Income tax system: flat or progressive?

[Surlethe]

I've been thinking recently about tax systems, partly because I'm one side of a double-column debate for the school newspaper and I'm arguing for a progressive tax over an income tax. In particular, one argument I've been having trouble with is the fairness argument: why should a person who makes more be required to pay a higher percent of his income? It seems the burden of proof is on the person wanting to take the money away to show that there is a greater social benefit to it. But on the other hand, the marginal value of each dollar to the person earning it decreases as income increases, so why not let the government take that 'extra value'?

What do you think? Is a flat tax more 'fair'? What if it were a flat tax on discretionary income?

[Rahvin]

why should a person who makes more be required to pay a higher percent of his income?

It's actually really freaking simple.

If you make 20,000 per year, and are taxed at, say, 25%, you take home 15,000. I don't know about you, but I almost pay that in rent, and I'm not exactly in a luxury apartment. A person at this level might pay up to 80 or 90% of his income on the bare necessities.

If you make 40,000 per year, and are taxed at 25%, you take home 30,000 - a great deal most money is available for living expenses. You can even have spending money, yay! You probably spend around 40-60% of your income on living expenses.

If you make 400,000 per year, and are taxed at 25%, you take home 300,000. You're able to afford a pretty goddamned nice lifestyle. You likely spend less than 30% of your income on "living expenses," and that only becasue your car payment goes towards a super-luxury SUV and your mortgage pays for your obscenely large house.

So, the poor person is barely able to get by at all, and every penny he is taxed is a penny he can't spend on food or other bare necessities. Every dollar he makes is worth more to him, becasue he needs it all.

Let's make it a progressive tax now.

You make 20,000 and are taxed at 10%. You only pay 2,000, and get to take home 18,000. That's a significant improvement in your ability to survive, and will have a direct and positive impact on your standard of living. If you were paying 80% of your income in living expenses at the old rate (12,000), your extra money has increased from 3,000 to 6,000. That's a 100% increase.

You make 40,000 and are taxed at 25%. You still pay 10,000, still take home 30k, and can still aford a reasonable lifestyle.

You make 400,000, and are taxed at 30%. You pay 120,000 in taxes, take home 280k...and barely even notice the difference, despite the fact that you pay more in that extra 5% than the poor person makes over the entire year. If your living expenses were 30% of your income under the old system (100,000), your available disposable income has gone from 200k to 180k - a 10% decrease you won't hardly notice.

Basically, flat taxes end up punishing the poor, because they need every scrap of money they get. They help the extremely wealthy, who would pay more under a progressive system...but then, they can afford it. It perpetuates the wealth gap, and while everyone is treated equally, it's certainly not fair.

Progressive tax plans take less money from poorer people because they have less to give, and need closer to 100% of their income just to survive.

[SCRawl]

Don't most sane flat tax schemes still have at least an income floor (or a standard deduction, or whatever) below which you pay no taxes at all? I admit that that isn't a true "flat" tax, by the literal meaning of the term, but with every other income level taxed at the same (unavoidable) level, you can say that it's flat starting at, say, $20k. Or something like that.

[Surlethe]

Don't most sane flat tax schemes still have at least an income floor (or a standard deduction, or whatever) below which you pay no taxes at all? I admit that that isn't a true "flat" tax, by the literal meaning of the term, but with every other income level taxed at the same (unavoidable) level, you can say that it's flat starting at, say, $20k. Or something like that.

That's essentially the same as what I suggested, taxing discretionary income. That way, the "poor people struggle more under such a tax" argument is removed.

[Rahvin]

Don't most sane flat tax schemes still have at least an income floor (or a standard deduction, or whatever) below which you pay no taxes at all? I admit that that isn't a true "flat" tax, by the literal meaning of the term, but with every other income level taxed at the same (unavoidable) level, you can say that it's flat starting at, say, $20k. Or something like that.

