Our Current Tax System - Upgrade or Replace - Page 2 - Tilted Forum Project Discussion Community

KMA-628 · 11-22-2004, 01:37 PM

Quote:

Originally Posted by alansmithee

I don't see how income would rise. On the fairtax.org site, they were stating that prices would most likely remain neutral. This being the case, why would businesses bother to raise wages? Many large companies are currently opperating with excessive capital, and to my knowledge not one of them has decided to increase the workers' wages. Microsoft is one I can think of who have had excess cash for awhile. Instead of raising pay, they gave it back to shareholders in the form of dividends. They also have put forth a plan to buy back approx. 3 billion shares of stock in the next 3 years in an effort to raise the value of their stock. Remember, corporate decisions are based upon whats good for the shareholder, not the employees. Most businesses would likely consider the lower taxes on wages offset by lowering the price of their product (so that when the NCT kicked in the point of sale price is the same) to be enough of a benefit for consumers/employees.

Income would rise immediately because the money previously being withheld would be returned to the taxpayer in each and every paycheck. I am guessing that the average increase would be around 20%--but I have nothing factual to back it up, it is merely an educated guess.

In terms of an increase in salary after the initial bump, I theorize (note the word) that it would. There is no concrete evidence to support this, it is merely a belief.

I believe this because I think it would be demanded, if the workers were educated enough to understand what is going on and demand the increase. I don't think that it would happen automatically.

Prices vs. income. Once again, I think the market would cause a decrease in prices. All it takes is one company to lower their prices a smidgen and the rest would follow or lose business/revenue to the first company. Any company with a brain would realize this potential for increased revenue without a corresponding decrease in profit. The first ones to do this would be the short-run winners (i.e. following the kinked demand curve).

But as I mentioned before, most information and ideas presented here are theoritical. Since it has never been done here, there is no evidence to say 100% one way or another. All I know for a fact is that the current system is failing miserably. We can be pre-emptive and fix it early, or wait for it to get worse (which it does every year).

aliali · 11-22-2004, 01:47 PM

Quote:

Originally Posted by KMA-628

The "free" tax level is set at the poverty level, which is different for individuals and families and already set: I think for individuals it is around $9K.

Here is an example, based on the levels where I live:

Current Sales Tax: 7.1%
Proposed Consumption Tax: 16%

Total tax: 23%

Understand, however, that while this looks like an increase in spending on your part of 23%, it really isn't. First, costs will go down, followed by price. Second, real income will increase dramatically, instantly.

The "real" increase felt by most consumers will not be much more than is already being paid out--and nowhere near near the level we are being taxed at right now. This is actually a tax decrease, as roughly 50% of your income won't be spent on taxes as it is the case right now.

As the plan takes effect and begins to bring in more money, the rate would go down, probably to the 10-12% neighborhood.

Sorry if i missed the answer in here somewhere, but how do you exempt a certain amount of income? If two people go and buy a couch, don't they pay the same tax? If one is low income and won't have to pay the tax, how do we figure that out? Say you don't know until the end of the year how much you will make? Is the exemption based on consumption or income? If income, then don't we all have to do some form of taxes anyway?

alansmithee · 11-22-2004, 01:53 PM

It just seems to me that most companies would just pocket the payroll tax, or use that money to offset the loss of profit due to lowering prices. Again, the company isn't obligated to return the cash to the workers.

I don't work for Microsoft, but by reading the papers I found out about their cash surplus and what they were planning on doing with it. Why weren't workers there arguing for higher pay? Relying upon workers to force the hand of a business is rarely effective. Most people don't currently understand that businesses have to pay approx. double of their pay in various payroll taxes, why would they understand not having to pay it? At best, I could see it forstalling some layoffs, but I think even that is doubtful.

Again, a consumption tax might work in a true free market system, but that isn't what we have. Honestly I don't know of anyplace with a free market system. One of the most important things necessary for a free market economy to work efficiently and hold up to many theories is perfect information for all participants. And that is one thing almost always lacking, which gives those with more information (and usually higher income/money) more power in dealing with those without all the information.

KMA-628 · 11-22-2004, 01:56 PM

aliali -

First, income isn't related to it all. The first $18K for a family, $9K for an individual is tax-free; everyone gets this credit.

The current proposals seem to revolve around two different ways of handling this: rebate or prebate.

One proposal has a prebate being sent out at the beginning of each month. The rebate proposal shows the rebate amount being first applied to other payroll taxes (i.e. rocking chair, medicare) and the balance being paid back at the end of the year.

Does that answer your question?

KMA-628 · 11-22-2004, 02:04 PM

Quote:

Originally Posted by alansmithee

It just seems to me that most companies would just pocket the payroll tax, or use that money to offset the loss of profit due to lowering prices. Again, the company isn't obligated to return the cash to the workers.

I don't work for Microsoft, but by reading the papers I found out about their cash surplus and what they were planning on doing with it. Why weren't workers there arguing for higher pay? Relying upon workers to force the hand of a business is rarely effective. Most people don't currently understand that businesses have to pay approx. double of their pay in various payroll taxes, why would they understand not having to pay it? At best, I could see it forstalling some layoffs, but I think even that is doubtful.

Again, a consumption tax might work in a true free market system, but that isn't what we have. Honestly I don't know of anyplace with a free market system. One of the most important things necessary for a free market economy to work efficiently and hold up to many theories is perfect information for all participants. And that is one thing almost always lacking, which gives those with more information (and usually higher income/money) more power in dealing with those without all the information.

I guess there are a couple of ways to look at this.

First, our populace needs to be as educated on this issue as possible. Not an easy task, but a necessary one regardless of the type of tax system in place.

I would also assume that some "rules" would apply. Not every company would increase salaries because of the new found money, but some would. The companies that recognize this and increase salaries would then be the "hot" companies to work for. Competing companies would then have to "shit or get off the pot." All it takes is a few companies to recognize this and the ball would start rolling. And, I honestly believe that some companies would do this and start the trend.

As to the free market idea. Philosphically speaking, there is no such thing as 100%. Using that argument, there is no such thing as a totally free market. The best we can do is to try and achieve free market status and I think the U.S. is ahead of the curve on this. In terms of the availibility oif information, I see that trend changing dramatically every day.

KMA-628 · 11-22-2004, 06:50 PM

Edit: there seems to be many different ways of defining "regressive tax".

That being said. Is there no one else to chime in? I would like to hear as many opinions as I can. If you are for it, why. If you are against it, why? If you are against it and think the current plan is failing, what do you recommend that we do?

Thanks,

aliali · 11-23-2004, 08:27 AM

Quote:

Originally Posted by KMA-628

aliali -

First, income isn't related to it all. The first $18K for a family, $9K for an individual is tax-free; everyone gets this credit.

The current proposals seem to revolve around two different ways of handling this: rebate or prebate.

One proposal has a prebate being sent out at the beginning of each month. The rebate proposal shows the rebate amount being first applied to other payroll taxes (i.e. rocking chair, medicare) and the balance being paid back at the end of the year.

Does that answer your question?

I'm starting to get it. The exemption is only on consumption. A family can spend 18k without federal tax, right?

Prebate doesn't seem to make much sense. Sending out checks all the time would breed fraud and you would never know how much to send (can't predict consumption) and what happens when someone dies, moves, goes into a coma, leaves the country for a semester, etc. Too much hard work.

If you have a rebate system, then lower wage people have to pay the tax and wait for a refund. The Gov't wouldn't know how much to refund unless a record of the consumption is provided.

Or does the country simply send out checks assuming the consumption levels to be 18k per family and give each family X% of 18k in monthly or yearly installments? If this in the case, are we really going to have the gov't send JFKerry and GWBush checks? Aren't there real fraud concerns here? How old to you have to be to get your check? Do you have to be a citizen? Do visitors get rebates? If not, what is this going to do to tourism? If you fly into any big city, you already pay extraordinary taxes on your hotel room and rental cars, does 20-odd% get added on top? Can you work overseas and get a check? What about servicemen stationed abroad? What about foreigners on student visas?

Since this will be the primary source of funds for the gov't, will there be a crackdown on compliance that will accompany the million and six different ways people try to get around this--in kind transfer, garage sales, ebay, etc.

What are the other economic implications of assuming a minimum level of consumption for all citizens and rebating a check in that amount to everyone: rich, poor, sick, healthy, monk, priest, new yorker, arkansan, old, young, family of 3, family of 13?

abscondo · 11-23-2004, 02:00 PM

As bad as the current tax code is, I'm terrified at the thought of our current leaders rewriting it. It will favor the rich, pure and simple.

That's not the way they'll present it, of course; we'll hear that simpler = better, flatter = fairer, calculated rephrasings like "death tax," claims that the new system will help grow the economy and allow the elimination of the IRS, etc.

The end result will be that the middle class will be screwed. Politicians will remove taxes on things the rich enjoy, such as capital gains and dividends. They'll allow corporations to pay less, maybe even nothing. The poor will be protected by some threshold or rebate. The only people left to tax will be us in the middle class.

And my fellow Americans will take the bait. They'll swallow the arguments and embrace a regressive tax that will end up costing them money. How do I know? Because they believe so many other false claims made by this administration, such as "we invaded Iraq as part of a war on terrorism."

