Taxes & Income Inequality

There are some cases where federal projects should be funded by all, even though they might be located in one area. A good example would be the Interstate Highway System. This is something that benefits ALL of us, but clearly there will be unequal spending in different areas and not always in a way that can be based purely upon per capita formulas.

Given that the Whigs also say education funding needs to be derived from something other than property taxes to insure a more equitable level in poor areas I think the same would apply to infrastructure projects that need federal dollars.

I have a mind-blowingly simple solution that would address every concern listed on here. It's an adaptation of a proposal that's been popular with economists for decades. It has two parameters:
1.) For revenue, the current income tax will be scrapped and replaced with a flat income tax with no deductions. As proposed above, this will be applied to all forms of income, not just that which is earned, excluding only government payments. Nothing unfamiliar there, but considering technology these days and the simplicity of this tax, we might make the tax more frequent, perhaps every four months.
2.) To address both state revenue and inequality, the current welfare state will be replaced with a universal minimum income (UMI). The UMI is a flat quantity of money that will go to each and every citizen (not household) on a monthly basis, as long as they (or their guardians) submit a brief application for each fiscal year. I'm thinking this application could actually be used to replace the census, and may be more accurate because a) it is performed annually, and b) it provides a powerful direct incentive to respond.
In addition to replacing both the mess that is our current welfare system with a simpler one and the current census with a more accurate one, it will also replace the "federal tax dollars be[ing] provided to each state in a lump sum every fiscal year based on population" proposal above. How? Think about what people do with the income they receive. They may use it to purchase goods, and thus pay sales taxes. They in fact may use it to pay all sorts state taxes. In this way, state governments will "scoop up" some of the UMI. The amount of revenue a state gets through this process will be roughly proportional to both the size of the UMI and - you guessed it - that state's population.

The ultimate effect of this is the best of both worlds: the simplicity of a flat tax and the incidence of a progressive tax. Those who pay more in taxes than their UMI are net taxpayers, while those whose taxes are lower than the UMI are net welfare recipients. Because the UMI applies to all citizens, the latter category will include children, nonworking students, and retirees. There are a lot of fascinating, beautiful things that result from this simplicity, but I will have to elaborate on them elsewhere. I could go on for pages and pages.

There has to be a flat rate applied accross the board. No exemptions, allowances, etc. Just a flat amount applied to all and a government that will spend only what it gets.

Yes, I like the idea of a flat income tax for all people and business. No exemptions, no deductions. The percentage should be determined after careful analysis and review. All citizens are part of the country and therefore all should pay their share. A flat percentage tax would be logical.

It might be argued, that by implementing a flat tax percentage, the wealthy would pay more of than their fair share. However, the idea is to create an equitable solution for all. For example, an individual employed at a car wash would be at the same percentage as the CEO of a major corporation. Yes, monetarily speaking the CEO would pay more, obviously, since they make more. That is why it is equitable because it is the same percentage for both the car wash employee as well as the CEO; no more no less. Money is not the issue anymore because a percentage is blind.

From the standpoint of business, a flat percentage tax is also equitable. We should remember that corporations share many protections and have many of the same rights as a citizen. Therefore, they should also pay their share of taxes. Why? Because business would not have to hire so many tax accountants, they would not have to worry about decutions because their property would not be taxed, only their income. In other words, have as many business jets as you like, you do not have to worry about paying additional tax on them. Do most businesses buy and maintain the best equipment, transportation,offices, and other things to support their operations? Why then, would they not want to do the same for their country when it is the very foundation in which they operate? If I had a business, I, for one, would certainly not mind supporting our country. I also believe that most business owners would agree; even if they do so begrudgingly.

By no longer having deductions, exemptions, and credits, the size of the Internal Revenue Service should be able to be reduced considerably, while still maintaining enough staff for auditing; that in and of itself would help to reduce our deficit.

Just some thoughts.

I don't approve of a flat tax for everyone with no deductions or exclusions for one simple reason: a 10% tax on someone who needs to survive on, say, $5,000 a year is a much greater burden than a 10% tax on someone who needs to 'survive' on $5 million a year. I think there needs to be a single exclusion for each individual, probably able to be accumulated for families.

There is a much simpler way to achieve this effect. It is known as the "Negative Income Tax."

There are two values that are set equally across the board. They are the rate and the deductible, and they are equal for each citizen.

The rate is used to determine each individual's tax liability. For example, a rate of 25% would leave someone with an income of $40,000 with a liability of $10,000. An income of $100,000 would mean a liability of $25,000, and so on and so forth.

