduction or mortgage intrest deduciton and no other deductions. All income (passive or earned; from small business,…) should be treated equally. Federal deficits should only be allowed in the short term.

Another argument against flat tax (in my mind) is that the greater income/wealth comes with greated responsibility.

I could probably be persuaded that a sales tax/VAT that excludes food items or has some sort of exemption to cover living expenses so as to not disproportionally hurt low income families is not a bad solution.

M Schoon Says:
September 8th, 2006 at 1:12 pm

I am in favor of the Fair Tax. It is more fair than any of the proposed flat tax systems. It also solves a lot of the problems that are being argued here. As mentioned earlier check out fairtax.org for a complete description.

tired-of-being-broke Says:
September 9th, 2006 at 9:32 am

The comment about ‘poor’ people receiving more in benefits is just plain incorrect. Where are the facts to back up that statement? What percentage of the federal, state or local municipality budget that goes to these ‘poor’ people?

samerwriter Says:
September 10th, 2006 at 10:18 pm

A flat tax is more fair than the current progressive tax, but the most “fair” tax is a regressive tax.

Would it be fair for someone who makes $100,000 per year to pay $4 for a gallon of milk while someone who makes $25,000 per year only pays $1 for the same gallon at the same store? Surely not.

However, I’d certainly support a flat percentage tax as a far better solution than our current tax code, which explicitly punishes productivity, by discouraging our most productive workers from working extra hours.

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