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Tea Parties and Flat Taxes |
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Liberals understand that money trickles up, not down. They also understand that a healthy middle class is vital to a healthy economy, and in a completely free market the money will tend to pool at the top. This is why every economic super power practices some form of progressive taxation. America is no exception. Right now our top tax bracket is 35%. The lowest is 10%.
Not everyone thinks this is a good idea. Rush Limbaugh, Sean Hannity and Bill O’Reilly have built careers out of claiming the poor are stealing from the rich. John McCain made his opposition to such “redistributionism” the centerpiece of his campaign. Joe the plumber became the mascot for the downtrodden wealthy. Lately Fox News has been tossing the word “socialism” around 10-20 times a day, and all across the nation, people are throwing tea parties to protest “unfair” taxation.
It’s quite clear conservatives don’t mind spending. Bush doubled the national debt in 8 years and no one let out a peep. It’s the idea that the rich are shouldering more than their fair share that gets people riled up.
However, when we take into account other factors and look at total tax actually paid, it becomes clear our taxes are far less progressive than we think. Take a look at this graphic cited in a 2005 Christian Science Monitor Article:
SOURCE: CITIZENS FOR TAX JUSTICE, USING A MODEL FROM THE INSTITUTE ON TAXATION AND ECONOMIC POLICY FOR 2004 (PRELIMINARY); TOM BROWN – STAFF
Total effective taxes as a percentage of income are far less progressive than our marginal tax brackets suggest. The reasons for this are four fold:
- Effective tax rates are, by nature, less progressive than the published marginal rates. (Few people realize that every dollar earned is taxed at a different rate, and those rates are the same for every individual. For instance, everyone is taxed 10% on the first $8,000 they earn, no matter how rich they are. (See this article if you don’t understand.)
- Capital gains are taxed at a much lower rate than income. In fact, in 2006 the wealthiest 400 people in America paid an average of 17% in total taxes due to low capital gains rates.
- Payroll taxes are capped at 102K and thus take a larger chunk out of income for the middle and lower classes than they do the rich.
- Local, State and Sales taxes are regressive by nature.
So all in all, our tax system is far less progressive than it appears to be. So not only are we missing out on the all the benefits a progressive tax system could afford, but we must put up with the constant wrath from Rush Limbaugh and Joe the plumber, who bemoan the “unfair” treatment of the “achievers”.
Explaining the nuances of the tax system listed above is a difficult task. Try to illustrate the difference between an effective tax rate and a marginal tax rate to the average American and you’ll likely be met with a confused stare. Wouldn’t it be nice if there was a tax system that was considerably more progressive than it appeared to be?
There is: Flat taxes with an exemption on the first 10-20 thousand dollars everyone earns.
A quick and dirty mathematical analysis of the above chart suggest that we could bring in the same Federal revenue by charging everyone a flat 26% tax on all money earned over $15,000. This has a ring of fairness and simplicity that even Joe the Plumber could love. What he wouldn’t realize is that the effective Federal rates would be roughly as progressive as what they are now.
Effective Federal Rates if We Had A Flat 26% Tax with a $15,000 Exemption
| Income Group | Average Income | Effective Federal Tax (as a percentage of Income) |
| Lowest 20% | $10,400 | 0% |
| Second 20% | $21,200 | 7.6% |
| Middle 20% | $34,500 | 14.7% |
| Fourth 20% | $56,300 | 18.0% |
| Next 15% | $96,700 | 21.9% |
| Next 4% | $201,000 | 24.0% |
| Top 1% | $978,000 | 25.6% |
The reasons for this progressivity are four fold:
- The effective tax rates are progressive because the exemption is a larger proportion of income to the poor.
- Treating ALL money earned as “income” means capital gains would be taxed at the flat rate as well. I’ll argue for the validity and effectiveness of this in another article, but the short argument states that money earned from wealth shouldn’t be taxed less than money earned from work. In fact, there’s a plausible argument that wealth ought to be taxed at a much higher rate than work, as “work” is what powers our economy).
- The regressive payroll tax would be abolished and the revenue replaced with income tax. This is no brainer. Payroll taxes act as disincentive to work by taking 7.5 percent of wages from the poorest of the poor. They act as a disincentive to hire workers by hitting employers with a 7.5% tax for paying someone a wage. And they hit the self employed with a 15% tax since they are paying themselves a wage.
- The simple rules of a flat tax abolish all deductions and loopholes that people exploit.
Our tax system could become even more progressive if we were to raise the exemption. Fifteen thousand is politically viable though. Even at this modest amount, some would express outrage that some poor people who earn less than the exemption wouldn’t pay taxes at all, but 1) It’d be fairly easy to argue that we should never tax the money it takes to survive. 2) We’d do away with the earned income credit and deductions for children. And 3) It would be crystal clear that no one is paying taxes on the first 15K they earn. This is not only is a billboard for fairness, but it increases the incentive for everyone to work, because the first 15K one earns would be tax free.
The obvious justice in this system would take the legs out from under Republican rage. This is the ultimate goal, because it would, in theory, make it easier to gain public support for social programs like universal healthcare. Universal healthcare could do more for the lower and middle classes than almost any form of progressive taxes. Not only is the government the only entity large enough to bargain for lower healthcare costs (MRI cost in America= $1,200, MRI cost in Japan = $98) but it’s been shown that government spending on social programs can be more effective than progressive taxation at closing the gap between the rich and the poor.
Yes, some economist from the Heritage Foundation would appear on Fox News and explain with charts and equations that the new flat tax system is actually slightly more progressive than our old system, but his words will roll off Joe the Plumber’s back like a John Kerry speech. The average American doesn’t do nuance or details, they’ll hear “flat tax” and the argument will be over.
And perceptions aside, any way you look at it, cutting out 600 pages of bureaucracy in our tax code is a good idea. Imagine if all those accountants who make millions hiding money for the wealthy with endless loopholes and tricks actually had to go out get real jobs that contributed to the economy?
It’s something to think about.
Jeff McCutcheon is an aspiring narrative and documentary filmmaker in Los Angeles, CA. He strives to create films that give unique insight into the human condition. He has a B.A. in psychology from Anderson University. His interests include art, humanism, ethics and the public understanding of science.
This is the best article on our tax system I’ve read to date. Not only does it suggest a clear way to make our taxes more fair, but it invites us to do something about it. More from this author!
I agree, I’m a big fan myself. I’ll make sure Jeff knows.
How does your math figure deductions into this? I realize that some of them are pretty much only there because people will complain when they vanish, but stuff like “unreimbursed business expenses” had better already be included in those income numbers, lest they saddle the self-employed with a 26% markup!
Yes, that’s true, in the above model, not all deductions would be eliminated - business would only be taxed on profit - so all business expenses would have to be figured as they are now. But since the rate was figured as a percentage of income, it assumes that there would just be no “artificial” deductions (like deductions for heavy trucks, or buying american etc… )
There’s a solid argument that many tax incentives can “point” our economy in a direction we want it to go (first time home buyers credit, deductions for hybrid vehicles) and that’s fine, but we just have to be keenly aware of the trade off in bureaucracy, and its effect on the total tax rate.
The flip side of rewarding behavior we desire with tax breaks is punishing behavior we don’t with extra taxes (taxes on cigarettes, gasoline etc) I’m still a firm believer in this, but they are less related to income tax.