Sure. But the point remains that taxing even a middle-class individual at the same rate as an extremely wealthy individual creates a huge disparity in the amount of extra income taken by the government. Even if everyone is taxed at 25%, that's still around 50% or so of a middle-class person's non-necessary spending, and only like 30% or so of an extremely rick person's, even allowing for the rich persons "necessary" spending to include obscene mortgages, car payments, food...basically a MUCH higher standard of living.

So let's just reverse your question: why should a rich person who can afford an incredibly luxurious lifestyle only pay 33% of his left-over income in taxes, while a middle-class person pays 50%? The situation is even worse if we don't give the extremely rich person so much leeway with their "necessary" spending. If we only calculate based on the average standard of living, the extremely rich person is paying a much smaller percentage of their non-necessary income to taxes than even the 30%.

Treating everyone equally is not the same as fairness when taking distribution of wealth into account.

[SCRawl]

Don't most sane flat tax schemes still have at least an income floor (or a standard deduction, or whatever) below which you pay no taxes at all? I admit that that isn't a true "flat" tax, by the literal meaning of the term, but with every other income level taxed at the same (unavoidable) level, you can say that it's flat starting at, say, $20k. Or something like that.

Sure. But the point remains that taxing even a middle-class individual at the same rate as an extremely wealthy individual creates a huge disparity in the amount of extra income taken by the government. Even if everyone is taxed at 25%, that's still around 50% or so of a middle-class person's non-necessary spending, and only like 30% or so of an extremely rick person's, even allowing for the rich persons "necessary" spending to include obscene mortgages, car payments, food...basically a MUCH higher standard of living.

So let's just reverse your question: why should a rich person who can afford an incredibly luxurious lifestyle only pay 33% of his left-over income in taxes, while a middle-class person pays 50%? The situation is even worse if we don't give the extremely rich person so much leeway with their "necessary" spending. If we only calculate based on the average standard of living, the extremely rich person is paying a much smaller percentage of their non-necessary income to taxes than even the 30%.

Treating everyone equally is not the same as fairness when taking distribution of wealth into account.

I think that the reason flat taxes can work is because so many taxpayers at the high end have ways of weaseling out of their tax responsibilities. (That's the perception, at least. I can't say that I know what the reality is.) A flat tax would remove those possibilities, requiring everyone to pay a flat percentage of their income above a certain amount.

[The Dude]

Flat taxes with an income floor are progressive. A 25% flat tax with a $20K income floor means someone making $20K pays zero, someone making $40K pays 12.5%, someone making $80K pays 18.75% and someone making $200K pays 22.5% (average rate).

[Coyote]

Ideally, a progressive tax rate with a gentle curve and no fucking loopholes. A bottom-out clause to the tax rate, also, so that people earning under a certain amount (say, $20,000.00 a year?) don't have to pay anything but the sales tax on items they purchase.

And as for that damn sales tax....
... I think that we should not tax staple survival items like food. If I were in charge (RAR!) I'd have a sort of nutritional scale whereby if foods fall below a certain nutritional value, they are considered "treats" and subject to "indulgence taxes" (or "luxury" or "sin" taxes if you like). So broccoli isn't taxed, but Twinkies are.

[GrandMasterTerwynn]

Don't most sane flat tax schemes still have at least an income floor (or a standard deduction, or whatever) below which you pay no taxes at all? I admit that that isn't a true "flat" tax, by the literal meaning of the term, but with every other income level taxed at the same (unavoidable) level, you can say that it's flat starting at, say, $20k. Or something like that.

Sure. But the point remains that taxing even a middle-class individual at the same rate as an extremely wealthy individual creates a huge disparity in the amount of extra income taken by the government. Even if everyone is taxed at 25%, that's still around 50% or so of a middle-class person's non-necessary spending, and only like 30% or so of an extremely rick person's, even allowing for the rich persons "necessary" spending to include obscene mortgages, car payments, food...basically a MUCH higher standard of living.

So let's just reverse your question: why should a rich person who can afford an incredibly luxurious lifestyle only pay 33% of his left-over income in taxes, while a middle-class person pays 50%? The situation is even worse if we don't give the extremely rich person so much leeway with their "necessary" spending. If we only calculate based on the average standard of living, the extremely rich person is paying a much smaller percentage of their non-necessary income to taxes than even the 30%.

