Are you in favor of the FairTax?

[keith]

Originally Posted by lochinvar

Why not just leave it in the pocket of the taxpayer via the exemptions?

well the only unarguable advantage of a flat income tax is that it is simple and hence would slash compliance costs (time to sell those H&R block shares). As soon as you add exemptions you start to waste away that advantage - and you can start with mortgage and charity but fat chance that the politicians will not find ways to add in extra exemptions.

my joke about the 35% rate with rebates was simply that if you slashed out all the perks from the current code a four level tax system is at once equitable and easily administered. My objection to flat rates is that (without a massive support bureaucracy to manage transfers and rebates) they are regressive.

[lochinvar]

Originally Posted by keith

well the only unarguable advantage of a flat income tax is that it is simple and hence would slash compliance costs (time to sell those H&R block shares). As soon as you add exemptions you start to waste away that advantage - and you can start with mortgage and charity but fat chance that the politicians will not find ways to add in extra exemptions.

my joke about the 35% rate with rebates was simply that if you slashed out all the perks from the current code a four level tax system is at once equitable and easily administered. My objection to flat rates is that (without a massive support bureaucracy to manage transfers and rebates) they are regressive.

And what's so difficult about "The first X dollars of income are exempt from taxation; everything over and above that is taxed at a rate of 25%."

How would that be regressive? The very poor pay nothing; everyone else pays on a make more, pay more basis. The rich pay the most, but only because they earn the most.

This would easily be as simple to administer as the four tier system you are defending.

And as for the deductions (not exemptions) for mortgages, investments, charities, etc., those will never go away so long as the government perceives the tax code as an indirect way to channel money from the private sector in directions it deems good for the country.

No matter what system you end up with, the use of taxation to encourage the redistribution of wealth will remain.

[keith]

Originally Posted by lochinvar

And what's so difficult about "The first X dollars of income are exempt from taxation; everything over and above that is taxed at a rate of 25%."

nothing, but the IRS is an exemptions checking organization. The only way to shrink that beaurocracy is to shrink the exemptions.

Originally Posted by lochinvar

How would that be regressive? The very poor pay nothing; everyone else pays on a make more, pay more basis. The rich pay the most, but only because they earn the most.

uhm, because as a proportion of income the poor would (or may we say the 'less rich'?) would pay more. So the burden of taxation is uneven. Also a 25% rate is pure wishful thinking if you want to maintain exemptions - which leads to a disinsentive to work since above a certain income threshold you get a reduced portion of your extra income.

Originally Posted by lochinvar

This would easily be as simple to administer as the four tier system you are defending.

Nope, see above. The problem is not the number of tiers in the system it is the number of exemptions. I am sure just about everyone here itemises - that is where tax inefficiency springs from.

Originally Posted by lochinvar

And as for the deductions (not exemptions) for mortgages, investments, charities, etc., those will never go away so long as the government perceives the tax code as an indirect way to channel money from the private sector in directions it deems good for the country.

which is why a flat tax has no actual advantage over a multi-step system. Since the steps have nothing to do with the inefficiencies in the system

Originally Posted by lochinvar

No matter what system you end up with, the use of taxation to encourage the redistribution of wealth will remain.

Well maybe it is fairer to say that the rich have a greater interest in the status quo - so why shouldn't they pay more to keep it?

[lochinvar]

Okay, let's get a few definitions in order so we don't misunderstand each other.

EXEMPTIONS are income on which you owe NO tax; they reduce the absolute amount of your income that is subject to tax BEFORE it's calculated.

DEDUCTIONS are expenditures that are subtacted from your taxable income after the exemption has been applied.

Exemptions and deductions often have the same net effect on your tax bill, they are actually different creatures.

Originally Posted by keith

nothing, but the IRS is an exemptions checking organization. The only way to shrink that beaurocracy is to shrink the exemptions.

I was unaware that the IRS bureaucracy was in need of shrinking. By all reports, they are woefully underfunded and understaffed to do the job that they've been tasked with.

The size of the IRS is not the problem with the current tax system; the problem is that it is cumbersome, overblown, difficult to understand, and invites non-compliance through sheer confusion.

uhm, because as a proportion of income the poor would (or may we say the 'less rich'?) would pay more. So the burden of taxation is uneven.

Let's posit a hypothetical situation and see if the poor pay proportionately more.

Person A makes 100,000 dollars, of which the first 40,000 is exempt from tax and the rest is taxed at 25%. Net tax bill = 15,000, or 15% of total income.

