One Commenter’s Argument Against the Flat Tax

The posts of this week have led to some very interesting discussions. This is what I love about blogging. Yes, even some of the commenters that I didn’t agree with made some points that made me reconsider my positions.

I wanted to highlight one comment left on the What’s the Definition of “Fair” and “Rich?” post from earlier this week:

“Fair” as a flat percentage is not fair in my opinion for one reason:

Money has a real purpose.

If you make $10,000 a year, and pay, say 15%, you are left with $8,500. $50,000? $42,500. $5,000,000? $4,250,000.

If you make $10,000 a year and you buy a gallon of milk, how much does it cost, $4.00? If you make $50,000? $4.00. If you make $5,000,000? $4.00. Is that a fair percentage?

Money is not an abstract concept. It has a value only in its trade for goods and services. And goods and services do not work as a percentage. You don’t go to a dealership and buy a car for %10 of your yearly income. Why should taxes magically act that way?

The concept of a flat tax, as I understand it, treats money as if it’s fair to take the same percentage from all people, while still allowing money to have an absolute value of its own. This is why I can’t support a flat tax, personally.

I suppose this is the argument for progressive taxation. However, I think we have to be careful with this line of thinking. If I make $50,000 per year and I buy a $25,000 car, that’s 50% of my income. However, if I make $500,000 per year and I buy a $25,000 car, it’s only 5% of my income. Should I pay more for the SAME CAR just because I make more money? No. However, because I do make $500,000 per year, I have the ability to buy a more expensive car if I choose. Afterall, wealth does have its privileges.

When it comes to the everyday items we must purchase, if we want the prices of those items to have less of an impact on our budgets then we have to MAKE MORE MONEY! It’s really that simple.

I look at the flat tax this way: when our boys were younger, we paid them an allowance based on their age. When my oldest son was 8, he got $8 while my youngest son got $7. We required our boys to put back 25% of their money for long-term savings. That meant the oldest had to save $2.00 and our youngest had to save $1.75. We also required them to tithe, which again meant the oldest paid more tithe than the youngest. It was FAIR!

This is the way our society should be taxed! Same percentage for all people. No deductions, no incentives. You make $100,000, you pay $10,000 in taxes (or whatever the percentage would be). You make $10,000, you pay $1,000 in taxes. If the $1,000 tax burden is too much for you, then make more money.

Finally, the thing I would like most about a flat tax is that no one could say that the rich weren’t paying their fair share. Politicians wouldn’t be able to use taxes as a way to pander for votes.

Anyway, I have really enjoyed this week’s discussions (even if I drove a few people away). Those who stayed around really made some interesting comments. I enjoyed them all even if I didn’t agree with them all.

Thanks for reading.

39 thoughts on “One Commenter’s Argument Against the Flat Tax”

  1. While not driving me away, I still don’t think flat tax is “fair”, nor do I think (more importantly) that it is best for our country. Some degree of a progressive tax system, some degree of redistributing the wealth, is necessary. (Obviously, not completely. Not communism.)

    “just make more money” if the tax burden is too high is not a realistic response.

  2. One thing I would like to bring is that you make it sound like making more money is a very easy thing to do. I would disagree with that statement. I think anyone would be wrong to say that making more money is not as easy as just wishing to make more money. Also for the record I do support a flat tax.

  3. How would you implement a flat percentage on tithes?

    If Joe earns $50K cash plus $10K (untaxed) fringes, is Joe’s proper tithe $5K or $6K?

  4. I don’t think ‘Just Earn More Money’ is a valid response. There has to be some sort of progression to the tax system. All you need is a personal income tax credit of some sort, say 10 grand (almost exactly what Canada’s personal credit is) . . . This way, if the tax rate was 20%, then someone making 10 grand would pay nothing, 20 grand would pay 20% of 10 grand, or 2000. If you keep going up the scale at 50K you would pay 8K in tax, and at 500K you’d pay 98K.

    The problem here is that you have to have some kind of incentive to get people to save and invest, which is why my solution yesterday I think makes good sense. Simply set your personal credit at the 25% income level of the previous year, tax income at the current tax rate, interest income at 75% of the current tax rate, and dividends and capital gains at 50% of the current tax rate. If you didn’t do this, money would FLY out of the market at the transition period and cause all sorts of problems.