KMA-628 · 11-23-2004, 02:32 PM

Quote:

Originally Posted by abscondo

As bad as the current tax code is, I'm terrified at the thought of our current leaders rewriting it. It will favor the rich, pure and simple.

That's not the way they'll present it, of course; we'll hear that simpler = better, flatter = fairer, calculated rephrasings like "death tax," claims that the new system will help grow the economy and allow the elimination of the IRS, etc.

The end result will be that the middle class will be screwed. Politicians will remove taxes on things the rich enjoy, such as capital gains and dividends. They'll allow corporations to pay less, maybe even nothing. The poor will be protected by some threshold or rebate. The only people left to tax will be us in the middle class.

And my fellow Americans will take the bait. They'll swallow the arguments and embrace a regressive tax that will end up costing them money. How do I know? Because they believe so many other false claims made by this administration, such as "we invaded Iraq as part of a war on terrorism."

Well, at least there is a little more discussion on this.

A few questions to you:

1) If it is broke, who gets to fix it? Politicians as a whole fall under the "rich" category, Republican or Democrat. If the "current leaders" cannot be trusted to do it, who can? Congress is the one to propose and implement a plan, and their status won't be changing much over the next several election cycles.

2) How does this plan hurt the middle-class more. I am, by definition, middle-class. I took a very long look at the numbers and I will be better off under a consumption tax. I hear this argument over and over, but I haven't seen anything to lend credence to it (i.e. show numbers).

It should be obvious that I have gone to great lengths to understand my side of the argument. Why can't anybody come back with something more than talking points? You say I will be hurt more, but how? If I am missing something here, I would like to be made aware of it.

Here is an example of the opposition points that annoy me. I want details. I want to hear more than "what", I want to hear "why". So far, the only person remotely doing that is kutulu.

Editorial Masquerading as a News Article

I really, really want to discuss this, with anybody. I don't want to seem like I am trying to knock everybody down, I am trying to pose my side of the argument with in-depth analysis and understanding of the topic. I have said this over and over, but if there are "real" points of contention, I would like to be made known of them.

In other words, I need more than talking points.

i.e. - The middle-class will get hurt under this plan followed by an understandable example, preferably with some numbers (since this is a topic of numbers) to back-up the claim.

abscondo · 11-23-2004, 02:56 PM

Quote:

Originally Posted by KMA-628

I really, really want to discuss this, with anybody. I don't want to seem like I am trying to knock everybody down, I am trying to pose my side of the argument with in-depth analysis and understanding of the topic. I have said this over and over, but if there are "real" points of contention, I would like to be made known of them.

In other words, I need more than talking points.

i.e. - The middle-class will get hurt under this plan followed by an understandable example, preferably with some numbers (since this is a topic of numbers) to back-up the claim.

Well, I'm not paid to do this, and I have a hell of a lot of other things to do in my real life. But you want some reading material? Fine:

Falling Flat: The Dubious Case for the Flat Tax
http://www.epinet.org/Issuebriefs/fallingf_ib_1996.pdf

Many Middle-Class families Will Wind Up as Net Losers From the "Middle-Class" Tax Cut Legislation
http://www.cbpp.org/9-21-04tax.htm

The Decline of Corporate Income Tax Revenues
http://www.cbpp.org/10-16-03tax.htm

The Ultimate Burden of the Tax Cuts
http://www.cbpp.org/6-2-04tax.htm

KMA-628 · 11-23-2004, 03:20 PM

Well, I was hoping for an argument posed in someone's own words, not links to articles written by someone else (I don't do this for a living either, it is merely a "hobby").

Of the links, only one dealt with tax reform and it doesn't deal with the type of plan I am proposing. The other links are articles I read some time ago denigrating tax cuts. Tax cuts are not the argument here. Plus, the articles are devoid of some very important information relevant to the argument they are making, which is a totally different topic than being discussed here (in other words, they won't fly with me - case in point, article #3, referring to declining corporate tax revenue compares pre 9/11 to post 9/11. It completely ignores any mention of a recession or of any of the economic effects--of which there were many-- of 9/11. It also fails to mention that personal income tax revenue has gone up considerably--anyway, as I said, a different argument)

The best part about the first link is that it mentions that there isn't any empiracle evidence to support a "flat tax". Well, duh. There isn't a similar system to use as evidence, so, obviously there isn't any empiracle evidence. What kind of evidence did we have in 1908 when the current system was put into place? Or after WWII when it was enormously expanded? But we did it anyway, didn't we?

Let me try again, maybe someone else will answer:

If the plan I am referring to will hurt the middle-class more than they are being hurt now, how will that be? As I have stated before, I used myself as an example (and no, I am not posting the numbers--I did, however, post hypothetical numbers that are similar to mine) and have come out on the positive side in this argument. Since I am solidly middle-class, how will I get hurt?

If there are serious problems or things that need to be considered regarding a consumption tax, I really, really want to hear them.

Please make your argument specific to the points I mentioned and please make the argument in your own words, backed up with links if you so desire. Anyone can post a link, I would like someone to join this discussion that has thought about this idea and has a well-formulated opinion about it.

flstf · 11-23-2004, 03:57 PM

Quote:

Originally Posted by KMA-628

If the plan I am referring to will hurt the middle-class more than they are being hurt now, how will that be? As I have stated before, I used myself as an example (and no, I am not posting the numbers--I did, however, post hypothetical numbers that are similar to mine) and have come out on the positive side in this argument. Since I am solidly middle-class, how will I get hurt?

If there are serious problems or things that need to be considered regarding a consumption tax, I really, really want to hear them.

My initial thinking is that a national sales tax (consumption) or possibly a flat rate income tax may be fairer to most of us. However I don't know how to evaluate them because I don't know how much the current tax system is costing us now or how much the consumption tax would have to be to make things revenue neutral.

How can we possibly evaluate a new tax system when we don't know what the existing one is costing us now. Please see my posts #35 and #38. I don't think anyone else knows either or at least no one has come forward with an answer. If we got rid of all other taxes and replaced them with a consumption tax, it may have to be as high as 300%.

So I will ask again. How much of the current price of goods and services is included because of all the businesses involved passing the taxes up the ladder until the consumer eventually pays them all (indirectly) because they are included in the final price? Add how much a typical middle class family pays in indirect taxes this way to your estimate of 50% and we will have a starting point to evaluate from.

I have searched the net to no avail and was hoping a business major or tax pro could answer this. Surely they cover this kind of thinking in business schools.

Manx · 11-23-2004, 04:03 PM

You weren't asking me specifically, but I'll answer these two questions anyway.

Quote:

Originally Posted by KMA-628

1) If it is broke, who gets to fix it? Politicians as a whole fall under the "rich" category, Republican or Democrat. If the "current leaders" cannot be trusted to do it, who can? Congress is the one to propose and implement a plan, and their status won't be changing much over the next several election cycles.

Two words: Oh Well. I most certainly have no expectation that a bunch of politicians are going to "fix" the tax system. They'll change it anyway they can according to what they want. In the case of Republicans, what they want is lower taxes for the wealthy + corporations because they have an incorrect perception that the wealthy + corporations are being treated "unfairly" and because the people that will vote for them agree with that wrong perception. In the case of the Democrats, what they want is higher taxes for the wealthy + corporations because because they know that the people that support them do so because those people agree that the wealthy + corporations are not presently being treated "unfairly". Both sides will attempt to help their buddies as much as humanly possible without hurting their chances of reelection.

Quote:

2) How does this plan hurt the middle-class more. I am, by definition, middle-class. I took a very long look at the numbers and I will be better off under a consumption tax. I hear this argument over and over, but I haven't seen anything to lend credence to it (i.e. show numbers).

I honestly don't understand why the fundamental tax burden shift is not obvious to you.

Let's take two people. Person A makes $50,000 and Person B makes $500,000.

Under the current plan, A takes home approx. $40,000 a year and B takes home approx. $450,000 a year (considering B funnels his income through a corporation to decrease his tax base - i.e. a loop hole).

Under your plan, A takes home all $50,000 and B takes home all $500,000. Meanwhile, A spends $35,000 on consumption-taxable goods, minus the $18k free-zone, that leaves $17,000 in taxable money - at the very conservative 20% you have suggested, that means $3400 in taxes. Or, a 7% tax rate.

B, on the other hand, spends about $100,000 of his income on consumption-taxable goods, minus the $18k free-zone, that leaves $82,000 in taxable money - at the very conservative 20% you have suggested, that means $16,400 in taxes. Or, a 3% tax rate.

Welcome to regression.

KMA-628 · 11-23-2004, 04:16 PM

Quote:

Originally Posted by Manx

Under your plan, A takes home all $50,000 and B takes home all $500,000. Meanwhile, A spends $35,000 on consumption-taxable goods, minus the $18k free-zone, that leaves $17,000 in taxable money - at the very conservative 20% you have suggested, that means $3400 in taxes. Or, a 7% tax rate.
.

I question that "A" spends $35,000 on taxable goods under this plan. The plan that I am referring to uses retail spending as a base. I don't see "A" spending 70% of his/her income on retail spending. If that were the case, they wouldn't be able to afford a house, let alone a roof over their head.

Also, when I made $50,000/yr, my take home was less than $40,000.

I see where you are getting at, but I am not too sold on the numbers being used.

