A Progressive Argument for a Flat Tax

"The Destruction of Tea at Boston Harbor", lithograph depicting the Boston Tea PartyDemocrats and Republicans will only agree to changes in the tax codes if forced to by their caucus or in exchange for tax contributions. The debt default is looming, so let’s strike a deal.

  • A deal that requires no passage of a debt extension – now, or ever again.
  • A deal that protects social programs while creating incentives to make them more efficient.
  • A deal that allows a Democrat in the White House and a Democrat majority in the Senate to pass a series of core Republican initiatives – how’s that for reaching across the aisle?
  • A deal that will make the business lobby happy and create millions of new jobs for unemployed and under-employed Americans.

Tax subsidies without representation is tyranny.

The US tax code is more than 50,000 pages. Few among us have any idea of what is really in there. Much of the tax code was written decades ago to correct wrongs, incentivize or favor one economic group, investor, industry or corporation. Rather than even attempting to fix something politically impossible to fix, I propose that in exchange for striking all current tax regulation1, we:

  • Pass a balanced budget amendment requirement with tax rates to be set each year based on the CBO estimate of authorized spending and projected emergencies (war, for instance) requiring only a conference committee finding and a simple majority vote not subject to Senate filibuster rules to pass:
    • A flat personal income tax – the same tax rate paid for every individual with:
      • An exemption of $6,0002 for each person or a standard deduction of $15,000;
      • An exemption for charitable contributions up to $2,0003 to incent personal investment in important personal causes that help us all;
      • A continued exemption for contributions to a retirement, education or health savings account;
  • End all corporate taxes with a requirement that corporate income, no matter where in the world it is earned, be dispersed as dividends to shareholders4;
  • End payroll taxes for Social Security, Medicare and Medicaid getting the fiction that there are “trust funds” and removing those intra-governmental holdings from the national debt – which, by the way, would end the need to pass an extension of the national debt.

Yes, it would mean that any special break would have to be a direct subsidy including businesses or groups, energy initiatives, capital gains and home ownership2.

Yes, it would mean the payroll tax income limit capped at $106,800 in income (2010), would end, but so would the employer share of payroll taxes.

Yes, it would end double taxation of corporate profits by their shareholders.

Yes, inheritance, beyond the tax household, would also be subject to the flat tax. However, existing trust and charitable exemptions should continue to apply.

Yes, it would end an industry of the more than 1.2 million Americans employed as tax preparers and have negative economic impact on the US Postal service, the IRS, tax attorneys and the printing and paper industries. (Perhaps, at some time, if they have friends in Congress, they could receive a subsidy to be reeducated.)

Yes, a zero tax rate would be a huge benefit to business, especially small business. Large corporations simply do not pay at rates anywhere near the tax rates anymore. Small businesses do. Millions of new jobs would be created. Companies now sheltered in off-shore tax havens could finally be repatriated.

Yes, it would directly impact foreign investment in the US. Investors who earn money here would be required to pay taxes. Seems fair.

Yes, this plan, at least on paper, unfairly benefits the higher income taxpayers and is inherently unprogressive. However, that does not pass the real life test. The earnings of the very rich earn are deferred, unearned, sheltered and buried in million dollar losses – their effective rates would go up. If future Congresses want to address this, let them.

Yes, it would absolutely make each Federal expenditure have direct political consequences in its direct impact on the tax rate – that includes war, corn ethanol and new office buildings.

Yes, there would be huge incentive for our politicians to get as many people working as possible since each would be figured into the tax rate.

No, it would have little direct impact on state taxes. Each state would have to decide. Sure, there would be less competition for industry displacement using tax incentives, but we can all live with that.

What would the rate be? Nobody knows. I believe it would likely be about 25%.

Here are some examples based on a family of four (not retired), comparing current tax rates that include self-employment taxes (Social Security, 10.4% and Medicare, 2.9% taxes up to $106,800) with a 25% flat rate:

Income

Subject to Tax

Total Tax

Effective Tax Rate

Subject to Tax

Total Tax

Effective Tax Rate

$17,000

$5,400

$3,961

23.3%

$0

$0

0.0%

$69,000

$57,400

$19,527

28.3%

$45,000

$11,250

16.3%

$139,350

$127,750

$49,042

35.2%

$115,350

$28,838

20.7%

$212,300

$200,700

$73,648

34.7%

$188,300

$47,075

22.2%

$379,150

$367,550

$139,324

36.7%

$355,150

$88,788

23.4%

$1,000,000

$988,400

$364,204

36.4%

$976,000

$244,000

24.4%

This is a serious outside-the-box suggestion to an extraordinarily complicated problem (click here for my suggestion for solving the immigration issue). I encourage you to ask your questions and express your concerns in the comment box. It is not perfect, but far better than status quo. If you like it, please send it to someone who can make a difference – a Congresperson, or a lobbyist.
___________

 

1 Allowable business expenses would need to be defined for such things as charity and political contributions, allowable travel and entertainment; employee benefits and executive compensation; deferred options; etc. Specialized taxes and fees for service (toxic waste clean up, FDA approval) would need to be reviewed separately.