Person B makes 500,000 dollars, of which the same first 40,000 is exempt and the rest is taxed at 25%. Net tax bill = 115,000, or 23% of total income.

Since 15% is less than 23%, it follows that the poorer person pays proportunately less tax than the richer person.

If you can create a scenario in which this doesn't hold true, I'd like to see your numbers.

Also a 25% rate is pure wishful thinking if you want to maintain exemptions - which leads to a disinsentive to work since above a certain income threshold you get a reduced portion of your extra income.

This is true of the current graduated tax bracket system, also, and I haven't seen it keep people from trying to make more money, even if that extra income is taxed at a higher percentage. The "disincentive to work" criticism is therefore shown to be false.

which is why a flat tax has no actual advantage over a multi-step system.

Except that it's easier to understand and calculate--significant advantages, I think.

Nope, see above. The problem is not the number of tiers in the system it is the number of exemptions. I am sure just about everyone here itemises - that is where tax inefficiency springs from

...Since the steps have nothing to do with the inefficiencies in the system

That's twice you've made that statement, so now I'm wondering just what do you see as the inefficiencies in the system, and why do you think they are rooted in exemptions/deductions?

[Have At You]

Am I the only one who thinks itemizable deductions are a GOOD thing?

There are things that we as a society want money spent on. We want money spent on charity. We want to encourage home ownership. We want people to save for retirement and for college.

At the same time, we recognize that government is insanely inefficient at spending money.

So we give the taxpayer a deduction for money they spent that way. It's the same as if the gov't spent it, but with the assurance that it went directly where it was supposed to go, without feeding a huge bureaucracy to get it from the taxpayer's pocket to the target.

Eliminating deductions means we're going to have to rely on the gov't to spend all this money, which is just stupid and wasteful if you ask me.

[Gav]

In the UK income tax started off as a temporary [flat] tax that was used to raise money for the Napoleonic wars. It was extremely unpopular when imposed, but because the goevernment realised that it was a good way of raising income it was repealed and then reintroduced. As I understand it, this was also controverials because the populace had been told it was temporary - and it still is. The problem with a flat tax scheme is not that it is inherently unfair, it's that the governments original implementation didn't take into account change. Times changed. Government couldn't resist tinkering with the tax and so it was tweaked over the years to the near incomprehensible state that it is in now. Interestingly it's only really incomprehensible to the rich because they have so much money they can afford a tax lawyer to evade it. Us poor folks pay a percentage after our allowance (which Loch' referred to as an Exemption) in a scheme called PAYE (Pay As You Earn). Most loopholes are poorly understood by the general populace unless they are pointed out to them (as in the case of students - who generally don't pay). The idea of self assessment is alien to me.

This is why I don't think that flat tax can work. Not because it's necessarily unfair, but because people can't help but tinker with it. There's a short history of the British Income Tax here.

[Bayou Bum]

Originally Posted by lochinvar

Since 15% is less than 23%, it follows that the poorer person pays proportunately less tax than the richer person.

If you can create a scenario in which this doesn't hold true, I'd like to see your numbers.

How about the following three taxpayers:
Taxpayer A: $5,510,000 in income pays $704,227 in taxes or 13%
Taxpayer B: $822,126 in income pays $227,490 in taxes or 28%
Taxpayer C: $69,995 in income pays $12,192 in taxes or 17%

Which taxpayers are paying their fair share, if any?

[keith]

Originally Posted by lochinvar

Okay, let's get a few definitions in order so we don't misunderstand each other.

EXEMPTIONS are income on which you owe NO tax; they reduce the absolute amount of your income that is subject to tax BEFORE it's calculated.

DEDUCTIONS are expenditures that are subtacted from your taxable income after the exemption has been applied.

Exemptions and deductions often have the same net effect on your tax bill, they are actually different creatures.

You forgot credits . Whatever you call them they have the same effect - complicating the collection of taxation, regardless of how the system is formed. Someone has to check you aren't fibbing on your return.

Originally Posted by lochinvar

I was unaware that the IRS bureaucracy was in need of shrinking. By all reports, they are woefully underfunded and understaffed to do the job that they've been tasked with.

The size of the IRS is not the problem with the current tax system; the problem is that it is cumbersome, overblown, difficult to understand, and invites non-compliance through sheer confusion.

True, but have a look at the tax tables. Are these complicated? Nope, what is complicated is working out how much of your income you can remove from the tax system via exemptions, deductions or regain using credits. I wholeheartedly agree that any tax system that allows you to deduct vehicle tax when it is based on vehicle value but not when it is based on vehicle weight is totally mad.