Kadath · 11-23-2004, 04:18 PM

The problem, KMA, is it's complicated to do. But I've got 25 minutes while Simpsons is on, so here goes.
I'm going with a 4 person family where only one parent works, both children are under 17, the worker makes 40K, putting 3K into tax-deterred retirement plan, neither of the children has expensive orthodontia and the family doesn't give anything to charity...you see the problem. I agree that taxes as they are needlessly complicated (the manual for preparing your 2004 return is three hundred and twenty two pages) but that makes it difficult to analyze whether a national sales tax is better for the average family.

With taxes dropping so much under this plan, the government would be bankrupt in a few years.

Manx · 11-23-2004, 04:21 PM

Quote:

Originally Posted by KMA-628

I see where you are getting at, but I am not too sold on the numbers being used.

I pulled numbers from thin air, as we seem to be doing in this thread - it's more philosophical.

I believe you may get the point: the more money you make, the less of it as a percentage you will spend on consumption-taxable goods. It's built-in regression.

KMA-628 · 11-23-2004, 04:25 PM

Quote:

Originally Posted by Manx

I pulled numbers from thin air, as we seem to be doing in this thread - it's more philosophical.

I believe you may get the point: the more money you make, the less of it as a percentage you will spend on consumption-taxable goods. It's built-in regression.

O.K., I see your point.

However, doesn't one spend more if one makes more? Obviously there is no way to prove this, i just look around to emphasize my point. I shop at Wal-Mart and they shop department store. I justify this plan by thinking that the more money one has, the more one is likely to consume.

I know I would if I had more disposable income; in my dream world, I would be the perfect consumer for this type of plan.

So, with that thinking, it may not be regressive, if the consumption is enough (which, as I mentioned, there is no way to prove).

Manx · 11-23-2004, 05:16 PM

Certainly, people spend more if they make more - but not proportionally to the increase in the amount they make. That's why we have things like the stock market and 401k's and mutual funds and venture capitalists and various other forms of investment. Because the millionaire doesn't use as much, proportionate to their income, in toilet paper as the 25 thousandaire. They both use about the same amount. After the essentials, you have the "fun" stuff - TV's, cars, boats, etc. The millionaire is going to pay more for high-ticket versions of these things, but not enough more to come close to keeping pace with the disparity in incomes.

It's much easier to spend a million bucks than it is to make a million bucks. And a millionaire knows that. Their lifestyle will not be 20 times greater than someone making 20 times less. It'll be somewhere around 5 times greater.

(Again, I'm making up numbers to demonstrate the point.)

KMA-628 · 11-23-2004, 05:34 PM

Well Manx, we are going to differ here because I don't know of any rule that says how much someone should pay in taxes. With either the current system, my proposal or any other proposal I have seen; the rich will always (b) make more than me and (b) pay more in taxes than I do. And "fair" is impossible to define in this realm. The rich person is always going to have more money than me, before and after taxes. So the question is, how much a burden should the "rich" have? Once again, there is no rule. I am not a redistributionist, so I am not in favor of the "rich" paying for me, I am in favor of me paying for myself. We could run in circles for hours about how much a rich person should make, and never, ever come to a conclusion. My bottom line: will the proposed system bring in enough money?

I looked at it back to front first. First, how much money do we need to take in? Then, where can we get that money that would be simpler and possibly more effective.

This system does just that, plus it gives a free ride to the poor--they will have no burden.

And, using my figures, the middle-class will pay less as well--a definite bonus in my book.

Add that together with a system that could (and these are assumptions): (a) be more succesful (b) Be much simpler (c) be harder to cheat (d) be more "fair" than our current one (e) and be beneficial to our economy as a whole which is beneficial to anyone that wants to do better with their lives.

Manx · 11-23-2004, 05:45 PM

I don't consider higher taxes on the rich as "paying for me". I consider it to be their paying for the priviledges they have gained in society.

I also do not know how much the rich should be taxed. I do know that they should be taxed at a higher rate than someone making less money.

As for the figures - I do not believe that eliminating the majority of the infrastructure we currently use to enable our tax system, will we gain enough savings to lower everyone's taxes - but even if that were true, I certainly oppose lowering the taxes of the upper class to something lower than the middle and lower classes.

KMA-628 · 11-23-2004, 07:46 PM

Quote:

Originally Posted by Manx

I don't consider higher taxes on the rich as "paying for me". I consider it to be their paying for the priviledges they have gained in society.

I also do not know how much the rich should be taxed. I do know that they should be taxed at a higher rate than someone making less money.

As for the figures - I do not believe that eliminating the majority of the infrastructure we currently use to enable our tax system, will we gain enough savings to lower everyone's taxes - but even if that were true, I certainly oppose lowering the taxes of the upper class to something lower than the middle and lower classes.

1) What about the advantages we get from the rich? Who starts companies? Who invests in new technologies? Private enterprise always does a better job than gov't funded enterprises. Also, don't forget about the rule of first consumers, we all benefit, every day from that one.

2) With this system the lower classes pay nothing, so there is nothing to bitch about there (unless you are a redistributionis, which I suspect you are). The middle-class tax burden goes down, who cares how it compares to other income brackets, it went down. How can anyone complain about that fact?

I suspect that the root of these oppostions fall heavily into the socialistic realm, which I will never enter, let alone consider.

So far, from what I have seen, the advantages of such a system measurably outweigh the disadvantages. And they blow any possible advantages of our current system out of the water.

However, if you are coming from the belief system that I suspect that you are, no tax reform will be acceptable to you unless the "rich" pay marginally more in taxes than they are doing now.

I don't throw my support behind a system using those ideals. My checklist is much more specific and devoid of ideals. It's more of a "works or doesn't work" kinda thing.

Manx · 11-23-2004, 08:30 PM

Quote:

Originally Posted by KMA-628

1) What about the advantages we get from the rich? Who starts companies? Who invests in new technologies? Private enterprise always does a better job than gov't funded enterprises. Also, don't forget about the rule of first consumers, we all benefit, every day from that one.

Those are not advantages afforded the non-rich. Those are supposed to be equal trades - a rich person gives work to a non-rich person, in exchange, the rich person collects most of the profit for the labor of the non-rich person. What I am referring to are true advantages - things that rich people are able to do that non-rich people are not, and in the process only the rich person gains. Most specifically I am referring to political power. Money buys political power (in the U.S. we mainly call it lobbying, in other countries we call it bribery - that way we can pretend that we are not, in fact, the most corrupt nation in the world). The political system of this country is managed by rich people, because they can afford the costs of "membership". In exchange, the non-rich people are given a "voice" via the lowest-common denominator producing election system. Non-rich people are given a choice of vicariously electing various rich people (now, there is the rare occasion where a non-rich person becomes elected to a position of ample power, but this is the exception, not the norm). The rich people then set the agenda, enact the regulations of the society and produce the media that the non-rich people consume to determine the "facts" they use to elect another rich person. This incredible power disparity is not effectively offset by higher taxes for the rich, but this power disparity must be included when discussing what is "fair" and what is not in regards to paying for our society.

Quote:

2) With this system the lower classes pay nothing, so there is nothing to bitch about there (unless you are a redistributionis, which I suspect you are). The middle-class tax burden goes down, who cares how it compares to other income brackets, it went down. How can anyone complain about that fact?

For all of the above. And additionally, I do not see the overall mechanism by which all taxes would drop - you have mentioned various assumptions of explosive growth eventually rising from a consumption-based tax system. I am not sold on those assumptions. So, I see the system as nothing more than an almost 1 to 1 shift of taxation - $1 goes back into the rich man's pocket while almost $1 dollar comes out of the non-rich man's pocket. But even if we make your assumptions on growth, that still does not address the power disparity brought about by the progressive wealth structure of a capitalist society.

Quote:

I suspect that the root of these oppostions fall heavily into the socialistic realm, which I will never enter, let alone consider.

I would be open to addressing the power disparity of capitalist systems via other methods besides a progressive tax system. If there is some way of muting the power disparity while also flattening taxation, I would be all for it. I firmly believe in working hard to earn your way through life. But since the cards are stacked in favor of the rich - beyond simply the money aspect - I cannot ignore it by focusing solely on the financial aspect. If you are closed to investigating deeper into the needs of a socialistic remedy to power disparity, then there is not much more to discuss.

Quote:

I don't throw my support behind a system using those ideals. My checklist is much more specific and devoid of ideals. It's more of a "works or doesn't work" kinda thing.

In that case - what we have now has been working for decades. Maybe with some minor tweaks here and there it will be fine for decades and decades more. Why throw it all away if all you're looking for is the success we have already proven?

KMA-628 · 11-23-2004, 09:39 PM

Quote:

Originally Posted by Manx

In that case - what we have now has been working for decades. Maybe with some minor tweaks here and there it will be fine for decades and decades more. Why throw it all away if all you're looking for is the success we have already proven?

First, I have yet to see anyone back up the claim that our current system is fine and fixable by a few tweaks. The data arguing this point is huge and backed up by pretty much anybody.

What I don't understand is that you point out problems that we have under our current system and then say it is fine. The disadvantages claimed by you were created, or at least allowed to grow, under the system we currently have, so I don't get that argument at all.