Treating everyone equally is not the same as fairness when taking distribution of wealth into account.

I think that the reason flat taxes can work is because so many taxpayers at the high end have ways of weaseling out of their tax responsibilities. (That's the perception, at least. I can't say that I know what the reality is.) A flat tax would remove those possibilities, requiring everyone to pay a flat percentage of their income above a certain amount.

You could make a simple progressive tax too. The reason the rich can weasel out of paying for their share is because of the hugely complex and loophole-rich tax code. Instead of having these arcane rules in place for deductions and tax-deferrals and credits and whatever else, you have a code that states If you make range X in income, regardless of the type, you pay Y in taxes. Don't like it, we'll throw you in prison, so STFU and pay already. The only complexity I'd add to a system like that would be a per-child tax-credit that would only apply to the first two children of people making under $100,000/year or some similar cutoff (annually adjusted for inflation.)

[Rahvin]

I think that the reason flat taxes can work is because so many taxpayers at the high end have ways of weaseling out of their tax responsibilities. (That's the perception, at least. I can't say that I know what the reality is.) A flat tax would remove those possibilities, requiring everyone to pay a flat percentage of their income above a certain amount.

And how do you prevent such weaseling? And at what percentage can the bottom of the taxed population pay that will be "fair" for someone who makes 3 times or more their income?

The fact that a system can work does not mean it is fair. Even assuming you can somehow ensure that the extremely rich pay every penny of their projected tax (and that's a pretty big assumption) under a flat tax plan, how do you address the fact that an extremely rich person will still be paying an much smaller percentage of their non-necessary income?

Taxing only the income after living expenses would help, but how is that calculated? What standard of living is used? Are the extremely rich allowed to claim a $5000/month mortgage as part of their "living expenses" while a middle-class person claims $1000? Or is an "average standard of living" used for the calculation and applied to everyone?

I strongly favor higher taxes those who are more able to pay them. Part of the problem of the incredibly rich, remember, is that they don't spend nearly as large a percentage of their income compared to the "normal" population. "Hoarding" money stagnates the entire economy, while it could be put to better use in government programs...like say, universal healthcare, or education, or infrastructure spending, or...well, you get the idea. Those programs create more jobs and stimulate the circulation of money, which is the basis for a healthy economy. The trickle-down "Reaganomics" bullshit that suggests the extremely wealthy will "invest" their giant sums back into the economy instead of hoarding it away has been shown to be pretty goddamned far off the mark.

[Beowulf]

You can have a family making $60k/year, but in bumfuck, NE. They're rich. Another family, making $80k/year. They're in San Francisco. They're poor. They most likely have to commute for hours to get to work, because they can't afford a place near where they work. Which family is more able to pay? The one that makes more? They're barely keeping their head above water. The one that makes less? So you're targeting the lower class then. That line of reasoning is ineffective when you have different costs of living in different areas. Unless you somehow try to put that into the law, at which point you have problems when people move, or a couple is living in different locations in the country for job reasons.

And how the hell do rich people "hoard" money? Stick it in a mattress? They put it in a bank, which lends the cash out, which stimulates the economy. Or they stick it in bonds, which is doing the same thing, but to a corporation or government. Possibly they stick it in stocks, which is still putting cash somewhere it can be used as capital for expansion.

[Alyrium Denryle]

I've been thinking recently about tax systems, partly because I'm one side of a double-column debate for the school newspaper and I'm arguing for a progressive tax over an income tax. In particular, one argument I've been having trouble with is the fairness argument: why should a person who makes more be required to pay a higher percent of his income? It seems the burden of proof is on the person wanting to take the money away to show that there is a greater social benefit to it. But on the other hand, the marginal value of each dollar to the person earning it decreases as income increases, so why not let the government take that 'extra value'?

What do you think? Is a flat tax more 'fair'? What if it were a flat tax on discretionary income?

