Madame M:
A
completely flat tax might SEEM fair, but it isn’t unless adjustments are built
into it, and, assuming no deductions, those adjustments are the same complexity
as a progressive system. But a
progressive system without deductions brings in far more revenue on average,
and, more importantly, spurs the system to delay and de-emphasize profit taking,
and instead reinvest in both workers and the long-term.
I
will anticipate you asking me what adjustments would have to be built if there
were a flat tax, and they are primarily these: A certain amount ($30,000?) of
each person’s income would need to be exempt from taxation (except for maybe a
$100 “US occupancy fee”) to keep a flat rate from falling disproportionally
upon the poor. In effect, this would
mean taxation would not begin until one had an income of $30,000, with everything
above that amount having the flat tax rate applied to it. This too has complications, however, among
them the determination whether one begins it at that point, or one “pro-rates”
it over the whole expectancy period, meaning, the expected tax is deducted bit
by bit every “pay period.”
The
idea of eliminating deductions has complications where businesses are concerned. We would have to decide as a society whether
to allow businesses to deduct nearly the full range of their present types of
deductions (there are both benefits and abuses to this), or to merely allow
them to deduct the costs to directly produce the goods or services. If we allow the full range, expect the number
of “businesses” to increase significantly, and that means headaches with
auditing and enforcement. And deciding whether
the present types of entrepreneurial businesses, that are treated as flow
through individual persons for tax purposes, will get to have the deductions,
is a problem too. Always complications!
Regardless,
having present tax rates without deductions can only be kept up for so long
without needing to reduce the rates. A
deep and painful recession would be effectively unavoidable, and we would need
to get some rate relief within a reasonable time so as not to contract the
economy too much or trigger a depression.
Pain. Serious pain. Not going to be easy AT ALL.
The
election is nine days away. We
Americans, among our many political/civic/historical bad habits, have the
particularly bad one of most of us paying SOME attention to the spectacle of
electioneering for a while, and then ceasing to pay almost ANY attention
afterwards. Just when the hard business
of governing, legislating, and forcing the system to be responsive is needed, most
Americans jump instead into shopping, holidays, and diversions of many sorts,
and never really get TO, let alone BACK, to the matter of making their creature—government,
the instrument Locke and the Framers devised for them—bend to their will, the
good of the many.
Leaving
the selfish relative few to get what they want instead.
Repeat.
3 comments:
Professor J,
Thank you for sharing the great ideas how the US will create a wonderful world if we simply have the proper tax code. You thought that if we shared sacrifice and shared pain that America will then heal itself so that real hope and a wonderful life will result. You believed:
(A) The US budget deficit will be solved.
(B) That global economic stability produces less risk of war…… and that the risk of war is from the small expenditures, rather than the big ticket items of heavy weapons.
(C) The environment will be stabilized if the US simply taxes the things that damage the environment and the result is somehow clean, renewable energy.
(D) When all the bad things go away……. and all these good things advance, then the US will have lower taxes, pay down the US debt, and produce extra money for welfare benefits.
However, you begins to espouse that the tax code fixes won’t arise because the US political system in unresponsive because the system is run by wealthy. Ok, could you tell us how to change the political system, back to Obama four years ago, “hope and change”?
Don’t you think “tax reform”, or a “flat tax” or “reducing deduction” will somehow provide a reduction in deficit spending, producing tax fairness, and result in a bounty of wealth. Maybe the problem is not taxation; it is the government spending needs to be cut! (Including military budget need to be cut and others supporting the alien illegal funds, etc…)
• I am really confused on progressive tax rate and regressive tax rate. I have learned that lower rates and regressive rates on high income taxpayers cause more investment, not less. And also have learned that progressive tax rates cause investors to accelerate the taxation of their gains so that they remain in lower tax rate brackets, rather than bunching all their gains years later into very high tax rates. Don’t you think the wealthy people will simply not engage in very many taxable activities, like not sell assets or take much salary, or simply sit on huge amounts of cash don’t invest in hiring people or building, or move their companies to foreign country where is lower tax rate. Because of they felt the unfairness taxation. Therefore, government tax revenues will drop, the economic development will delay, cause more debts.
• Back to Bill Clintons time, US had surplus in the budget because the House & Senate were both controlled by Republicans, they forced Bill Clinton reduced taxes and lower taxes during his last 6 of his 8 years in office. The history approved that lower taxes work better in economic wise.
• Please correct me if I'm wrong.
Progressive tax rates gradually increase the percentage for the higher incomes. They do not tax ALL income at the new highest rate, but only the marginal income, that is, the income above the amount taxed under the previous bracket.
I am not sure what you mean by lower rates and regressive rates on high income taxpayers. Do you mean to assert that lower tax rates for high income taxpayers are regressive (usually) to lower income taxpayers? Because that is correct.
TYPES of investments are important. One can get all kinds of churn, as we got in the 1980s and 2000s (and even a good amount in the 1990s), but it is not “investment” in the true economic sense of the word.
Progressive tax rates would not mean acceleration of taxation of high income earners’ gains, unless they were by fortunate circumstance able to just squeeze by and remain in their present tax bracket. What progressive rates tend to do (unless they are very low, as they are at present, especially the capital gains rate) is to defer capital gains for a long time. The drastically low capital gains taxation rate (and dividends and interest taxation rates) tends to make decisions on profit taking not very dependent on taxes (and the extremely generous loss offset provisions only make this more so)
What has happened in the past is that high progressive tax rates have caused businesses to reinvest in themselves and their workers, rather than take profits for themselves (or their stockholders). This was the pattern of the 1950s, for example.
It is misleading to say the Clinton “surplus” (itself a bit of a misnomer, as it largely depended on excess Social Security tax collections) was due to the House and Senate controlled by Republicans. The process started in 1993, with the Balanced Budget Act (Omnibus Budget Reconciliation Act), when Democrats held majority. Surpluses (such as they were) did not actually begin until 1998, as the shifting from deficit spending to an offset and pay as you go system was slow in the transition.
The economy during the Clinton years was light-years ahead of the George W. Bush years’ economy. The rates were significantly lower during the Bush years, so the premise that lower rates lead to higher growth does not bear out historically. Even the much heralded Clinton capital gains reduction (from 28% to 20%) still made it higher than the capital gains rate of the George W. Bush years. The Clinton years’ economy was also better than the Reagan-George H.W. Bush years’ economy, further lending indication that lower rates do not necessarily lead to better economic times.
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