Also, for the record, a consumption tax is NOT a REGRESSIVE tax. It would be a proportional tax if it didn't have the rider in it for lower incomes. Since it does account for lower incomes and provide for "free spending", it is, by economic definition, a progressive tax. By this I mean, the rich will pay more than the middle-class, the middle-class will pay more than the poor. Proportionately, the rich may pay a lower percentage of their income, but that fact does not come into play when defining a tax as "regressive", "Progressive" or "Proportional". (yes, non-economically speaking, it may be similar to the definition, but that definition is not accepted in economic circles).

/silently wishes onetime2 was around, sometimes his input is invaluable, but I understand the absence and wish him the best of luck

Manx · 11-23-2004, 09:55 PM

Quote:

Originally Posted by KMA-628

First, I have yet to see anyone back up the claim that our current system is fine and fixable by a few tweaks. The data arguing this point is huge and backed up by pretty much anybody.

What I don't understand is that you point out problems that we have under our current system and then say it is fine. The disadvantages claimed by you were created, or at least allowed to grow, under the system we currently have, so I don't get that argument at all.

I'm not suggesting it is fine - I'm a proponent of an idealistic solution (as in all things, I am a perfectionist). You discounted idealism and stated you were only looking for "what works".

Well - what we have works. So I don't understand why you would want to implement such drastic changes unless you view it from your own idealistic perspective.

Quote:

Also, for the record, a consumption tax is NOT a REGRESSIVE tax.

As I have pointed out, I disagree.

KMA-628 · 11-23-2004, 10:48 PM

Quote:

Originally Posted by Manx

Well - what we have works. So I don't understand why you would want to implement such drastic changes unless you view it from your own idealistic perspective.

I can say that my ideals do not come into play when I say that the current system is broke dick and in need of replacement.

When every attempt to simplify the system makes it more complex.

When thousands of taxpayers lose out on millions of dollars because they don't understand the system.

When 46 tax professionals come out with 46 different answers, with a difference being more than $30,000....for the same tax return.

When the gov't itself admits that nobody understands the system.

When the amount of taxpayers increased 12%, but the number of calls to the IRS for help tripled.....even with the advent of custom software to prepare taxes.

I say the system is broke and broke bad (poor english on purpose).

On that same argument, I will also admit that there is no "perfect" tax system that will please everybody.

I then sacrifice some of my ideals for a system that would at least be an improvement to the one we have rather than give up and accept a monstrosity.

This system is so simple that only the people that need to pay attention to the warning label on a chainsaw that says "don't stop chain with hand" could be confused. Hell, even a flat tax would be an improvement over what we have now.

With a consumption tax, there is no more worrying about how the forms are filled out, were the correct deductions included, will the gov't accept this deduction and not this one, etc. Everytime you shop, you take a bite out of your tax burden. And the best part is that it would be a smaller bite than the one currently taken, for virtually all people.

Manx · 11-23-2004, 11:12 PM

Simplification for the sake of simplification is not a solution.

Although there are an assortment of real problems with our tax system - we are still the wealthiest nation in the history of the world. It does work.

It may not be simple, it may not do all that is should - but it works.

Maybe a complete overhaul is necessary to make it work and make it simple and have it do what it should do. I don't see that in the consumption tax plan. Primarily because it no longer does what it is a major piece of what it should do: target the wealthy.

KMA-628 · 11-23-2004, 11:20 PM

Quote:

Originally Posted by Manx

Primarily because it no longer does what it is a major piece of what it should do: target the wealthy.

Ah, I see you are up late too.

I highlighted this because it points out a fundamental difference between us, one that more than likely, cannot be breeched.

If you have read any of my other posts you should know that I would never subscribe to this philiosphy, nor would I propose or lend my backing to a plan that had the basis of "target the wealthy." Ironically, I am not even remotely rich, yet I do not lend credence to this thinking. By my own definition, I am a conservative economist who will someday be rich (yeah right, eh?).

It seems, my friend, that we have reached an empass.

Manx · 11-23-2004, 11:25 PM

I described my reasoning for targetting the wealthy in the first section of post #62.

I haven't had many people attempt to argue those points with me - typically, a conservative will stick with the common "fairness" aspect as it applies exclusively to money. (And, typically, a liberal will not attempt to argue those points, whether they understand them, agree with them, or not.)

Maybe someday someone will discuss it in the proper and full context: power.

Until then, yes - we have reached an impasse.

A very nice conversation it was. Thank you for broaching it and in the manner you did, KMA.

KMA-628 · 11-23-2004, 11:31 PM

Quote:

Originally Posted by Manx

A very nice conversation it was. Thank you for broaching it and in the manner you did, KMA.

You know what's funny.

I knew I was spelling "impasse" wrong, but I couldn't even find the correct spelling at dictionary.com (empass and impass returned nothing, I forgot the damn "e" at the end).

See, a minor thing, but I am the wiser for it.

Enjoy your evening, or what is left of it. As my work for the day is now finished, I start my cocktail hour (early training for when I am good and rich).

Manx · 11-23-2004, 11:55 PM

Empass didn't look right - so I dictionary'ed impass first - got the same acronym listing.

My evening is only getting started - gotta finish up some work here - early training so that I am good and rich.

Enjoy!

smooth · 11-24-2004, 12:41 AM

Quote:

Originally Posted by KMA-628

You know what's funny.

I knew I was spelling "impasse" wrong, but I couldn't even find the correct spelling at dictionary.com (empass and impass returned nothing, I forgot the damn "e" at the end).

See, a minor thing, but I am the wiser for it.

Enjoy your evening, or what is left of it. As my work for the day is now finished, I start my cocktail hour (early training for when I am good and rich).

KMA,

Manx' definition of regressive tax (his example to you) was the definition I learned in my social inequality courses. That's the definition that social scientists use.

A regressive tax is understood to occur when a person's tax liability (as a proportion) decreases as their income increases.

I also double checked various internet definitions to see if there were common parlance usages. I couldn't find any that differed from the 'academic' definition.

Where did you learn your definition? Is it based on what you think regressive means (as in 'unfair') and progressive (as in 'fair')?

I used to speak to an economist when I ran his student lab. He was always talking about how to fix the tax situation in Oregon (it doesn't have a sales tax). He claimed that the best solution was to raise the groce receipt taxes. I can't remember if he was talking about grocery receipt taxes, but I think so.

If I have more time and can remember all the details, I can return and flesh it out. But I'm supposed to be working on my Master's right now!

There is strong historical evidence that capitalists will keep their wealth, not spend it. They need to invest it, first of all, in a capitalist society. Those are the rules of the game in order to keep the pie growing. They have to capitalize their profit. I don't want to remake the wheel, so if you happen to be in a library grab Empire by Hardt and Negri. They do a quick rundown of how this plays out. If you happen to grab that book, the pages are p. 222-228. I'll try to scan them later if I have time.

Also, how I define fairness in taxes is by how much resources one consumes. So I think people should pay taxes on the percentage commensurate with their wealth--not income.

I have posted in another thread explaining how I view the use of resources and infrastructure.

Briefly, workers subsidize the owners, not the other way around. This operates even outside the issue of infrastructure. For example, you asked about a number of things. The government uses public money to support private corporations. We call it subsidies or bailouts. This occurs when they want to do ventures, research drugs or many other technologies, and when they end up stealing from consumers (as was the case with S&L and energy scandals).

What I find interesting is that I have no problem with loaning or incentivizing corporations to research and develop. But once they hit something good, the public coffers should get a percentage of return. Either through straight repayment of capital invested, or via royalties. This is what any private lender does, so I don't see what the issue with that would be.

I would also like to see a particular tax on wealth that would urge reinvestment of the liquid capital. I believe this is the foundation for property taxes, to urge people to use the land productively and not just sit on it. And I don't think our society has a moral or fairness issue with property taxes as long as they aren't putting people out of home. So I think our public would be willing to come to terms on a wealth tax on the same premise.

Philosophically, or theoetically, we should encourage people to invest, but not punish them if they choose to consume. We need consumers to keep the pie of capitalism warm. Taxing on consumption seems to penalize consumers for what we need them to do.

I'm not convinced that we can restructure our tax code to reduce taxes for everyone. Some things I've read make me doubt that to be the case, but mainly I just don't want to risk a shift that large without some positive evidence.

I would consider meeting part-way, however. For example, if we used a self-sufficiency standard instead of the current poverty threshold, I would be amenable to a consumption tax to see how it pans out for temporary. That would mean that in Orange County, you would agree to exempt my first $38,000. That is the researched figure that I would need to meet my basic needs: housing (2 bedroom for a family of 4), food, clothes, transportation, & etc, That amount doesn't allow me to go hog wild out on town. Housing wacks about 24K right off the bat. So you can start thinking to yourself how far the other 14K would get me--especially if you want me to save for my healthcare and retirement each month (and childcare hopefully). Whatever disposable income I have left would be spent on necessities.

All this so I can continue coming in to work each day. And the less stressed I am, the more productive I am liable to be. Given that I create the profit, making compromises like this seems to be in their long-term interests, as well.