  5. “Just make more money,” why? To feed the government juggernaut. This appears to be class warfare because some people will have a difficult time making more money. Personally, I feel we should reign in government spending. Ron Paul had a good idea on completely abolishing the income tax, and the government would still have the same revenue it had ten years ago.

  6. While I’m not going to voice an opinion on the “make more money” statement, I will say that the best flat tax proposals I’ve heard all include a “poverty” rebate.

    For 2008, the poverty threshold for the United States is $14,000 for a 2-person household in the contiguous 48 states. ( If the FairTax passed in its current draft form (, every household would receive a monthly rebate of the amount of tax levied against that household’s poverty threshold. For a 1-adult, 1-child household, they would receive a monthly rebate of $268 to cover the taxes that would have been imposed on the first $14,000 of the household’s earnings.

    By compensating for poverty and shifting the tax burden to consumption rather than penalizing production, FairTax, while not perfect, is a huge step in the right direction.

  7. I am 100% against the flat income tax. The reason being you are still left with the same problems we have today, “How do you determine what is income?”. This is the reason we have the 1,000’s of employees at the IRS and all the tax code and lobbyists fighting for minute changes to the code to benefit their company by the millions (then the new code dribbles down to other companies who finally figure out the tax savings).

    All this time and money just to determine what income is and what can be deducted from income.

    The most efficient taxing method has got to be the federal sales tax idea that Mike Huckabee was proposing. Paying income tax as you purchase products is “fair” in that it’s based on your ability to spend as you go. Some products would be exempt from tax, such as food. This idea has been around for years and I haven’t heard a good argument against it yet. The IRS would shrink to a fraction (smaller government) and would be spending most of their time looking for black markets instead of small town waiter/waitress not reporting their tip income.

  8. I’m flattered.

    One thing. Of course things shouldn’t automatically cost more if you’re more wealthy. They do end up doing so in that if you have more, you can afford better. The only argument I was making is that a flat tax is a higher burden somebody making less because the taxes affect their living expenses much more. I’m not saying that you should be able to go to a dealership and pay a percentage instead of a solid number. That’s not how money works. Which is why I question the idea of hammering a percentage tax in.

    As far as your children go, make the metaphor more realistic. $7 for one kid, $8 for another. 25% “tax” and 10% tithe, they’re left with $4.55 and $5.20. Now, charge them for their room and board, we’ll say a $5.00 rent (I wish I could get that rate :)) Would you continue to push a flat percentage? Would you give advice like some politicians and say “you need to get a second job if you want to pay your rent”? Or would you try to work out something fair, not to make a bigger mess?

    It’s not a matter of punishing people that are successful: It’s a matter of not piling on extra problems to people that already have problems. So, perhaps something fair, with exceptions for low income earners.

  9. I also heard somebody mention the “fair tax”. I looked it up. It’s an interesting concept. Eliminate income taxes, establish a federal sales tax, estimate the amount of sales tax required for minimum expenses and give that out at the beginning of the tax year as a “prebate”. Result: cost of living (as calculated) is untaxed, and all extras are taxed. 2 problems stand out immediately: Americans would not be happy with a sudden jump (23% is the suggested amount!) in the price of everything. You could try to point out that the paychecks are bigger with no taxes being withheld, but it would still feel worse every time you went shopping. The other problem: We all know the savings rate in this country. You think a lump sum to cover the cost of living will be actually used to do that? It will be treated as a windfall, and spent frivolously by many. One possible solution: give the prebate in the format of those food stamp cards: a debit card only able to be spent on groceries and necessities. A little too big brother for my tastes, but the only solution that comes to mind.

    There are problems with every system. Taxation is, by definition, unfair. Somebody is taking money you worked for in order to pay for something else. There will always be people slighted and wronged by a system like that. It’s also the best system we have for paying for the cost of government. Seeing as it’s patently unfair yet necessary, would you rather be unfair to somebody that it could kill, or for somebody that it could inconvenience? The progressive tax is far too complicated and is too easily taken advantage of, the flat tax is heartless, and the fair tax is too radical to be implemented suddenly.

    The solution? If I knew that, I’d be accepting my prize in Oslo. Perhaps some combination or medley: A flat tax with allowances for cost of living, or a “fair tax” introduced gradually along with decreasing progressive taxes until a happy medium is found. I’m not sure.