Originally Posted by lochinvar

Let's posit a hypothetical situation and see if the poor pay proportionately more.

Person A makes 100,000 dollars, of which the first 40,000 is exempt from tax and the rest is taxed at 25%. Net tax bill = 15,000, or 15% of total income.

Person B makes 500,000 dollars, of which the same first 40,000 is exempt and the rest is taxed at 25%. Net tax bill = 115,000, or 23% of total income.

Since 15% is less than 23%, it follows that the poorer person pays proportunately less tax than the richer person.

uhm, no the poor pay more vs a stepped system.

Originally Posted by lochinvar

If you can create a scenario in which this doesn't hold true, I'd like to see your numbers.This is true of the current graduated tax bracket system, also, and I haven't seen it keep people from trying to make more money, even if that extra income is taxed at a higher percentage. The "disincentive to work" criticism is therefore shown to be false.Except that it's easier to understand and calculate--significant advantages, I think. That's twice you've made that statement, so now I'm wondering just what do you see as the inefficiencies in the system, and why do you think they are rooted in exemptions/deductions?

okay so I wasn't sure which arguement for a flat tax you were using - simplification of the tax code or providing an incentive for the rich to work harder so paying more tax. The first is only true if you remove all exemptions/deductions/credits, but gives less benefit (personal opinion) than a stepped system with no exemptions/deductions/credits. The second as you point out is untrue, or only true if you assume the rich are more sensitive to income loss than the poor.

I am not sure how the assertion that the complexity of the tax code comes from the calculation of taxable income and not from the calculation of the tax to be paid on that income could be viewed as obscure.

An income tax with no exemptions/deductions/credits is the simplest way of aquiring revenue for the government. Perhaps with a sales tax added in for all the drug dealers (although perhaps legalising drugs would just be simpler?).

[lochinvar]

Originally Posted by Bayou Bum

How about the following three taxpayers:
Taxpayer A: $5,510,000 in income pays $704,227 in taxes or 13%
Taxpayer B: $822,126 in income pays $227,490 in taxes or 28%
Taxpayer C: $69,995 in income pays $12,192 in taxes or 17%

Which taxpayers are paying their fair share, if any?

Um, how did you arrive at those figures using the formula I posited?

According to the formula given:

A: Income of 5.51M, of which first 40K is not taxable and the rest is taxed at 25%. Tax bill = 1,367,500, or 24.8%.

B: Income of 822,126, taxable portion 782,126. Tax bill = 195,531, or 22.1%

C: Income of 69,995, taxable portion 29,995. Tax bill = 7,499, or 10.7%

[keith]

Originally Posted by Have At You

Am I the only one who thinks itemizable deductions are a GOOD thing?

snip

Eliminating deductions means we're going to have to rely on the gov't to spend all this money, which is just stupid and wasteful if you ask me.

No eliminating deductions (etc) means that the government is excluded from deciding on capital allocation in the general economy. You don't eliminate the mortgage deduction and then expect the government to buy you your house.

All deductions are inefficient. The mortage deduction does not make housing more affordable it discounts the interest rate which makes housing more expensive: everyone can now bid more for a finite resource so raising prices. Added to that the perk is better at higher incomes since it only comes into play if you can itemise and is not limited by tax rate.

[lochinvar]

Originally Posted by keith

You forgot credits . Whatever you call them they have the same effect - complicating the collection of taxation, regardless of how the system is formed. Someone has to check you aren't fibbing on your return.

Yet someone still has to check the figures even in your posited stepped system that uses no exemptions/deductions/credits. No net reduction in the bureaucracy will result in either system.

uhm, no the poor pay more vs a stepped system. (bold added)

Conceded, but the original challenge wasn't comparing the flat tax to a graduated tax, but rather that a flat tax was, in fact, regressive. Without an exemption it is, but with an exemption it is not.

I am not sure how the assertion that the complexity of the tax code comes from the calculation of taxable income and not from the calculation of the tax to be paid on that income could be viewed as obscure.

That isn't obscure, as you now state it; however, your original claim was that exemptions/deductions were the font of inefficiency, not complexity. Things can be complex and still efficient, depending on what they are intended to accomplish.

An income tax with no exemptions/deductions/credits is the simplest way of aquiring revenue for the government.

The simplest way to acquire revenue, but not the simplest way to encourage the channeling of monies into areas that the government deems good for the nation.

As Have At You noted above (and I think we both agree with this sentiment), it would be grossly inefficient to have the government directly subsidize all of the things that the current tax deductions subsidize--and let's call a spade a spade: tax deductions are subidies.