KMA-628 · 11-24-2004, 12:57 AM

From Roger Miller, economist

Quote:

Under a proportional system of taxation, taxpayers at all income levels end up paying the same PERCENTAGE of their incomes in taxes. If the proportional tax rate were 20%, an individual with an income of $10,000 wouold pay $2,000 in taxes, while an individual making $100,000 would pay $20,000. The identical 20% rate, therefore, is levied on both taxpayers

granted, this definition refers to a Flat Tax, not an NST. However, if we read further down:

Quote:

So far, all congressional proposals (refering to alternative tax ideas) have called for exempting household incomes from taxation up to some minimal threshold (often the official "poverty line" for U.S. economies). In these proposals, only incomes above such a minimum threshold would be subjected to taxation at a single rate, thereby making sure that the proposed flat tax systems would, like the current system, be progressive.

The social security tax is an example of a regressive tax, because it is capped at, I believe, somewhere around $80,000 of income. After earning $80,000-something, you pay no more. That is a regressive tax, this one isn't. A consumption tax doesn't neatly fit into either category, but it most closely resembles a progressive tax as there is no cap, and the more you earn, the more you pay.

KMA-628 · 11-24-2004, 01:01 AM

Quote:

Originally Posted by smooth

I would consider meeting part-way, however. For example, if we used a self-sufficiency standard instead of the current poverty threshold, I would be amenable to a consumption tax to see how it pans out for temporary. That would mean that in Orange County, you would agree to exempt my first $38,000. That is the researched figure that I would need to meet my basic needs: housing (2 bedroom for a family of 4), food, clothes, transportation, & etc, That amount doesn't allow me to go hog wild out on town. Housing wacks about 24K right off the bat. So you can start thinking to yourself how far the other 14K would get me--especially if you want me to save for my healthcare and retirement each month (and childcare hopefully). Whatever disposable income I have left would be spent on necessities.

/yes, happy hour is extending late tonight

First, you have to re-do your numbers to match the plan I am referring to, as housing would not be included. I believe that healthcare would be exempt, but I will have to check.

So, I think that the $38,000 number would be a wee bit high. Anyway, the idea behind any threshold is to be more "fair".

KMA-628 · 11-24-2004, 01:40 AM

By the way, I was wrong about housing:

Quote:

Thus, the NST should be imposed on gross payments for the use, consumption, or enjoyment in the United States of any taxable property or service. Taxable property and services include any tangible property (including rents and leaseholds on tangible property) and services. Securities, contract rights, copyrights, patents, and the like are not taxable. Housing, financial intermediation services, government goods and services that are sold to the public--such as bus rides, postage stamps, and publications of the Government Printing Office--gaming services, and the unrelated business activities of not-for-profit organizations are also included in the tax base. Property (or services) produced or rendered outside of the United States (imports) would be taxed at the point of sale. Thus, virtually any consumer good (ranging from food to video games to cars) would be taxed. Apartment and house rents and home purchases also would be subject to tax. Goods purchased abroad by consumers would be taxed upon entry into the United States. [28] Services to individuals and households (including, for example, services provided by barbers, plumbers, therapists, accountants, lawyers, doctors, and the like) would also be taxed.

Here is more on the regressive concept, from the same site:

Quote:

A common assumption about the NST is that it is naturally regressive, since lower income individuals spend a greater percentage of their income in any given year on consumption of necessities. Because a sales tax is an altogether different paradigm of taxation, any judgment on the equity of the tax must be accompanied by a different analysis of regressivity.

Quote:

In any case, an NST plan can be made progressive through a rebate mechanism that would shelter low-income people from paying the tax. One manner in which the NST could be made less regressive would be to exempt certain necessities--such as food and clothing--from the tax. That approach would exempt, however, the most expensive food (lobster and caviar) and the most expensive clothing ($1,000 designer suits). It is a very inefficient means of providing tax relief to lower and middle income Americans and would necessitate a much higher overall rate. [41] A more neutral and less distortive approach is to simply provide each family a level of consumption free of tax by providing a rebate of the tax on expenditures up to the poverty level. That is the device we recommend and the approach chosen by Representatives Schaefer and Tauzin in H.R. 3039.

Quote:

The family consumption allowance approach has several effects. First, it makes the sales tax applicable only to consumption beyond the necessities of life. Second, it makes the tax in effect progressive, not only because it is based on consumption, a better index of true ability to pay, but because--if one wants to continue to view progressivity through an income tax lens--it entirely exempts lower income workers. Third, unlike most state taxes, it does not undertake the complex and politicized task of determining what to tax and what to exempt, thereby minimizing administrative and compliance questions and economic distortions.

Source

Manx · 11-24-2004, 01:57 AM

Quote:

A common assumption about the NST is that it is naturally regressive, since lower income individuals spend a greater percentage of their income in any given year on consumption of necessities. Because a sales tax is an altogether different paradigm of taxation, any judgment on the equity of the tax must be accompanied by a different analysis of regressivity.

It's nice to say it requires a different analysis of regressivity because it is a different paradigm, but that doesn't really mean a whole lot.

In the example I gave above, Person A/Person B, the 7% and 3% tax rates are not real tax rates, the real tax rate is 20%. The 7 and 3 are comparative tax rates to the income-based tax system. In essence, we look at how much consumptive tax is paid by each person and view that as a percentage of the income. It certainly is an analysis along the lines of our current system applied to an entirely different system. But at the same time, the result of the analysis is applicable as a comparison to our current system.

As your source stated, consumption spending does not increase equivalent to an increase in income, which I have mentioned a few times now. It offers a remedy of adding in an essentially arbitrary number (poverty level) to bring back some of the progressivity it had eliminated. The effect is nothing more than an artificial crutch for the failings in the consumption-based tax plan. Maybe there's a term for it, but if you think of a curve on a graph, the arbitrary number simply levels out, flattens, the first segment, then the curve continues on it's way, unadjusted. (The curve being the regressivity of the tax system.)

Maybe smooth's suggestion of localized cost of living would be more applicable than poverty level - but it would still be an artificial crutch for the system.

Speaking of this arbitrary number - where did they come up with the poverty level as the number that would be appropriate? If the system is based on consumption, why is the "fix" to the flaw in the system a number based on income?

kutulu · 11-24-2004, 09:50 AM

Adding sales taxes to houses and rentals would be terrible. Real estate is one place where prices will not go down. All of a sudden your amount financed goes from 200k to 240k.

To make things worse it would only apply to people who purchase a house AFTER the tax goes into effect, meaning first time home buyers and current renters get screwed the hardest. The only way to remedy that would be to retroactively add a tax to all currently owned homes. As if that would happen.

smooth · 11-24-2004, 11:11 AM

Quote:

Originally Posted by KMA-628

From Roger Miller, economist

granted, this definition refers to a Flat Tax, not an NST. However, if we read further down:

The social security tax is an example of a regressive tax, because it is capped at, I believe, somewhere around $80,000 of income. After earning $80,000-something, you pay no more. That is a regressive tax, this one isn't. A consumption tax doesn't neatly fit into either category, but it most closely resembles a progressive tax as there is no cap, and the more you earn, the more you pay.

Keep in mind that it isn't the "more you earn, the more you pay," but rather the "more you spend the more you pay."

My main point about the poverty "fix" is that the current threshhold is artificially low. I don't like the plan you are outlining, but if it were to work in any way, the poverty threshhold would have to be reevaluated.

Diana Pearce is a sociologist on the faculty of the School of Social Work at the University of Washington. She created the Self-Sufficiency Standard when she was Director of the Women and Poverty Project at Wider Opportunities for Women in Washington DC. If you google her name and "self sufficiency standard" you'll get a lot more info on this aspect, which I hope you'll find interesting and illuminating.

smooth · 11-24-2004, 12:02 PM

Here is an exploration of the NST issue from the other side of the aisle:

Quote:

Why Fairness Matters: Progressive Versus Flat Taxes

By Robert J. Shapiro

Editor's Note: The full text of this report is available in Adobe PDF format, only. (Requires Adobe Acrobat Reader.)

Executive Summary

Tax reform is Washington's latest answer for the discontent Americans feel with national politics and their own economic prospects. Several presidential hopefuls have promised to replace the current system with a new flat tax or a national retail sales tax, and others would substitute a new consumption-based income tax. Among the various proposals, the flat tax in particular has gained a following, probably because it purports to use tax reform to change politics as well as the economy. As we will see, its advocates claim too much. In fact, their analysis of the current tax system is often wrong. Their promise to reform politics is largely empty. And the policy would probably leave the country worse off, both socially and economically, than it is now.

The three basic measures of a sound tax system and sensible reform are simplicity, growth, and equity; none of the current reform strategies meet all of these tests. The key to the initial popularity of a flat tax is the first measure, its radical simplicity. It would abolish almost all tax deductions, credits, and exclusions in both the personal and corporate income taxes. Make no mistake, such simplification is sound economics. The less the tax code influences how people and firms consume, save, earn, and invest their income, the more efficiently America's markets can allocate the economy's resources. And by broadening the tax base, simplification allows us to raise the same revenues with lower tax rates and lower tax rates, like lower taxes, are almost always better for an economy.

The public is drawn to drastic tax simplification, however, because it sees it as an attack on the quiet arrangements and tacit corruptions that allow powerful industries and wealthy people to secure special tax treatment. Even so, the flat tax plans offered by Rep. Richard Armey or Steve Forbes would not deliver such political reform. While they would repeal scores of special provisions used today by profitable businesses and wealthy people to shelter part of their income from tax, they wouldn't end the privileged tax status of the well-heeled. That's because both plans would replace those special provisions with new and much broader tax exemptions covering all personal income derived from interest, dividends, or capital gains, and all business income used for capital investment.