    “Pure” tax systems are probably like “pure” political systems. Good on paper, but never as good in practice.

  10. I’ll briefly echo other’s sentiment that “just make more money” is not an easy nor realistic task.

    Maybe this was brought up in another thread but I’m kind of surprised that someone has not brought up the idea of a national sales tax as opposed to an income tax. The discussion so far has centered on changing the tax rate on money made. The other way of looking at this is taxing the money spent instead.

    This to me seems extremely fair. Remove the income tax and tax only on what people spend. That way it doesn’t really matter if I make 50K a year or 100K a year. When I buy that 25K car, both people would be paying the same amount in taxes.

    This also benefits the frugal and savers. If you don’t spend as much money, then you won’t pay as much taxes. And for those who have to keep up with the Joneses, they will pay a larger share in taxes as a result.

  11. In defense of my “just make more money” statement.

    It only makes sense that if the things you buy take up too much of your income then you either have to:

    1. cut back—buy less

    2. make more money

    Is it possible for everyone to make more money? No, but I know lots of people could if they really wanted to.

    Ken asked: What’s income?

    I would say income is anything you have coming in: income from a job, dividends, and capital gains (I’ll have to think about that one).

    Dividends should not be double-taxed (taxed at the corporate level as income before they are paid out and then again as income to the investor when they are received). So,… I think it would be better to tax them as they are received and not at the corporate level.

    The topic of dividends was one of the big problems I had with Steve Forbes’ Flat Tax Plan as laid out in his book. He advocated not taxing dividends as income. Well, that’s easy for him to say since a lot of his income is received as dividends. In other words, “rich” people could theoretically pay no income tax under Forbes’ plan. Talk about a class war!

    The “fair” tax (taxing spending or consumption) is an interesting idea but I just like the flat tax better.

  12. @Dreamer: “The other problem: We all know the savings rate in this country. You think a lump sum to cover the cost of living will be actually used to do that?”

    I liked your overall comment, but I think this quoted part is not quite on. It isn’t really relevant what people use their lump sums for.

    It is a fundamental assumption of economics that people respond to incentives, and there are tons of books with example after example to support that assumption. I’m convinced, people do respond (collectively at least) to incentives, and any consumption tax has a better shot at encouraging saving than any income tax because of this.

    I myself could take on extra work for example. I have great computer skills and could set myself up to do consulting. But I’d pay out about 40% of my earnings in self-employment, federal, and state tax and so it really isn’t worth it for me and I don’t do it. Income tax creates a disincentive (sometimes high and sometimes not so high) to work.

    A consumption tax creates no disincentive to work, but it does create a disincentive to spend. If you spend less, you win twice because you are consequently taxed less. By not discouraging work and not encouraging spending, the consumption tax — because of its inherent design — has a better chance to improve the savings rate than an income tax. Details about how lump sum payments will be used don’t really change the picture.

    For the record, I’d actually be in favor of a simplified progressive tax system, but I don’t think the savings rate is the end-all be-all criterion for choosing a system. I suspect in the future we’ll see both kinds of taxes actually, an income and consumption tax and I’m okay with that since both systems have some advantages.

    My biggest peeve about the current tax system: why are dividends given a favorable tax rate but interest income is not? If you want people to save, especially low-income people who often don’t, I think you should give them the same incentives that more wealthy people take advantage of all the time.

  13. I see several significant loopholes in the sales tax over income tax argument, those being the cost of energy and public school funding.

    Would the national sales tax apply only to items that are currently subject to state sales tax? For example, utilities (electricity, natural gas, water, etc.) are subject to sales tax in my state. For a working family currently paying essentially no income tax this would add a significant new tax burden. For the ultra wealthy this would present an opportunity to find ways to reduce there need for public utilities. For example, becoming “greener” or joining together to form energy co-ops to avoid this consumption tax. Maybe this unintended consequence is what the global warming alarmists would like. Also, what would this system do to the price of gas? Again lower income individuals would be forced to pay a much larger percentage of their income to drive to work.

    As for schools, would they be exempt from the national sales tax or would they just see their costs increase by the proposed 23%. And if so, where will that money come from? Most likely, increased state sales tax and or increased property tax. While I’m talking about tax-exempt organizations, what would this new tax do to charitable giving? Is the moral call to give enough to overcome the loss of the tax benefit of giving?