The deductible is then subtracted from the calculated liability, resulting in the final, refundable tax amount. With the 25% rate above, and a $10,000 deductible, someone who earns only $20,000 would have a liability of $4,000. When the deductible is subtracted, they would end up receiving a payment of $6,000. Someone with a $40,000 income would have a tax amount of $0, and someone with a $100,000 income would pay $15,000 when the dust settles.

The effect of this policy is threefold:

1) It greatly simplifies the income tax. No more credits or deductions, just one simple formula.
2) It makes the tax code work for all Americans.
3) It replaces our patchwork of welfare programs by ensuring a guaranteed income. There is no more need for social security, welfare or food stamps. In doing so, it eliminates the "welfare trap" where those receiving government benefits cannot work more hours for fear of becoming ineligible for those benefits and therefore losing money.

Why not have a flat tax of 4.5% income plus an additonal $100 the 100 might not seem like much but it will s itreally add up if everyone pay

I am a tax attorney who works frequently on tax law legislation. I think a flat tax is a good idea in theory, but the challenge is in defining what is taxed. Taxing "all income" sounds great until you try to craft a legal definition of the term that has its intended effect.

So Congress imposes a flat tax on gross income (it has to be on gross income, since adjusted gross income is what you get after subtracting all those deductions the flat tax is supposed to do away with). 26 USC 61 defines "gross income" as "all income from whatever source derived." However, our current system of deductions, exclusions, etc. reduces gross income down to adjusted gross income, which is then further reduced by deductions, credits, and so on to taxable income. There are also a number of things excluded from gross income.

See how long the Section 61 definition remains intact after the imposition of a flat tax. Every interest group out there will lobby like crazy to make sure that the definition of "gross income" excludes items near and dear to them. Ten thousand of new items will join those already excluded from what is considered "gain".

And there are a slew of hard questions to resolve. What about corporations, which for the most part use the accrual method of accounting? What happens with worthless debts? Without a deduction, the corporation will have reported the accrued income before payment was received, and will have no way to "cancel" that reporting when it turns out the company will not be paid. Put them all on the cash method? That will be unworkable chaos. What about existing but unused NOL carryovers? Credits? Are they just lost after the conversion to a flat tax? What do we do with existing retirement plans? Roth IRA gains are exempt, and retirements are planned around that tax treatment. We either say "sorry, now taxable" or have a dual tax code system for decades, until the Roths run dry. And how will a federal flat tax system impact state tax systems, most of which "piggyback" onto the federal laws? States will also have to completely rewrite their tax codes.

All this to say: it's not so easy as saying "let's put a flat tax bell on the cat." It is actually an extremely complicated proposal. Great for my profession, but only great for this country if done right.

One thing that might be done without too much disruption is for the IRS to calculate everyone's minimum tax liability and file that as their return for the year. They already get enough information to do that for most people. The government would probably save millions by simply sending out an annual statement or check instead of tax forms. Only those who didn't agree with the IRS calculation would have to file returns.

Then we could work on cleaning up the tax code so they could actually do it for everyone.

Flat tax at a percentage rate to be determined by Congress, passed by Congress, signed by the President. Void all tax loopholes. Every pays the same so we can stop arguing who pays what and who pays more. It would put a stop to much of the left vs right arguing in this country. A rate should be decided which generates a surplus budget yet is not any higher than necessary.

As I said earlier, my only real objection to a flat tax with no deductions or exemptions is that it would be a much greater burden on low-income taxpayers than on those with higher incomes.

I like your stand on everything I've read so far. I do believe that all income over a certain dollar amount should be taxed at a flat, fair, and reasonable amount. There should be no actual income that is tax-free, be it personal, business, or charitable. We in the realist Party proposed this in the 60's, but since we have millionaires in congress who like their tax-free perks and income, nothing got done. A low, flat tax would also benefit businesses since they would not have to spend millions on tax accountants and tax attorneys. They would pay, x% of their gross revenues as their tax. They could factor that into the price of the things they sell. The other perk is that we could eliminate about 90% of the IRS and all the money they cost us a a nation.

I agree generally with flat tax w/exemption or the Negative Tax ideas.

Thanks to keh7 for a deeper look at the snags with this "simple" solution.

There are a few concerns I have that I don't generally see addressed in tax and revenue discussions. I'm going to address one of those concerns here.

One is that not all income is the same. I'm not referring to source, but to amount. IMHO there are three categories.