Flat tax advocates defend these blanket exemptions by shifting the argument from political reform to the second measure, economic growth. Sharply progressive tax rates, they insist, discourage the most productive people from working and saving more, which in turn reduces growth for everyone. The flat tax's answer has two parts. First, it would eliminate the personal tax on income from savings and replace progressive tax rates with a single flat rate on the income from labor. Second, it would channel new savings to traditional capital investment by allowing firms to deduct the full cost of new purchases of plant and equipment.

This defense relies on faulty data and flawed economics. The data, first, refute the claim that the current federal tax burden is sharply progressive. Taking all forms of federal taxation into account personal and corporate income taxes, payroll taxes, and excise and estate taxes middle class families already pay roughly what they would under a pure flat or proportional tax, or a little less. The federal tax burden on the most affluent people is only modestly greater. Even for the richest 1 percent of Americans, more than 70 percent of the taxes they pay represent merely their proportional share of the costs of government.

Second, the 1980s demonstrated that tax cuts for various forms of personal savings and business investment have little effect on overall saving and investment rates. In 1995, despite more than $120 billion in direct tax incentives for personal saving, the U.S. personal savings rate remained less than 5 percent. And even if such tax incentives did work as flat taxers claim, that wouldn't guarantee higher national growth. Studies of what makes the U.S. economy grow have found repeatedly that technological innovation and improvements in the skills of the work force are six-to-seven times more important than business investment in plant and equipment in promoting higher growth and incomes. As a result, the flat tax growth strategy has a serious problem of scale: To achieve a permanent 1 percentage point increase in economic growth, we would have to nearly triple our current national savings rate.

In an upcoming report, the Progressive Foundation will offer a growth-oriented strategy for tax reform designed to stimulate not simply savings but economic innovation, efficiency, and productivity. In this report, we will examine and analyze the current system and the principal proposals to change it through the optic of tax equity and fairness.

The terms of tax fairness

Fairness in the tax system matters because tax collection depends vitally on voluntary compliance. Paying taxes is also most Americans' chief point of contact with their government, and probably their closest approximation to a common civic experience. Yet, some analysts today dismiss equity issues and, with increasing boldness, insist that regardless of their effects on fairness, all tax cuts are desirable because government's right to tax is less than fully legitimate.

Behind this disdain for tax fairness lies a critique of democracy itself. It posits that the economic choices of individuals are morally superior to the political decisions they make as a community because in some important sense people are "natural" while governments are merely "artificial." Those who make this case misunderstand markets as well as democracy. Society probably cannot maintain itself without individual property rights, but the economic activities that produce property occur within a fabric of relationships shaped by the social and political institutions that people create for themselves. Individuals exercise their economic choices, then, within associations and corporations, which are creatures of the law, and so also, of the political decisions of communities.

Without a doubt, most people don't enjoy paying taxes. But in a democracy like ours, people contribute private resources to provide the public goods they deem appropriate as a community, including helping those unable to make their way by themselves. In America, paying taxes embodies a civic relationship of mutual responsibility, and people's obligation to pay them is as legitimate as any other public duty.

Among those who do not question a citizen's obligation to pay taxes, there are two broad views of the meaning of tax fairness. Fairness under a proportional or flat tax emphasizes equality: Everyone should be subject to the same tax rules, and therefore, everyone should pay taxes at the same tax rate and bear the same relative tax burden. By contrast, fairness under a progressive tax system stresses people's different circumstances: All people should pay taxes according to their ability to do so, and therefore, the tax system should exempt the poor and apply to everyone else tax rates and relative tax burdens that increase with income.

Conservatives generally believe that a flat tax will best protect people's individual liberty, because by burdening everyone equally, it creates the broadest constituency possible for limiting government's demands on individuals. Moreover, because a truly flat tax imposes an equal economic burden on everyone, it does not affect the market's distribution of income. This provides the basic measure of a genuine proportional tax: Each person and each income group claims the same share of national income after paying taxes as it did before paying them. And this is thought to be just because, from a conservative's vantage, markets distribute income based on how hard and well people work.

On the other side of the debate, liberals generally believe that progressive taxes protect individuals better than a flat tax, by curbing concentrations of economic power that threaten the opportunity of others, and by providing poor families with the resources they need to live independently. From this vantage, people's incomes reflect not only their own efforts but also a universe of circumstances they cannot affect; therefore the market's distribution of income is not the final word on economic justice. True equality of opportunity becomes a social achievement, one that tax progressivity advances by changing the market's distribution of income. This provides the fundamental measure of a progressive tax system: After paying their taxes, those at the top are left with a smaller share of all national income than before, and those at the bottom a larger share than before.

Both approaches to fairness can claim some basis in economic theory. The economic logic for a pure flat or proportional tax rests on the basic market notion that people produce economic goods and services because they expect to reap economic benefits. All taxes reduce the benefits people receive from working and investing but, the argument goes, a flat tax should discourage work and saving the least because a system with only one tax rate will have the lowest possible top tax rate. In addition, a market will produce goods and services most efficiently when its resources are allocated through prices that directly reflect everyone's individual preferences and taxes should reflect the "prices" people would pay for the public goods provided by government. Since traditional public goods such as national security or public parks benefit everyone equally, efficiency dictates that everyone pay taxes at the same rate to finance them.

The economic theory behind progressive taxation begins by separating the tax system from the economy that provides its resources. By this view, people work and save because they need or want certain benefits. The existence of taxes does not change those needs or desires, and so should not discourage work and saving. Therefore, tax rates could reasonably rise with income without imposing additional economic costs. In addition, just as an efficient economy uses its most productive resources first, until the cost of using more of them equals the cost of using something else, so an efficient tax system should provide that all taxpayers bear an equal sacrifice. From this optic, tax rates should rise with income, so that an additional dollar of tax entails the same sacrifice by people at every income level.

By itself, economic theory cannot choose between the two cases, and hard economic evidence does not fully support either side. As near as we can tell, tax rates do affect work effort and savings, but only when the rate is very high, and then only to a modest degree. Moreover, the impact of high tax rates is even smaller when people can protect their income from these rates by claiming various deductions, exemptions, and exclusions and that's almost always the case. Yet, relatively high tax rates and tax burdens also cannot produce economic equality. Progressive taxes apply only to people's annual income, not to their accumulated wealth, and so have only modest effects on concentrations of economic power. Moreover, while high income people don't stop working or saving because their marginal tax rate is high they find ways to avoid it or live with it the transfers financed by their taxes can affect the work efforts of those receiving them. In any event, lifting tens of millions of low income people into the middle class by direct income transfers would require much higher taxes not just on the wealthy, but also on strapped middle class families.

Ultimately, progressive taxation has the better of the argument. Flat taxers may be right that it would be morally offensive to tax higher income people more heavily if differences in income reflected only how hard different people work. But income differences reflect much more than that, if only because people don't start in the same place. People are born with different talents and come to age in families, neighborhoods, and cultures with different resources to prepare them for market competition. And plain luck often plays a role.

America's wide-open markets accentuate the impact of all these factors, so that those with more ambition, self-discipline, and talent can prosper greatly. Bill Gates and his investors, for example, would not have enjoyed as great a success in other advanced countries because their markets and laws would not have provided so hospitable an environment. And once a person or family's economic success is secured, America's open markets allow them to increase the value of their wealth at a greater rate than in most other places. The economic benefits of free markets are large and obvious. But there are social costs, because our open markets and laws also produce harsher economic inequality than in other advanced countries an urgent issue today when economic inequality is increasing rapidly and for reasons that most working people can do little about.

Progressive taxes cannot undo this inequality or restore upward mobility to poor or middle class Americans not even progressive taxes to finance transfer programs. A progressive tax system, however, can protect poor and middle class families from bearing the higher tax burdens entailed in a purely flat or proportional system, and in this sense, ameliorate some of the distributional inequalities achieved through our markets but based on factors other than how hard different people work. And the additional burden of progressive taxation is a reasonable price to pay by those who in some respect start with more, for the privilege of prospering relatively more under America's laws and in her markets. Bill Gates and his investors have a responsibility to not merely bear an equal share of the burden, but a greater share because they enjoy a larger share of the benefits provided by these laws and markets.

Furthermore, when accidents of birth and luck affect people's ability to succeed through hard work, economics as well as social considerations can dictate that they receive the means and opportunity to participate more fully in the economy. At the very least, the tax burden to finance these efforts should be progressive at the bottom so that the tax system does not further impair the ability of low income people to participate. At the top, people with higher income can contribute, within limits, without harming the economy or their own basic freedom. In the end, progressive taxation can trade off the benefits of ensuring a broader distribution of opportunity against the modest costs of higher tax rates and higher tax burdens on some to finance it.

Who pays the taxes

As we will see, the current federal tax burden including the personal and corporate income taxes, payroll taxes, excise, and estate taxes is most clearly progressive at the bottom of the income ladder. The total burden is also progressive at the top, but only moderately so and much of that reflects income tax changes enacted in 1993. For the broad American middle class, the tax system is, on balance, more nearly proportional than progressive, barely affecting the share of national income held by most families. Finally, while everyone would like to pay less taxes, evidence suggests that a substantial majority of Americans would prefer a little more progressivity, so that low income families could pay a little less than they do today and very affluent families would pay a little more.