There are a few good arguments to be had here. The first, and arguably best is that you should pay into the social infrastructure in a manner which is proportionate to what you receive from it. The person who makes 400k a year benefits from society much more than the grad student who works 12 hours a day for 15k (it is a labor of love I swear) and as a result should pay more for the service. That seems like a better argument from fairness than OMG WHY SHOULD THE RICH PAY MORE THAN THE POOR!! UNFAIR!!!111

No matter how you slice it, the rich person is rich due to the rest of society. They were educated by usually public schools, they use public infrastructure, the populace pays for their goods, services, and ideas etc etc. They are dependant upon society just like the rest of us are, and they have a duty to pay that back.

And how the hell do rich people "hoard" money? Stick it in a mattress? They put it in a bank, which lends the cash out, which stimulates the economy. Or they stick it in bonds, which is doing the same thing, but to a corporation or government. Possibly they stick it in stocks, which is still putting cash somewhere it can be used as capital for expansion.

And we all know that trickle down economics actually helps the common citizens standard of living and maintains public infrasctucture

They hoard money in the sense that they do not really help out what we would consider the general populace with it. For the most part, it stays within one group. The wealthy. They invest in a business... a business for the most part owned by another rich person. They are not really investing in common goods. Even putting it in the bank only really generates capital for them and their ilk, because *gasp* the person the money is loaned too just goes into debt and pays exorbitant interest rates which generates money for rich people...

[Darth Wong]

I've been thinking recently about tax systems, partly because I'm one side of a double-column debate for the school newspaper and I'm arguing for a progressive tax over an income tax. In particular, one argument I've been having trouble with is the fairness argument: why should a person who makes more be required to pay a higher percent of his income? It seems the burden of proof is on the person wanting to take the money away to show that there is a greater social benefit to it. But on the other hand, the marginal value of each dollar to the person earning it decreases as income increases, so why not let the government take that 'extra value'?

What do you think? Is a flat tax more 'fair'? What if it were a flat tax on discretionary income?

My suggestion: discard the idea of fairness. It's overrated, and life itself is incredibly, massively unfairly in favour of rich people anyway. The idea of treating higher-income and lower-income people "fairly" starts from a preposterous assumption that life would be fair for those two classes if the government did not mess it up.

Heavy taxation of the wealthy serves a public good, for three reasons:

1) Someone has to pay the bills to run the apparatus of society, and the wealthy can afford to pay more.

2) It keeps the money in the country. Wealthy people have extremely portable assets, ie- they can move vast amounts of money overseas at will, and they will do so at any time with no compunctions, if it serves their interests.

3) The deprivations inflicted upon the wealthy as a result of increased taxation are much less dramatic than those inflicted upon the poor and middle class.

In short, at the end of the day, less people should be suffering in a society that skews its taxation scheme to tax wealthy people at a greater rate.

The counter-argument is that if you tax wealthy people, then the economy will suffer, and everyone will pay the price. This reasoning is based on the belief that wealthy people are more likely to invest in the domestic economy than poor or middle class people: a proposition for which I have never seen any particular evidence. A wealthy person, being much more free to invest his money wherever he likes, is just as likely to send it overseas as he is to keep it local (and in fact, it is usually considered wise investment practice to deliberately send money overseas, in order to "diversify"). Worse yet, when the domestic economy is doing poorly (ie- when you most need to be able to get those funds), wealthy people are most likely to send vast amounts of money overseas.

[Gullible Jones]

Progressive. Flat taxes are retarded - a given percentage of income means a lot more if you're poor than if you're rich.

[Uraniun235]

I agree with heavily taxing the rich. We hit over 90% on the top tax bracket in the 50's, the so-called "golden age" that so many nostalgic conservatives look back on. It wasn't until Reagan (whose big initiative was to cut down those taxes) that we saw the top tax bracket fall below 70%.

Any notion of "fairness" is not derived from a fixed percentage of income or even of discretionary income; it's based on burden.

I still don't like the notion of fixed "brackets" though - I much prefer a curve.

You can have a family making $60k/year, but in bumfuck, NE. They're rich. Another family, making $80k/year. They're in San Francisco. They're poor. They most likely have to commute for hours to get to work, because they can't afford a place near where they work.