Category 1 is a minimum figure for an economic unit (household typically) at which all money, used as efficiently as possible, will be completely used up for necessities. I mean real necessities, e.g. - bulk rice for food and the cheapest apartment available. If there is less income than this amount, then the required sustenance has to be obtained through government or charitable intervention. Such intervention alwasy costs more money overall than if the individual(s) had simply been paid enough in the first place. This income should never be taxed, because ultimately it is more expensive to reduce it than otherwise.

Category 2 income is discretionary in that it exceeds the minimum and may be used for whatever purpose the individual conceives of, including better housing or food, education, savings for retirement, health care, travel, etc. A great deal of American income fits into this second category, but the margins have been getting slimmer for most of us. Such income might be reasonably taxed at a flat or a progressive rate, although our current straits suggest at least a short-term progressive structure to pay off the debt.

Category 3 income is income of such magnitude that it exerts significant political and economic influence on other people's lives and upon our political processes. Such income confers control over the lives of thousands of employees, may own and tie up vast resources, buy 24/7 lobbying efforts in its own furtherance, fund campaigns and candidacies, and purchase media companies with a view to controlling the political message. Such fortunes and the incomes they generate can be passed on from generation to generation without being earned (a significant percentage of American billionaires inherited it), and were nearly inconceivable in the US of 1788. I do believe that in fact many people who did not partake of it's benefit had to labor to enable the ultimate possessor to acquire a fortune of that size. In addition to their labor, the system of government, national infrastucture, and abundance of resources of the USA made it possible for such an accumulation. A tax code that slows such accumulation at the upper end and mitigates the continuance of such a vast concentration of wealth through multiple generations doesn't need to impose genuine economic hardship on the possessor. There is a natural human acquisitiveness however that does not like being thwarted, even when it is not in the interest of the nation and society at large.

I maintain here that it makes as much sense to use the 2d Amendment to justify private ownership of WMDs as it does to allow the abuse of our nations's enormous economic freedom to concentrate the economic power of the entire nation into the hands of a tiny fraction of its citizens. This is the road to enslavement.

I see a lot of discussion on the flat tax and its benefits. Thanks to keh7's post I now know about some of the hurdles facing a switch. I still like the answer of a flat tax with a deductible, but now realize it isn't a simple solution.

I would like to hear opinions on the idea of using a national sales tax as a solution to making the taxation more fair and equitable. I have heard of luxury items being taxed at a higher rate, and such. However, a flat tax rate on all sales seems viable to me as those with higher income will invariably buy more things. Also the tax revenue generated from the sale of one luxury yacht would probably create more revenue than all of my purchases for three years.

Add flat income tax with a deductible that pays back the difference if your income puts your tax obligation lower than the deducible to a national sales tax, this would essentially be paying back the sales taxes paid to lower income families who wouldn't be able to afford the national sales tax.

This may not be the right place to pose this question (forgive me I'm new to MWP) but what are the collective thoughts on VAT? Comparatively it seems like a very stabilizing tax system. I know that Sweden converted to it a few years back and it has done them very well. I've also been told that Maine uses the VAT. I'm wondering why this isn't part of the current discourse on the economy.

I submit that "Income Inequality" is not a problem. People who have high income do not stay in that position forever. In a Capitalistic society, some people will have high income for a little while and then lose that. Overall, the "wealthy" lose their wealth at a rate of 20% in 20 years. Over 100 years, only 1% of wealthy families are still wealthy. The average time to bankruptcy after winning the lottery is three years.

So, why is there a problem? The problem is not the wealth, but how some wealthy people distort the legal system to avoid prosecution for crimes or distort the laws to get special consideration and priviledges. When we look at other countries, it is these special priviledges that keep some faimlies wealthy, not any merit. The problem is political corruption, not income inequality.

"I think a flat tax is a good idea in theory, but the challenge is in defining what is taxed. Taxing "all income" sounds great until you try to craft a legal definition of the term that has its intended effect."

Governments can never define income in a way that meets all the political goals. So far, all attempts have wound up with corporations having two (sometimes vastly ) different statements of their profit, one for tax purposes and one for investors. Perhaps the best thing would be to get government out of the business of defining income. Instead, tax corporate profits. If according to GAAP(Generally Accepted Accounting Prinicples), it is profit, then it is taxable. Sure, there will always be people who figure out ways to get around any law. But we need a way to have only one statement of profit for a corporation for both investors and tax collectors.