The current distribution of all forms of federal taxation can be summarized in the following five findings:

First, everyone bears some of the burden. Higher income people pay the bulk of all federal taxes mainly because they earn the bulk of all income, but even families living in poverty pay on average more than 6 percent of their income to the federal government.

Second, a family's tax burden rises most sharply as it moves up from poverty to the middle class; beyond that, the tax burden increases with income at a more modest rate. A family living on $6,000 a year pays roughly 6.4 percent of those resources in federal taxes, and as its income increases to $25,000, the share it pays in taxes nearly triples to 16.8 percent. If the same family increased its income 20-fold more, to reach $500,000, its tax burden would only double to 32.7 percent.

Third, two groups bear lighter tax burdens than others: Elderly people pay significantly less than younger households with comparable income; and at low and moderate income levels, families with children pay less than other households. Lower taxes on families with children reflect the intended effects of the dependent's exemption and the earned income tax credit (EITC). Lower taxes on the elderly are mainly an indirect consequence of taxing much more lightly the capital income and Social Security benefits on which many elderly rely than the wages and salaries on which working families depend.

Fourth, the total federal tax burden is genuinely progressive at the bottom and at the top of the income ladder, and roughly proportional for everyone else. Relative to the current tax system, a pure flat or proportional tax system would leave poor families with 16 percent to 22 percent less to live on than they do today, and the wealthiest 1 percent with 12 percent more. For virtually everyone else, a truly flat system would raise or lower their disposable income by less than 3 percent.

*Fifth, higher income people bear all of the current costs of tax progressivity, but these costs have only moderate effects on their total income. Only families earning more than $75,000 pay more today than they would under a pure flat tax system. Even for those who earn $500,000 a year, the progressivity of the current system accounts for less than 30 percent of their taxes, and this additional burden represents less than 10 percent of their income.

Fairness and tax reform

Plans to broadly reform federal taxation, especially the flat tax and national retail sales tax proposals, would leave the system much less progressive and much less fair. Under the current arrangement, basic fairness is provided through six progressive elements. At the bottom, (1) an exemption for initial income protects poor families from income tax, and (2) the EITC, in effect, refunds part of the payroll tax and other tax payments of working poor families. For everyone else, (3) tax rates on personal income rise from 15 percent to nearly 40 percent as income increases. And for those at the top, (4) most of the value of their personal deductions is phased out; (5) federal corporate taxes affect mainly owners of capital, who are predominantly affluent; and (6) estate taxes affect only the very well-to-do.

Flat tax. The Armey and Forbes flat tax proposals would repeal four of these six elements the EITC, the graduated tax rates, the phaseout of personal deductions at the top, and estate taxes. The repeal of the EITC, in particular, would worsen the poverty of millions of working poor people and their children. However, the proposals would help many moderate income families, by expanding the current tax exemption for initial income. Yet, the benefits of this change would not be felt by many middle class taxpayers who would lose their personal deductions for mortgage interest, pension contributions, and state and local taxes.

There's no easy way for the flat tax to avoid this problem. Simply preserving the mortgage-interest deduction won't work as long as the flat tax also exempts interest income from tax. If flat taxers tried to allow people to deduct both the interest they pay and the interest income they receive, anyone could take out a second mortgage and deduct the interest cost and then invest the money and exclude the income it earns. The result would be pure tax leverage, producing taxpayer-financed transfers to those holding the greatest home equity, a revenue hemorrhage, and financial distortions as the nation's capital was channeled through second mortgages.

A pure and comprehensive flat tax system wouldn't have this problem because it would tax all income the same, whether it comes from labor or capital. And a pure proportional tax would affect the disposable income of most middle class families very little, one way or the other. The current proposals, however, cannot avoid imposing higher taxes on most middle class Americans as the original architects once noted themselves because they would not tax capital and labor the same. Instead, the Armey and Forbes plans would shift more of the total tax burden to labor, because capital would be taxed once under a business tax while wages and salaries are to be taxed twice under both the income tax and the payroll tax. The middle class has to pay more under such a system, and the wealthy much less. That's because virtually all of the income of average families come from wages and salaries, with only 6 percent to 10 percent coming from capital, while people at the top derive much less of their income from labor but 35 percent to 48 percent from the interest, dividends, and capital gains receipts exempt from personal tax under these plans.

Initially, however, the flat tax would likely depress the market value of all corporate stock, by strongly favoring new investments in plant and equipment over existing business capital. Still, by one preliminary estimate, these plans would mean at least $30 billion more in taxes paid by families in the bottom half of the income distribution, and $50 billion less in taxed paid by those in the top 20 percent.

National sales tax. A national retail sales tax has an even more troubling effect on tax fairness. This approach would repeal all six progressive elements in the present tax system: Along with eliminating the EITC, graduated tax rates, the deduction phaseout, and estate taxes, the plan also would repeal business taxes and the exemption for initial income. Further, it would create an unlimited tax deduction for new saving and investment, favoring those with high income, since poor and middle class families have to consume much larger shares of their income. The only progressive feature of a sales tax approach is an implicit tax on existing wealth, since people would pay the tax whenever they sold an existing asset and spent the proceeds. By one preliminary estimate, such a proposal would more than double the effective tax burden on the poor and substantially raise the burden on middle class families, while providing enormous tax relief to wealthy families.

Under the flat tax or a national sales tax, for the first time in American history the tax system would redistribute income towards wealthy people. Families at the top of the income scale could claim a larger share of all national income after paying their taxes, so that the tax system would actually reinforce the country's growing inequalities in income.

USA tax. Of all the current major reform proposals, only the Unlimited Savings Allowance (USA) tax plan of Sens. Sam Nunn and Pete Domenici would have little adverse effect on fairness. This plan would exempt new saving and investment from federal income tax, including all inheritances, but it also would preserve the EITC, graduated tax rates, business taxes, and a substantial exemption for initial income. While including some modest simplification, especially for the corporate tax, the plan retains personal deductions for mortgage interest and charitable contributions and creates a new deduction for college tuition. It also would offset some of the regressive effect of its exemption for new net saving and investment by providing workers a new tax credit equal to their payroll tax payments. In addition, it would create the same kind of implicit tax on existing wealth as a sales tax. Nevertheless, in order to maintain roughly the same progressivity as exists today, the proposal requires higher tax rates than those imposed currently on income which is not saved or invested.

Robert J. Shapiro is the director of economic studies of the Progressive Foundation and vice president of the Progressive Policy Institute.

---http://www.ppionline.org/ndol/print.cfm?contentid=1398

KMA,

do you see why Manx and myself understand the NST to be a regressive taxation structure?
Do you agree with us?

The article you provided doesn't dispute the regressive nature of the NST, but rather attempts to patch it to reduce the regressivity within it. It's important to note who the audience of that position paper is directed toward. The assumption made before the model was created is that someone is paying too much tax. So the model attempts to answer the question of how do we reduce the tax burden on that particular payer and implement a more fair system.

The attempt is not to reduce taxes for everyone. I didn't see it in that paper, but hopefully CATO didn't say it would--because that would put them in a pretty untenable situation. I was surprised when you asked how this would negatively affect the middle class. Restructuring the tax burden is not going to lower taxation for everyone; instead it will move that burden around because it is a discussion on where, not whether, the burden should fall.

When I say something like that study came from CATO or this one comes from the Progressive Center, I'm not asserting one should reject one in favor of the other based on that information. But one must evaluate the assumptions the authors are operating under and who their target audience is. Neither the CATO position nor the Progressive Center's position is attempting to solve an objective problem. They are both trying to solve a problem for their respective audiences.

Without knowing your specific income situation, I can only guess whether you are the intended audience of the CATO Institute. Have you taken all your receipts from the past ten years (including housing

)? That average would give you a more clear picture of your expected burden. But if you don't have those figures, at least roughly figure the past few years before deciding that you wouldn't be economically harmed by this shift.

If you find that you are not, it's important to realize that the goal of this position is to reduce the tax burden on the wealthy. If your taxes are reduced and/or remain stable, but the wealthy taxpayers' burden is reduced, then we need to add a new phenomenon into the equation: where does the government make up lost revenue.

The historical answer has been to increase fees. So this means that if you like to go to national parks or go gaming or other recreational activities, you might pay $60 dollars for your fishing license instead of $24. Park entrance rises from $10 to $30 per day, for example. These costs need to be figured into your share of the burden of the cost of government services.

Another part that needs to be figured is how state's will receive money. Will they charge a per usage fee for police assistance, or will they just raise overall rates?

Now, it's important to watch where the position claims loss of revenue is going to come from. They may claim that there will be no loss of revenue. That is, maybe the market will produce enough to make up for the loss. But we can look at the historical record to interrogate the probability of that. The important thing to note is whether the position gives a good enough account of where the increase is going to come from. Even if the position believes the market will make up for the decrease, it ought to provide an alternative scenario in case the market doesn't adjust or provide enough. If it doesn't, why not?

Sun Tzu · 11-25-2004, 06:23 AM

Abolish the IRS and break all ties with the Federal Reserve Bank for starters.

Here's a few sources to view the different angles.