How much of that is due to the retardedly inflated housing market?

Besides which, it's not like the curve has to shoot up drastically between $40K and $80K. A lot of the outrage is that the top tax bracket is only something like 35%. A dude making $1M/year supposedly only has to pay 35%? Come on. We can do better than that.

Though frankly we need to stop underfunding the IRS so badly.

[Fingolfin_Noldor]

There might be a serious need to work out serious legislation to prevent money from ending up in tax havens.

[Rightous Fist Of Heaven]

Hmmh, I guess progressive taxing would make sense if the system would work in a fucking sensible way. Working 100 hours overtime in a month so I can end up having a bit more cash on my next paycheck, I end up paying so much taxes that the extra time I worked means practically jack fucking squat. Yay, if I have 1 day off in a month instead of 8, and work 10 hours a day instead of 8, I can make 500 euros more. Oh the joys of progressive taxing in Finland. Really encouraging people to work hard.

[CmdrWilkens]

I'm going to say first go with progressive and then say the question needs to start by beginning it as "why do we tax at all?" Once we have the basic logic behind taxation then we can decide who should carry the burden and in what proportion.

So why do we tax? It is the instrument by which government is able to function. Moreover the function's themselves are neccessarry to the general health of the economy from which taxes are taken. Economies expand when resources are plentiful, regulation creates fair competition, investors and consumers feel safe and secure in their personal economic stake, and when effort is fairly equated with reward. The folks who have benefited the most, then, from the efforts of government to do this will consequently be the most successful. In turn they SHOULD have the greatest burden for paying towads the benefits which they have incurred.

the CEO is rich and may have gone to ivy leauge schools but the workforce which makes him money and which spends money on his enterprise is entirely dependent upon public schooling, roads, utilities and infrastructure, as well as the general intangibles of a country where the general consuming public feels secure that transactions are fairly regulated and that they are in no grave danger due to war, famine, death, disease, etc. Simply put the entire empire of the CEO in American society (and most western societies) is heavily dependent upon the quality of the government services offered to producers, consumers, and employees.

[Twoyboy]

Ideally, a progressive tax rate with a gentle curve and no fucking loopholes. A bottom-out clause to the tax rate, also, so that people earning under a certain amount (say, $20,000.00 a year?) don't have to pay anything but the sales tax on items they purchase.

And as for that damn sales tax....
... I think that we should not tax staple survival items like food. If I were in charge (RAR!) I'd have a sort of nutritional scale whereby if foods fall below a certain nutritional value, they are considered "treats" and subject to "indulgence taxes" (or "luxury" or "sin" taxes if you like). So broccoli isn't taxed, but Twinkies are.

I'd just like to point out that this is pretty much exactly the tax system we have in Australia. Progressive tax with a bottom out at $6,000pa rising to a maximum of 45% (when earning over about $135,000pa). Then a GST (Goods and Services Tax) of 10% is applied to everything we buy/sell - except things deemed necessities like fruits, veg, fresh meat, milk, bread, etc or things used to generate income, so when a company buys something it requires to run it is GST free.

The only problems are the complexities involved. Like what the hell is considered a necessity. (Plain chocolate in blocks is GST free, flavoured chocolate and Easter eggs attract a GST )

[wjs7744]

The problem with applying a tax to luxury items is that it is then in the government's interest to classify everything as a luxury. Our VAT is theoretically for luxury items only, but very few things are exempt from it. For example, I have no problems with paying a luxury tax on the components I bought to upgrade my computer recently, but it pisses me off that I also have to pay it for my lightbulbs. I know that if it comes down to it, a lack of lightbulbs will not kill me, but is that really a good definition of luxury? As I said, it is in the interest of the government to define as many things as luxuries as they can get away with.

[fnord]

Then a GST (Goods and Services Tax) of 10% is applied to everything we buy/sell - except things deemed necessities like fruits, veg, fresh meat, milk, bread, etc or things used to generate income, so when a company buys something it requires to run it is GST free.