    One last question, would the purchase of a home be subject to the national sales tax?

  14. I’m sorry, but this whole argument is foolishly simplistic.

    A flat tax will never be “fair” because the more wealth you control, the more you’re able to hire people to cleverly shield your income – exactly the way it happens now.

    A federal tax sales tax will not work for the same reason; those with the ability to make large purchases outside the country will do so.

    Yes, part of the government’s role is to redistribute wealth. It has to or else the powerful (wealthy) become ever more powerful and the basis of democracy itself upsets.

    Since the more money you control, the more you are able to shield your money from any form of taxation, progressive taxation is the only practical means of achieving the “fairness” a flat tax appears to promise.

  15. I think the flat tax is an interesting proposal. Under the progressive tax system,the goal is to minimize taxes. With no incentives or deductions, it would definitely change people’s habits. However, I also think people underestimate what the government may need to operate. If a war breaks out, does the flat rate go up. If the flat rate was as high as say 22%, would you support it?

  16. The fair tax will work. The “problem” is that everyone is too worried that other people are unable to take care of themselves (pertinent example: making correct budgeting decisions).

    From a completely non-empathetic standpoint, we are disrupting evolution by continually picking up the slack of those less capable. Its a negative feedback loop. This is the problem!

    People need to think for themselves. They need to fall down and get back up on their own and in the process learn from their mistakes. Be accountable for your LIFE!!!

    It infuriates me when people come up to me for handouts when I’m parked at a stoplight in downtown Atlanta. “Can I have some money” they say. These people are ‘even’ with regards to a balance sheet. They don’t think or care that I’m negative ‘$50k’ from student loans because I invested in myself. How is it my fault that they did not do the same?

    Please don’t pitch the BS about socio-economics. If you grew up in an area where it was uncool to do well in school and make responsible decisions, then blame your parents, blame your friends, blame god. But don’t come knocking on my door asking for handouts because life “dealt you a bad hand”.

  17. You had me until the tithe… Why subject children to a church tax? Little children, who are too young to have their own independent opinions about the world and their beliefs? And what on earth does tithe have to do with personal finance in the first place? Unless it’s an article that goes along the lines of “Stop paying tithe and invest that money instead. Yay for compound interest,” I fail see how it’s applicable.

  18. @jrs: “A flat tax will never be “fair” because the more wealth you control, the more you’re able to hire people to cleverly shield your income – exactly the way it happens now.”

    People always try to use this line. The top 10% of earners pay over 70% of all taxes. They don’t seem to be doing a very good job of “shielding” their income.

    “Yes, part of the government’s role is to redistribute wealth. It has to or else the powerful (wealthy) become ever more powerful and the basis of democracy itself upsets.”

    I completely disagree with this statement. The wealthy may have had that kind of power in the Middle Ages, but not now. If the government allows individuals the freedom to compete and excel, then almost anybody can become rich. Most of today’s top 10% of earners were not there ten years ago. This is despite our progressive tax income, not because of it. There is an incredible amount of social mobility in this country, moreso than any place in the history of our civilization.

  19. I totaly disagree with jrs who said “part of the government’s role is to redistribute wealth”. The role of our government should be to protect us with military, police, firemen, etc… They should not be involved with our money, except to pay for the above mentioned services. All subsidies, and other government handouts whould be stopped. This is why government has gotten so big and costly, they want to control eerything in your life. A flat tax or federal sales tax would help reduce government and make taxes more fair.

  20. An ‘almost’ flat tax I could support.

    20% flat tax. A personal exemption set at the poverty level for a single person, double that for married couples. No other exemptions. All income counts: wage, dividends, interest, capital gains, etc.

    Maybe the only other exemption would be retirement accounts.

    No other federal income taxes: no SS, no Medicare. They start coming out of the general federal budget.

    Then maybe have a higher marginal rate only for those making over 500,000

  21. I don’t understand the argument that it is unfair that expenses for wealthier people (the so-called “rich”) don’t place as much of a burden on them as compared to the poor. Duh. It doesn’t, and it shouldn’t. I spent many years in school, work hard, and spend/save responsibly just so expenses aren’t as big of a burden. People in this country love to blame the “rich” for all their problems and act like the “rich” were just handed all their money. Most are working 80 hours a week, giving up time they would love to spend relaxing with family, in order to earn the money that you think we should happily hand over to the government and lower income earners in this country. Sorry, but I have a problem with this notion that I should pay more just because I can.