Income, income, income! I want to also hear about expenditures, expenditures, expenditures! For both governments and and taxpayers. I want to hear about protections from inflation, depression, recession, war, major disasters, epidemics, and other unpredictable occurrences. Then, the flat tax goes to 15, 20% with dire effects on the lower end of the income ladder, which is increasing at this time.

I want to hear about how to account for the political variables in ideologies and elections that cause roadblocks and changing priorities, as well as changes to favor influential entities.

There is more involved than how we can reduce tax liability and keep more in our pockets.

This is only one part of the broader issue of the economy as a whole. It is one of those special topics that excites but says little about the complexities and pitfalls that are involved.

I don't reject this outright, but there is not enough substance here for me to consider supporting such a stand.

An income inequality statement may do well to include a statement about "overpaid CEO's".

Overpaying the top people in a corporation is a very bad idea - for the corporation in question. In a competitive environment, such overpaying the top people puts the corporation at a significant disadvantage to its competitors. Almost always, the corporation tends to fall behind in sales and profits.

Overpaying the top people has two important results. First, it tends to destroy the loyalty of the rest of the employees. Thus, they do not push as hard for sales, do not take care of the customers as well, and do speak against their employer to the rest of the community. Secondly, it destroys the "Good Will" that the company has in the general community. Customers then start looking for alternatives.

The only way that a corporation can get away with overpaying their top people is when the corporation is a monopoly or in an oligarchy. When such privilege is enacted into laws is when our country is in danger.

Americans have fought against such privilege in the past.

One of the best ways our country handled the problem in the past was through the AntiTrust movement. Increasing competition is the most effective way of dealing overpaid CEO's. As a country, we do better when we provide that competition rather than relying on other countries providing the competition.

As we have more competition, we spread the wealth out to the middle class and increase the pie.

Let us have competition.

I disagree with the above posts on a flat tax. Any flat tax capable of balancing the federal budget would bankrupt a good chunk of the country. The Negative Income Tax sounds interesting, but I think it is not progressive enough. My proposal is to simplify the current tax code to three brackets. The first bracket would go from $0 to the poverty line, and would pay no tax. The second bracket would go from the poverty line to the poverty line + 100,000 and would pay a low tax rate (5 or 10% ?) The last tax rate would be all income over the poverty line + 100,000 and would be taxed much higher (20-30%). There would be no deductibles, and capital losses would not reduce your tax liability. This approaches flat tax levels, since the income brackets are so large, but still retains its progressiveness.

@RighteousCenter:

You make very good points, but how would you address the question of losing talented executives to foreign companies? For example, if an extremely talented and intelligent upper executive at Boeing has a very restrictive earning potential at this American company, but can have unlimited upside at Airbus, how do we prevent him (and countless others) from moving to foreign companies? If this were to happen, we may be faced with the prospect of mediocre to good executives at American companies and most talented at foreign companies. How would you combat this?

The "negative income tax" approach looks good to me, in a general sense, but I'd like to see it refined a bit.

I've thought of something along similar lines to create a simpler, fair tax that essentially pays for services all Americans need (including utilities and health care) without taxing money people need to meet their other needs, and eliminating redundant welfare administration, but I want to see it further refined by essentially turning the welfare system into a temporary employment, job training, and child care agency so those who collect public funds earn their keep, and there is no incentive for able "heads of household" to freeload.

This would not only solve the problem of unemployment and reduce poverty to almost nil, but greatly reduce crime, and eliminate any objections of those who stereotype all people who collect public aid as parasitic deadbeats.

We can do this through a combination of public projects to rebuild infrastructure and build a new infrastructure for cleaner energy, and tax incentives for businesses to hire more people working less hours for good wages.

I'm also 100% on board with the Whig plan of tax incentives for hiring Americans and paying them good wages for a reasonable work week. We need to not only level the playing field regarding trade, but make it favorable to Americans, as far as American business activities are concerned.

In other words, have the needs of America dictate how the finances are handled, rather than the other way around.

We have more than enough potential and resources (both human and natural), we just need to take off the economic blinders to enable them to be put to proper use. The real value created will effectively back the dollars circulated better than gold could ever do.

I agree with several posters that a flat tax, while it sounds palatable, places an unnecessary burden on the poor. Our current system feels effective with the elimination of exemptions and deductions. I am very interested in the negative tax system as a potential alternative.

"how do we prevent him (and countless others) from moving to foreign companies?"

