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Flat tax

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The flat tax is like a date with Julio Iglesias. It takes you a while to realize you've been screwed.
—Cecil Adams[1]

The term flat tax can generally mean any tax which is collected at a constant rate. However, it's most often used to refer to a fantasy indulged in by uninformed people who think everyone should pay the same tax rate. No exceptions.

The US has a barely progressive income tax system that, when combined with the Social Security tax (6.2% for employee and employer both, or 12.4%) which is only levied on the first $100k or so, results in the rich paying a barely higher percentage of their income than the not-so-rich.[2]

A major problem with implementing the tax is that it requires a redefinition of what counts as income and when, exactly, income occurs in order to be revenue-neutral. Flat tax advocates often point to former Soviet bloc countries in Eastern Europe as an example, many of which adopted flat tax systems during their transition from communism to capitalism. However, this isn't the best of test cases considering these nations had just retooled their entire economies. Most of the plans proposed in the US would also massively shrink the tax base by eliminating taxes that tend to affect the wealthiest Americans, such as the capital gains tax. Probably the biggest failing of the flat tax pipe dream, politically speaking, is that many flat tax proposals haven't actually been flat.[3]

Steve Forbes[edit]

The flat tax is most commonly associated in the US with millionaire publisher Steve Forbes, who promoted the idea during his runs in the 1996 and 2000 Republican primaries. Forbes' scheme involved repealing the Sixteenth Amendment and implementing a 17% flat tax on all personal and corporate earned income over $36,000. The idea was essentially to close off all of the loopholes in the current tax system by just throwing it out. However, the Forbes plan conveniently[4] exempted income from real estate, capital gains and inheritance.[5] As the latter two types of income are overwhelmingly earned enjoyed by those who have access to money to invest on Wall Street, and since it would allow them to pass these tax-exempt gains on to their descendants untaxed, the Forbes plan far more resembled a regressive than a flat tax. Basically, the Forbes plan would suck if you were a wage earner living in a rented home. Even those homeowners whose income mainly came from wages would probably not be benefited hugely as tax exemptions for flipping your home would likely A) be of relatively low importance to your overall household income, unless you want to move constantly; but more importantly B) fuel a(nother) real estate bubble whose inflated prices would probably eat up much of the gains anyway. Combine this with the plan's tax exemption for Wall Street and you pretty much have the recipe for a very familiar scenario.

Since tax reform is a third rail in politics, support for the flat tax tends to be limited to fringe, populist-leaning conservative candidates like Forbes, though the Democratic Governor of California Jerry Brown included a flat tax in his platform during his 1992 presidential run. A survey by the Brookings Institution suggests that support for a regressive taxation plan is based on the misconception that the wealthy would actually pay more than they do now under this system.[6] Indeed, a common argument of flat tax proponents is that your tax returns will be "simple enough to fit on a postcard", but simplification of the tax code is a separate issue from progressive taxation. For one, you could just as easily remove all the deductions while leaving the tax brackets in place.

Pseudolegal argument[edit]

Some flat tax proponents, as well as some tax protesters, use pseudolegal arguments to declare progressive taxes as unconstitutional. The general thrust of the argument goes something like this: The Fourteenth Amendment guarantees equality under the law and incorporates the Bill of Rights (i.e., applies them to the states). This is used to argue that a progressive tax does not constitute equality under the law; no court so far has ever entertained the idea that collecting more tax revenue from bigger stashes constitutes unconstitutional discrimination. Sometimes, flat tax advocates will bullshit about the meaning of "direct taxation" and bring up an 1895 case, Pollock v. Farmers' Loan & Trust. Of course, since the Sixteenth Amendment was passed after this case, the case is considered to be overturned.[7]

See also[edit]

External links[edit]

References[edit]

  1. Do the rich pay very little tax? Wouldn't a flat tax be fairer?, The Straight Dope
  2. Thomas Piketty and Emmanuel Saez. How Progressive is the US Federal Tax System? A Historical and International Perspective. Journal of Economic Perspectives, vol. 21, no. 1, winter 2007, pp. 3–24
  3. Flat Tax Fiasco, Douglas Dunn
  4. Surprise, surprise, a rich guy wants to exempt types of incomes mostly earned by rich people from taxation in his "flat" tax plan...
  5. Steve Forbes on tax reform, On the Issues
  6. Slemrod, Joel. The Role of Misconceptions in Support for Regressive Tax Reform. University of Michigan, Brookings Institution, Nov. 2003.
  7. Hey Joe: Meet the Constitution, Huffington Post