  22. G.L. wrote:

    “…what on earth does tithe have to do with personal finance in the first place?”


    It has A LOT to do with PERSONAL finance if you’re a Christian. My wife and I think tithing is important. You may not. It’s a PERSONAL decision. No big deal.

    I will say this: our financial situation got much better after we made the commitment to tithe. Coincidence? I don’t think so.

  23. Kiran,

    I could be persuaded to go for what you’re proposing! I still question not taxing those with lower incomes. I think everyone with income should pay taxes.

  24. The quoted comment is interesting but it completely overlooks the role of productivity in the equation. I cannot expect to barter for goods in the marketplace with a “fair” value that does not take into account what I produce. Right now, the only way we have to measure productivity at the worker level is income.

  25. @bill: You can’t “disrupt” evolution. There’s no specific goal to evolution. Evolution is a side result of the natural way things work. Not only that, evolution is not a “nature, red in tooth and claw” sort of thing. Cooperation and charity can increase the survivability of a species too.

    But, your position is an honest one at least. That’s the thing about these tax systems. You could try a tax system that benefits the majority of people at the expense of the minority, one that has equitable rates (there is a big difference between equitable and fair, in my opinion) regardless of personal consequences, or one that benefits that small percentage that would suffer the most devastating losses, at the expense of the majority. This leads into debates on the purpose of government and personal responsibility.

    And those are all good debates to objectively pursue.

    Very compelling argument. My point was this: Even though it’s really their own money, it feels like a windfall, and it may be spent accordingly, zeroing out the benefit. But, there’s only so far you can go before you have to allow people the freedom to screw their own lives up. I really don’t like the debit card idea; it was just the only solution to the problem I could see. Also, I agree: a hybrid is probably the best option. A lowered and simplified income tax (maybe even a lower flat percentage) and a moderate federal sales tax on consumer goods.

  26. another point to consider when describing fairness as compared to taxation, is the amount you are getting back from you taxes. We all have the same access to public facilities, roads, firemen, and protection from a national military.

    These services are given to you whether you personally paid for a single book or an entire tank batallion.

    You shouldnt always considers only losses when talking about taxes without looking at what one gains.

  27. @bass: “These services are given to you whether you personally paid for a single book or an entire tank batallion.”

    I like this point. One of the largest tax expenses we have is military spending; you have to pay for this kind of protection.

    The wealthy have more to protect, their insurance should cost more…

  28. It’s sounds like you are proposing to go from a tax bracket system to a flat tax and not change IRS code regarding what is income. I’m not for putting additional burden on lower income people or for middle class paying the same tax as upper income folks. If the American Dream has treated you well, you should pay your share equivalent to what you have received from the people of this country.

    That’s why I think we should avoid all the nonsense and go with a federal sales tax instead of income tax. Yes you would have new problems, but you would see the complexicities of the tax code go out the window and now everyone would be treated equally and have access to the same loop holes.

  29. The more I look into the “fair tax” the more I like it. A consumption tax that offers a prebate for all Americans up to the poverty level. It’s very simple. Yes, we’ll be sending everyone checks, but we just did that via the stimulus package. I love the idea that we pay for what we use and we earn what we work for. Am I missing something?

  30. You say “no deductions, no incentives” but half (I’m guessing) of the tax code is probably written to define “income”. So a flat tax will still have thousands and thousands of pages of regulations. Not everyone gets a W-2.

  31. Don –

    Dividends are taxed at a lower rate because the corporations that distribute them have already paid tax on the earnings that generated the money – hence the double taxation. Interest income doesn’t have this issue since the bank is merely paying you for the right to use your money.

  32. “Fair” could be defined in many ways.

    Lets look at one way of defining “fair” ..

    Shouldn’t each person in the US pay their share of the expenses to run the country regardless of their income? If you live here you get all the benefits.

    To figure the per capita cost look at total actual federal spending and divide it by the total US population then levy a per capita fee on every man, woman AND *child*.