2 $6,000 is an example. A balance would need to be struck between a progressive figure and one that simply recognizes the cost, including health insurance of non-income earning household members (BKA: children, disabled, retired, etc.) and the minimum cost of a residence. In large part, this deduction is intended to minimize the loss of the homeownership tax deduction for taxpayers who itemize and progressively address tax rates for middle to lower income taxpayers.

3 This limit is intended to incent charity without unfairly benefitting an economic group or a specific charity. I’m flexible here.

4 The requirement should allow for some retained income and reserves, and should be averaged over a number of years. Shareholders, including holding companies off-shore would be required to file tax US tax returns subject to the Federal tax rate.

4 thoughts on “A Progressive Argument for a Flat Tax

  1. Jack deJarnette

    Gosh Lee,
    You put a great deal of thought into this. It makes sense to me, although I would allow a deduction of up to 10% of gross income for charitable contributions. My reasons are that many Americans are Christians and Jews whose religious beliefs encourage them to give 10% and most charities perform more efficiently than governmental agencies.

    Reply
    1. Lee Leslie Post author

      You make a good point -- particularly, if one believes that tax policy should be designed to support organized religion. The number that I offered was arbitrary. I do believe there needs to be a limit that incents donation, but does not have the government unfairly subsidizing a specific cause (or faith) without a direct vote in Congress. I felt that a specific amount was a fairer method than a percentage in a similar way that a specific standard deduction is currently used. Perhaps a specific amount that is a percentage of median income would be better. If so, I suggest it be above 10% to allow those good faith-based types, like yourself, to also give to other important humanitarian causes with pre-tax dollars.

      Reply
  2. Frank Povah

    Jack -- many Americans are Muslims who also pay forms of tithes.

    Lee --

    There should be taxes on ALL property and businesses held and run by religious organizations. Deductions to bona-fide religious charities by congregations should be tax-deductible (donations to teevee evangelists who ask for $5,000,000 so that their deity doesn’t kill them should not be). Neither “missionary” work nor donations to it, should be tax deductible and any organizations mixing religion with aid should lose all claims to tax exemption.

    Abolish all sales taxes, state and Federal, and apply a mandated five per cent (?) Federal Goods and Services Tax (GST) with the States free to apply their own at whatever rate they wish (this would have the added advantage of showing where a lot of the taxes actually go). Food to be exempt.

    Allow counties to levy only property taxes. Combine all police and school boards under state jurisdiction (apart of course from federal agencies), paid for out of the GST. There would be a huge saving there alone.

    Close all tax loopholes for corporations and then lower the corporate tax rate. Company-provided jets, cars, holidays and other lurks to be assessed as income.

    Tax on lottery and other gambling winnings abolished OTHER than for professional gamblers.

    Cash bonuses over $1 m to be taxed at 50 percent,over $5 m, 75 per cent; bonuses in kind over those amounts to be assessed at market value and taxed at the same rate.

    Corporations and individuals with money in tax shelters overseas should have that money assessed as part of their income and taxed accordingly.

    For starters.

    Reply
    1. Lee Leslie Post author

      There you go being idealistic. The main obstacle to any fair reform are the 236 members of the House and the 41 members of the Senate have signed Grover Norquist’s pledge* not to vote for any bill that raises marginal rates (or changes in deductions or subsidies, which raise them) -- my feeling is if you get rid of all, but standard deductions, the effective rate for the very rich would be more fair than any plan you are likely to get from these corrupt bastards (mainly comes from getting rid of capital gains and rolling payroll taxes into the flat rate -- corporate perks would have to be handled as reported income). While in my plan, the marginal rates are raised for the poor, which violates the pledge, they are offset by an increased across the board standard deduction (plus, with payroll taxes rolled in, the rate is likely less than what is in effect now). I’m okay with changing the standard for deductible charities, but once you start getting specific, it is a slippery slope back to lobbyists demanding and getting special breaks.
      Frank, in all candor, my plan could fairly be characterized as parody in that it turns the opposition party’s ideas on them in a way that could turn out fair for most, depending on the details.

      *Taxpayer Protection Pledge -- I, _____, pledge to the taxpayers of the (____district of the) state of ______ and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rate for
      individuals and business; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

      Reply

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