The only problems are the complexities involved. Like what the hell is considered a necessity. (Plain chocolate in blocks is GST free, flavoured chocolate and Easter eggs attract a GST )

IIRC, the Get Screwed Tax is still paid, but by the end-user rather than the intermediary in question - the business gets the GST it paid on its inputs as a credit against the GST arising from sales of goods and services.

[Patrick Degan]

Heavy taxation of the wealthy serves a public good, for three reasons:

1) Someone has to pay the bills to run the apparatus of society, and the wealthy can afford to pay more.

2) It keeps the money in the country. Wealthy people have extremely portable assets, ie- they can move vast amounts of money overseas at will, and they will do so at any time with no compunctions, if it serves their interests.

3) The deprivations inflicted upon the wealthy as a result of increased taxation are much less dramatic than those inflicted upon the poor and middle class.

There is also a fourth benefit and this one most invaluable: heavier taxation of the rich counters the negative effect of entrenched wealth. Plutocracy is poisonous to democracy in the long run because the greater advantages of entrenched wealth warps the structure of elective government and society in general. When one class with most of a society's wealth at its command (if not its personal ownership) can essentially buy the government, it ceases to be a government of, by and for the people at large and instead exists only to service the interest of the privileged few —who increasingly disconnect not only from the society at large but from reality itself as each generation does less and less actual work to hold onto money. The eventual end to this process, if left unchecked, is oligarchy then dictatorship and finally revolution.

For free republican government to exist and thrive, there is a very strong motivation to choke off the growth of plutocratic privilege and prevent too large a gap between rich and poor developing. Otherwise the society must eventually fall to ruin as its supports, both economic and political, are eroded simply so that a few may live like kings at the expense of the many.

[Darth Wong]

Hmmh, I guess progressive taxing would make sense if the system would work in a fucking sensible way. Working 100 hours overtime in a month so I can end up having a bit more cash on my next paycheck, I end up paying so much taxes that the extra time I worked means practically jack fucking squat. Yay, if I have 1 day off in a month instead of 8, and work 10 hours a day instead of 8, I can make 500 euros more. Oh the joys of progressive taxing in Finland. Really encouraging people to work hard.

One of the real problems with progressive taxation is that the people in charge of implementing any such scheme are likely to be penalized by it. Therefore, they always make sure that the middle class will be penalized as well, so that they will stop agitating for more of the same.

[ArmorPierce]

If anything, the progressive tax system should be made stronger. The disparity between the rich and the poor is greater than ever and if only for that reason, it would be good enough of one. Don't let me get into how democracy's are actually ogliarchies when too much power is concentrated in the hand of a few. Besides that, the entire reason that the rich are taxed higher is because they can take a higher burden and still have plenty left over. Besides it's not like their entire income is taxed at that rate, just the what is over x amount. I don't know how it can be any fairer than that?

[Covenant]

Progressive, obviously, along with other improvements. I would certainly like a salary cap for businesses and such, but as stated, the idea of fairness is foriegn to systems and money. If your goal is to create a functional engine that allows a nation to function best, the clearest solution is to attempt to uplift those people who need it most to a level at which they can be productive and useful while attempting to draw the draw the required funds to serve the public good from those areas where it can be most easily ignored. You have to look more longterm. Allowing low-income individuals to get off without a major tax burden is a public good, and it will, in time, pay dividends in terms of a more robust economy (since a great deal of the economy thrives on the need of the masses, not just the top few, and benefits from disposable and investable cash) and a more educated, competitive workforce.

This shouldn't be seen as unfair or penalizing the successful. They pay a greater burden, yes, but they still do have a better way of life and a greater degree of flexibility with their assets. Besides, the best way to avoid this is to do things like having salary caps, reducing the amount one can be paid in bonuses and 'golden parachutes' and so on, so there is simply no way for someone to accumulate the obscene amounts of money some of these people have except through hard work and a vast amount of investment in a lot of different corporations. That's good for business, good for employment, and so on. The only ones who can whine about that are people who simply inherit money, and I don't think they deserve to whine. If you're going to get all Ryan/Rand on us and accuse the lower class of being parasites then you need to justify it by making that income yourself.