    Easy calculation takes the total federal spending of $2700 billion and divides by the total US population of 300 million and you come out with a $9000 bill per person.

    So by this definition of ‘fair’ the average American family of 4 should owe $36000 to the federal government.

    If you are currently paying less than $9000 per person in your family then you are being subsidized.


  33. JLP: I will say this: our financial situation got much better after we made the commitment to tithe.

    How? I’m not making of you – I really want to know how donating 10% of your net income actually improved your financial situation? Did it make you more aware of your finances? If it did, wouldn’t you agree that putting 10% of your income in a savings account would raise similar awareness, as well as increase your net worth?

  34. As a low-income (but not poor) person with no hope of buying a home, I see all sorts of problems with a national sales tax.

    As currently proposed, it would tax all sorts of things not subject to state sales taxes.

    Services would be taxed. Need to replace your transmission? Replace your roof? The tax is gonna hurt.

    If you rent, your rent will be taxed. At all income levels, renters will pay more tax on their housing consumption than homeowners with equal consumption. What’s fair about that?

    What about twentysomething Johnny who lives with his parents and pays rent? Will his parents collect the tax from Johnny and send it in? Are you kidding?

    I rent a room in an owner-occupied house. Do you think the homeowner is going to collect the tax and send it in? What have you been smoking?

  35. Re: tithing

    I once tithed. Lasted about three months, when I started getting utility shutoff notices. You see, I was tithing out of my minimum wage income and letting the utility bills slide. Since my income did not increase, that was unsustainable.

  36. Rex said:

    The more I look into the “fair tax” the more I like it. A consumption tax that offers a prebate for all Americans up to the poverty level. It’s very simple. Yes, we’ll be sending everyone checks, but we just did that via the stimulus package. I love the idea that we pay for what we use and we earn what we work for. Am I missing something?

    Um, (at least) one problem.

    Under the fair tax, only renters pay for what they use. Homeowners get to enjoy their housing tax-free. Renters pay tax on every dollar of their rent, including the property taxes embedded in their rent. Under the fair tax, renters would pay a tax on top of a tax on top of a tax. That’s way too much tax for me.

    I ran some numbers, and under the fair tax, a lifetime renter would pay about five times more fair tax than a homeowner with equal housing consumption. It’s a great idea if you want to redistribute income upward from renters to homeowners.

  37. Jim said:

    Shouldn’t each person in the US pay their share of the expenses to run the country regardless of their income? If you live here you get all the benefits.

    Just one problem…the wealthy and the rich receive a vastly greater benefit from this country than do the middle and working classes.

    If you doubt this, just try investing your money in a third world country. While you’re at it, try living there. Good luck!

    The working class lives here and works here and has little to show for their hard work, and outside of the defense budget, I’m not seeing a whole lot of benefit. Think of a janitor working for minimum wage. Why should he have to pay for government janitors who work half as hard and earn four times as much (including fringes)? Is it his fault government wastes so much money?

  38. I for the very reasons above do not support a flat tax, unless it can be made progressive for lower income people.I think better yet close all the loop holes.What a person negotiates barters or recieves as a wage for His time and skill should be taxed at a much less rate then the other forms of income.All capital gains,except maybe homestead home sales should be taxed at maybe 40% or 50% progressively while dropping wage income tax to 5% to 15% progressively.
    People living on SSI or SSDI have no ability in most cases to create more income so as always they would take the brunt of a flat tax,how christanly,rob the poor to supplement the rich,again.

  39. I favor a proportional tax, but taxable income should be calculated first by subtracting the current poverty threshold income level for one’s household; there are some people who need every penny to live on and simply can’t afford to pay an income tax. This is practical and has nothing to do with so-called “fairness” or “unfairness”.

    I find that most people (though not all) who favor a progressive tax are motivated by some degree of resentment for the rich. It’s as though having extra money is supposed to bring some sort of idictment against alledgedly flawed character, and needs to be punished by taking more money away. This is nothing more than an expression of jealousy, an indicator of truly flawed character.

    One thing that proponents of a progressive tax can never answer is this: by what logical standard do you draw the lines between tax brackets? Even though Congress might try to present rationales, in reality it is totally arbitrary. On the other hand, a flat tax rate and poverty threshold levels can be based on needs from collected data….needs of the people and of the government, too.

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