Income tax system: flat or progressive?

[Gerald Tarrant]

I like Mankiw's four goals of tax policy:

When designing a tax system and evaluating tax proposals, policy analysts have at least four goals in mind:

Efficiency: The tax system should distort incentives as little as possible (and, in the case of externalities and Pigovian taxes, correct incentives when necessary).

Intergenerational equity: The tax system should raise enough revenue so current generations do not unduly burden future generations.

Egalitarianism: The tax system should try to achieve a more equal distribution of after-tax incomes.

Stabilization: The tax system should help maintain the economy at full employment.

The current debate over fiscal stimulus involves trading off these goals. The stimulus package being discussed is mainly aimed at achieving goal 4, but it does so at the cost of sacrificing goals 1 and 2 to some degree. Efficiency is sacrificed because the phase out raises effective marginal tax rates and because the higher future taxes that result from the extra government debt will likely be distortionary. Of course, the phase out is there in order to achieve goal 3: This is the classic tradeoff between efficiency and equality.

From Here

Personally I tend to tune out folks who only focus only on the benefits or costs. I'm a lot more willing to listen to someone who talks about the tradeoffs that any tax or policy makes.

People in favor of less progressive taxes tend to emphasize efficiency and stability. They usually reference supply side economics. There's certainly room for a good discussion about how much (or little) damage tax increases do to businesses and economic growth. That's one area of discussion. Another area is to weigh the goals (more equality) against the costs(slight slowdown, maybe).

Hopefully your comparison of flat taxes and progressive taxes is about the US's situation. If so, there are some pretty compelling arguments against flat taxes. Right now the middle quintile pays 14.2% effective taxes. PDF -> Link. The top 10% of tax payers pay 60% of all taxes. PDF again Link. Let's assume that your flat tax will be revenue neutral, let's also discard Laffer silliness as it's not applicable (Google what Mankiw has to say about Laffer curve folks, also his analysis of the Bush Tax cuts shows they didn't meet the Laffer standard). Any revenue neutral flat tax will not be that different from the rate the top tier is paying, since they pay the majority of the taxes.

[Uraniun235]

(Google what Mankiw has to say about Laffer curve folks, also his analysis of the Bush Tax cuts shows they didn't meet the Laffer standard).

Hahahahaha not only is Reaganomics bullshit but Bush can't even get Reaganomics right.

That's rich. Thank you.

[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.

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.

Well, what makes the system even more annoying here in Finland is that the simple solution for the people who decide on increasing or tightening the already screwed up taxation can solve the financial loss they themselves suffer by increasing their own wages. Which they regularily do. It gets more and more frustrating at the point when you've studied hard for a profession, that promises good income in turn for requiring frequent travelling all over the country and working 10 hour days. Only to end up paying 40-45% in taxes. Resulting in a level of income not even close to matching the amount of work you end up doing and the effort required to get the job in the first place. When this is combined with extremely high taxation of basic commodities such as food, fuel, electricity and generally high VAT, the frustration grows to immense proportions.

Then foreigners wonder why Finns are generally a somewhat depressed and melancholy people.

[Stuart Mackey]

I have found that that its better to think of what is the rate of tax at a given income point, rather than a simple flat or progressive system; you can have a progressive system with the payment threshold held at higher levels , for example.

What must be borne in mind, and what a lot of right wingers forget, is what is the value of a dollar? One can give a 10% tax cut, but the value of that 10% is much greater to those on a higher income than to those on a very low income, and who benefits most from what they actually get?.

[His Divine Shadow]

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%.

But you have no capital gains income then AFAIK so rich people just put their money in stocks instead of as income. Thats what I've heard anyway.

[Darth Wong]

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%.

But you have no capital gains income then AFAIK so rich people just put their money in stocks instead of as income. Thats what I've heard anyway.

In Canada at least, they introduced capital-gains tax as a way of making up for getting rid of huge inheritance taxes. You have to do something about the entrenched aristocracy one way or another.

[Rogue 9]

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.

Ummmmm... That's the way it already is.