(although perhaps legalising drugs would just be simpler?).

I agree.

[keith]

Originally Posted by lochinvar

Yet someone still has to check the figures even in your posited stepped system that uses no exemptions/deductions/credits. No net reduction in the bureaucracy will result in either system.

absolutely, any income tax needs double checkers - the only way to limit them is to have a single uniform exemption. After that how you calculate the tax on taxable income is just checking against a table or using a calculator, the flat tax has only the most marginal advantage.

Originally Posted by lochinvar

Conceded, but the original challenge wasn't comparing the flat tax to a graduated tax, but rather that a flat tax was, in fact, regressive. Without an exemption it is, but with an exemption it is not.That isn't obscure, as you now state it; however, your original claim was that exemptions/deductions were the font of inefficiency, not complexity. Things can be complex and still efficient, depending on what they are intended to accomplish.

okay so in my terminology;
sales tax (most regressive), flat income tax, progressive tax bands (least regressive).

I concede that compexity does not exclude efficiency, perhaps with the exception of anything a government touches? Gav hit the nail on the head.

Originally Posted by lochinvar

The simplest way to acquire revenue, but not the simplest way to encourage the channeling of monies into areas that the government deems good for the nation.As Have At You noted above (and I think we both agree with this sentiment), it would be grossly inefficient to have the government directly subsidize all of the things that the current tax deductions subsidize--and let's call a spade a spade: tax deductions are subidies.

but all you want is a flat exemption? otherwise you are not simplifying the tax system, and any subsidy distorts the economy - whether it is to farmers, home owners or people who have their vehicle tax calculated on value not weight. The government should not be deciding capital allocation directly or indirectly.

Originally Posted by lochinvar

I agree.

damn

[Bayou Bum]

Originally Posted by lochinvar

Um, how did you arrive at those figures using the formula I posited?

According to the formula given:

A: Income of 5.51M, of which first 40K is not taxable and the rest is taxed at 25%. Tax bill = 1,367,500, or 24.8%.

B: Income of 822,126, taxable portion 782,126. Tax bill = 195,531, or 22.1%

C: Income of 69,995, taxable portion 29,995. Tax bill = 7,499, or 10.7%

I didn't use your formula ... those are actual incomes reported and paid by three taxpayers.
A = Senator & Mrs. Kerry
B = President & Mrs. Bush
C = Mr. & Mrs. Bum

Under the FairTax plan, assuming I saved nothing and spent 100% of my income, my taxes would be $69,995 - $20,000 (assuming this is the poverty level) x 23% = $11,499 which is less than I am paying now.

Of course we all know the ink would not even be dry on the FairTax bill before congress was making changes to it.

[lochinvar]

Originally Posted by keith

but all you want is a flat exemption? otherwise you are not simplifying the tax system, and any subsidy distorts the economy - whether it is to farmers, home owners or people who have their vehicle tax calculated on value not weight.

During the course of this conversation I have come to the realization that I do favor more than just one flat exemption, and that my proposed flat tax would gain us nothing in the way of efficiency over the current system.

I withdraw the motion. Let my testimony be stricken from the record; the jury is directed to disregard my remarks.

That having been said, I don't see where the "Fair Tax" system would be any improvement, either.

The government should not be deciding capital allocation directly or indirectly.

Ah, now...there's a different topic, probably best left for another thread...

[keith]

Originally Posted by lochinvar

During the course of this conversation I have come to the realization that I do favor more than just one flat exemption, and that my proposed flat tax would gain us nothing in the way of efficiency over the current system.

a pleasure to have been of assistance.

Originally Posted by lochinvar

That having been said, I don't see where the "Fair Tax" system would be any improvement, either.

Agreed.

[telkanuru]

Originally Posted by Bayou Bum

How about the following three taxpayers:
Taxpayer A: $5,510,000 in income pays $704,227 in taxes or 13%
Taxpayer B: $822,126 in income pays $227,490 in taxes or 28%
Taxpayer C: $69,995 in income pays $12,192 in taxes or 17%

Which taxpayers are paying their fair share, if any?

Taxpayer A has $4,805,773 remaining
Taxpayer B has $594,636 remaining
Taxpayer C has $57,803 remaining

I'd say C is still getting pretty royally screwed.

For a general 25% tax burden

A has $4,132,500
B has $616,595
C has $52,496

In otherwords, those with a good deal of money still have a good deal of money, but the little guy is still worse off. I'd say under either system, C is paying too much. Under the latter model, A and B are paying a good enough amount though. Graduated taxes are the key.