Is someone going to foreign competition? Let them. If they are going to a huge company, they are more likely to stagnate there than be a force that takes over the world.

The history of breaking up companies has shown that by breaking companies up, we offer the next generation of executives a much better future. I submit that we have far more people waiting in the wings looking to take over than spots to give them in the current corporate structure. Companies are far more likely to lose the talented executives when the company is held together and only one of the group of possible replacements is chosen. The rest leave.

Potential top executives are far more attracted to the possibility of running their own show than they are attracted to the money. The story of America is that freedom is better than sure money.

Look at the break up of AT&T. The result was that a new generation of leaders took charge, came up with numerous new ideas (such as embracing cell phones), and our communications infrastructure is far more capable than it would have been under the old monopoly.

From a governmental point of view, we should not be preventing companies from getting large or from paying people outrageous amounts of money. Instead, let us simply use the large payouts as proof that the company needs to be broken up.

Dear sir,

Taxing income is an antiquated idea from an antiquated time that should be swept into the dustbin of our history. The goods and services that our society demand put an ever-increasing demand on finite resources, so perhaps rather than taxing the production of those goods and services, which is essentially what income taxes do, we should be taxing consumption of those goods and services.

Yes, consumption taxes are regressive...but that can be mitigated by exempting essential goods and services from the tax and/or only taxing some goods and services that exceed a minimum amount. For example, produce might be exempt from taxation, while only the first $30,000 of the purchase price/mortgage payments/rent payments of a primary residence would be exempt from taxation.

That said, I agree with the MWP position that we need to keep our current tax system, reforming any low-hanging fruit, as we explore, draft and plan any potential replacement or major reform.

Your’s &c.
the Federal Farmer

Here's an interesting idea.

Enough is enough. Congress should reform our tax law to put the brakes on further inequality. Specifically, we propose an automatic extra tax on the income of the top 1 percent of earners — a tax that would limit the after-tax incomes of this club to 36 times the median household income.

Importantly, our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.

Here’s how the tax would work. Once a year, the Internal Revenue Service would calculate the Brandeis ratio of the previous year. If the average 1-percenter made more than 36 times the income of the median American household, then the I.R.S. would create a new tax bracket for the highest 1 percent of income and calculate a marginal income tax rate for that bracket sufficient to reduce the after-tax Brandeis ratio to 36.

This new tax, if triggered, would apply only to income in excess of the poorest 1-percenter — currently about $330,000 per year. Our Brandeis tax is conservative in that it doesn’t attempt to reverse the gains of the wealthy in the last 30 years. It is not a “claw back” tax. It merely assures that things don’t get worse.

Get rid of the income tax. Why do we need it? We already have payroll tax, gas tax, corporate taxes, tariffs, etc. We have tons of taxes at the federal level, never mind state or local. Shouldn't that be enough? Why do we need something so intrusive and prone to abuse? Mike Gravel is right, even a FAIR Tax or VAT would be infinitely preferable to dealing with the jackals in the IRS. But of course, that's not the only solution. We need to significantly cut spending too. And no I'm not against ALL social programs. I do think everyone should have a roof over their heads (even if it's just being able to stay at the homeless shelter) and food and basic healthcare.. But current levels are just not sustainable, at all.

Income tax rates are at their lowest levels since before WWII. And the economy is at its weakest since ... before WWII.

Is there a connection?

My first choice is the Fair Tax. Anyone who studies the Fair Tax would come to the same conclusion since every argument against it is erroneous. The second best system would be a flat tax on gross income regardless of source. There should not be a tax waiver income paid by a government entitlement, that income should be equally taxable. Capital gains would be taxed as regular income.

There should be no tax on businesses, whether they be corporations, partnerships or sole proprietorships. Profits would pass to owners who would be taxed on those profits as regular income.

As far as a flat tax being harder on the poor, in my opinion that couldn't be further from the truth.

You ask is there a connection between current tax rates and the poor economy and pre WWII rates and economy. I see no connection at all.

Your assertion is based on income tax rates. Income taxes are a drop in the bucket compared to total tax suffered in this country today. Add in local sales taxes, property taxes, gas taxes, various government service fees and on and on.

We pay exorbitant taxes to all levels of government and those governments spend that and more forcing the economy into its weakened state.

The only way to revive this dying economy is radically slash spending, revamp the tax code and give the people their money back and let the free market correct the last 60 years if rotten government.

Dogwood - "As far as a flat tax being harder on the poor, in my opinion that couldn't be further from the truth."

I'd be interested in your reasoning.