[Ariphaos]

My vote: Neither. Force all banks to associate with their county, and charge a tax for money that is transferred out of county, another for out of state, and another for out of country. Jack up non-homesteaded property taxes appropriately (including 'intellectual property' over a certain reasonable age), and possibly have some form of system for rationing (fossil fuels, for example). There will need to be a collateral account market for revolving investments.

Just out and out kill tariffs, sales tax, and income tax. Tax accountants will lose their jobs, but I can't say I would sympathize.

[Ariphaos]

Ghetto edit: forgot to add in - return a decent inheritance tax. Anything over a set amount should be taxed at 100%.

[ArmorPierce]

Funny how people are actively attempting to get rid of the inheritance tax. As it is, the inheritance tax is going to be repealed in 2010 but returned in 2011 due to the sunset provision. There are people attempting to take out the sunset provision.

[FireNexus]

I say progressive, but count overtime income like you would the current capital gains tax. 10% flat on all overtime. You get the benefits of the progressive tax, but you don't fuck people for working harder, and in fact you encourage them to.

If the 23.50/hr I used to get from overtime at my old employer was only taxed at 10%, I'd have been there 68 hours a week without a doubt.

[Darth Wong]

Funny how people are actively attempting to get rid of the inheritance tax. As it is, the inheritance tax is going to be repealed in 2010 but returned in 2011 due to the sunset provision. There are people attempting to take out the sunset provision.

I think it's pretty obvious why rich white men want to get rid of the inheritance tax. What's more mystifying is why so many poorer people support them, but I suspect that it's really not a very popular provision. If Bush ran for election based on getting rid of the inheritance tax, he would have lost. The Republicans' strength lies in taking advantage of peoples' anger toward others, such as gays or Mexican migrant workers or welfare recipients, and then riding the coattails of this anger to slide in provisions that benefit themselves at the cost of the very voters who are supporting them.

[Flagg]

Funny how people are actively attempting to get rid of the inheritance tax. As it is, the inheritance tax is going to be repealed in 2010 but returned in 2011 due to the sunset provision. There are people attempting to take out the sunset provision.

I think it's pretty obvious why rich white men want to get rid of the inheritance tax. What's more mystifying is why so many poorer people support them, but I suspect that it's really not a very popular provision. If Bush ran for election based on getting rid of the inheritance tax, he would have lost. The Republicans' strength lies in taking advantage of peoples' anger toward others, such as gays or Mexican migrant workers or welfare recipients, and then riding the coattails of this anger to slide in provisions that benefit themselves at the cost of the very voters who are supporting them.

It's because they think the tax also applies to them, even though it never has. The amount of inheritance you needed to be getting for the tax to be paid was $1,000,000. But that never stopped them from using the example of the "small family farm or business" when decrying the "death tax".

I'm sure the "Well I might be rich some day and I don't wanna have to pay that" aspect is there to some degree as well.

[ArmorPierce]

Funny how people are actively attempting to get rid of the inheritance tax. As it is, the inheritance tax is going to be repealed in 2010 but returned in 2011 due to the sunset provision. There are people attempting to take out the sunset provision.

I think it's pretty obvious why rich white men want to get rid of the inheritance tax. What's more mystifying is why so many poorer people support them, but I suspect that it's really not a very popular provision. If Bush ran for election based on getting rid of the inheritance tax, he would have lost. The Republicans' strength lies in taking advantage of peoples' anger toward others, such as gays or Mexican migrant workers or welfare recipients, and then riding the coattails of this anger to slide in provisions that benefit themselves at the cost of the very voters who are supporting them.

From what I see, most of them garners support for it by bringing rhetoric about "the american dream," "fairness," and "make it simpler."

[Patrick Degan]

I'm sure the "Well I might be rich some day and I don't wanna have to pay that" aspect is there to some degree as well.

That's a lot of it —millions of Americans have been sold on the idea that they too will one day be rich. Not realising that they already are compared to most of the rest of the world. Not considering how steeply the odds-against are that they'll wind up in the Bill Gates strata or even that of the Million Dollar Club realtor. They've been successfully gulled into buying into a repackaged version of the old Horatio Alger mythology and of course have no clue how well that worked out in reality the last time it was pushed.