1

2

3

SecretMethod70 · 11-25-2004, 06:58 AM

Sun Tzu beat me to it. The more I slowly learn about the Federal Reserve system, the more disturbed I become.

11-22-2004, 06:50 PM	#46 (permalink)
KMA-628 ....is off his meds...you were warned. Location: The Wild Wild West	Edit: there seems to be many different ways of defining "regressive tax". That being said. Is there no one else to chime in? I would like to hear as many opinions as I can. If you are for it, why. If you are against it, why? If you are against it and think the current plan is failing, what do you recommend that we do? Thanks, Last edited by KMA-628; 11-22-2004 at 07:01 PM..

11-23-2004, 02:00 PM	#48 (permalink)
abscondo Tilted Location: MI	As bad as the current tax code is, I'm terrified at the thought of our current leaders rewriting it. It will favor the rich, pure and simple. That's not the way they'll present it, of course; we'll hear that simpler = better, flatter = fairer, calculated rephrasings like "death tax," claims that the new system will help grow the economy and allow the elimination of the IRS, etc. The end result will be that the middle class will be screwed. Politicians will remove taxes on things the rich enjoy, such as capital gains and dividends. They'll allow corporations to pay less, maybe even nothing. The poor will be protected by some threshold or rebate. The only people left to tax will be us in the middle class. And my fellow Americans will take the bait. They'll swallow the arguments and embrace a regressive tax that will end up costing them money. How do I know? Because they believe so many other false claims made by this administration, such as "we invaded Iraq as part of a war on terrorism." __________________ Ceci n'est pas une pipe. Last edited by abscondo; 11-23-2004 at 02:04 PM..

11-23-2004, 03:20 PM	#51 (permalink)
KMA-628 ....is off his meds...you were warned. Location: The Wild Wild West	Well, I was hoping for an argument posed in someone's own words, not links to articles written by someone else (I don't do this for a living either, it is merely a "hobby"). Of the links, only one dealt with tax reform and it doesn't deal with the type of plan I am proposing. The other links are articles I read some time ago denigrating tax cuts. Tax cuts are not the argument here. Plus, the articles are devoid of some very important information relevant to the argument they are making, which is a totally different topic than being discussed here (in other words, they won't fly with me - case in point, article #3, referring to declining corporate tax revenue compares pre 9/11 to post 9/11. It completely ignores any mention of a recession or of any of the economic effects--of which there were many-- of 9/11. It also fails to mention that personal income tax revenue has gone up considerably--anyway, as I said, a different argument) The best part about the first link is that it mentions that there isn't any empiracle evidence to support a "flat tax". Well, duh. There isn't a similar system to use as evidence, so, obviously there isn't any empiracle evidence. What kind of evidence did we have in 1908 when the current system was put into place? Or after WWII when it was enormously expanded? But we did it anyway, didn't we? Let me try again, maybe someone else will answer: If the plan I am referring to will hurt the middle-class more than they are being hurt now, how will that be? As I have stated before, I used myself as an example (and no, I am not posting the numbers--I did, however, post hypothetical numbers that are similar to mine) and have come out on the positive side in this argument. Since I am solidly middle-class, how will I get hurt? If there are serious problems or things that need to be considered regarding a consumption tax, I really, really want to hear them. Please make your argument specific to the points I mentioned and please make the argument in your own words, backed up with links if you so desire. Anyone can post a link, I would like someone to join this discussion that has thought about this idea and has a well-formulated opinion about it. Last edited by KMA-628; 11-23-2004 at 03:22 PM..

11-23-2004, 04:18 PM	#55 (permalink)
Kadath Muffled Location: Camazotz	The problem, KMA, is it's complicated to do. But I've got 25 minutes while Simpsons is on, so here goes. I'm going with a 4 person family where only one parent works, both children are under 17, the worker makes 40K, putting 3K into tax-deterred retirement plan, neither of the children has expensive orthodontia and the family doesn't give anything to charity...you see the problem. I agree that taxes as they are needlessly complicated (the manual for preparing your 2004 return is three hundred and twenty two pages) but that makes it difficult to analyze whether a national sales tax is better for the average family. With taxes dropping so much under this plan, the government would be bankrupt in a few years. __________________ it's quiet in here Last edited by Kadath; 11-23-2004 at 04:27 PM..

11-23-2004, 11:25 PM	#68 (permalink)
Manx Loser	I described my reasoning for targetting the wealthy in the first section of post #62. I haven't had many people attempt to argue those points with me - typically, a conservative will stick with the common "fairness" aspect as it applies exclusively to money. (And, typically, a liberal will not attempt to argue those points, whether they understand them, agree with them, or not.) Maybe someday someone will discuss it in the proper and full context: power. Until then, yes - we have reached an impasse. A very nice conversation it was. Thank you for broaching it and in the manner you did, KMA. Last edited by Manx; 11-23-2004 at 11:30 PM.. Reason: god told me to do it

11-22-2004, 01:53 PM	#43 (permalink)
alansmithee Junkie	It just seems to me that most companies would just pocket the payroll tax, or use that money to offset the loss of profit due to lowering prices. Again, the company isn't obligated to return the cash to the workers. I don't work for Microsoft, but by reading the papers I found out about their cash surplus and what they were planning on doing with it. Why weren't workers there arguing for higher pay? Relying upon workers to force the hand of a business is rarely effective. Most people don't currently understand that businesses have to pay approx. double of their pay in various payroll taxes, why would they understand not having to pay it? At best, I could see it forstalling some layoffs, but I think even that is doubtful. Again, a consumption tax might work in a true free market system, but that isn't what we have. Honestly I don't know of anyplace with a free market system. One of the most important things necessary for a free market economy to work efficiently and hold up to many theories is perfect information for all participants. And that is one thing almost always lacking, which gives those with more information (and usually higher income/money) more power in dealing with those without all the information.

11-22-2004, 01:56 PM	#44 (permalink)
KMA-628 ....is off his meds...you were warned. Location: The Wild Wild West	aliali - First, income isn't related to it all. The first $18K for a family, $9K for an individual is tax-free; everyone gets this credit. The current proposals seem to revolve around two different ways of handling this: rebate or prebate. One proposal has a prebate being sent out at the beginning of each month. The rebate proposal shows the rebate amount being first applied to other payroll taxes (i.e. rocking chair, medicare) and the balance being paid back at the end of the year. Does that answer your question?

11-23-2004, 05:16 PM	#58 (permalink)
Manx Loser	Certainly, people spend more if they make more - but not proportionally to the increase in the amount they make. That's why we have things like the stock market and 401k's and mutual funds and venture capitalists and various other forms of investment. Because the millionaire doesn't use as much, proportionate to their income, in toilet paper as the 25 thousandaire. They both use about the same amount. After the essentials, you have the "fun" stuff - TV's, cars, boats, etc. The millionaire is going to pay more for high-ticket versions of these things, but not enough more to come close to keeping pace with the disparity in incomes. It's much easier to spend a million bucks than it is to make a million bucks. And a millionaire knows that. Their lifestyle will not be 20 times greater than someone making 20 times less. It'll be somewhere around 5 times greater. (Again, I'm making up numbers to demonstrate the point.)

11-23-2004, 05:34 PM	#59 (permalink)
KMA-628 ....is off his meds...you were warned. Location: The Wild Wild West	Well Manx, we are going to differ here because I don't know of any rule that says how much someone should pay in taxes. With either the current system, my proposal or any other proposal I have seen; the rich will always (b) make more than me and (b) pay more in taxes than I do. And "fair" is impossible to define in this realm. The rich person is always going to have more money than me, before and after taxes. So the question is, how much a burden should the "rich" have? Once again, there is no rule. I am not a redistributionist, so I am not in favor of the "rich" paying for me, I am in favor of me paying for myself. We could run in circles for hours about how much a rich person should make, and never, ever come to a conclusion. My bottom line: will the proposed system bring in enough money? I looked at it back to front first. First, how much money do we need to take in? Then, where can we get that money that would be simpler and possibly more effective. This system does just that, plus it gives a free ride to the poor--they will have no burden. And, using my figures, the middle-class will pay less as well--a definite bonus in my book. Add that together with a system that could (and these are assumptions): (a) be more succesful (b) Be much simpler (c) be harder to cheat (d) be more "fair" than our current one (e) and be beneficial to our economy as a whole which is beneficial to anyone that wants to do better with their lives.

11-23-2004, 05:45 PM	#60 (permalink)
Manx Loser	I don't consider higher taxes on the rich as "paying for me". I consider it to be their paying for the priviledges they have gained in society. I also do not know how much the rich should be taxed. I do know that they should be taxed at a higher rate than someone making less money. As for the figures - I do not believe that eliminating the majority of the infrastructure we currently use to enable our tax system, will we gain enough savings to lower everyone's taxes - but even if that were true, I certainly oppose lowering the taxes of the upper class to something lower than the middle and lower classes.

11-23-2004, 11:12 PM	#66 (permalink)
Manx Loser	Simplification for the sake of simplification is not a solution. Although there are an assortment of real problems with our tax system - we are still the wealthiest nation in the history of the world. It does work. It may not be simple, it may not do all that is should - but it works. Maybe a complete overhaul is necessary to make it work and make it simple and have it do what it should do. I don't see that in the consumption tax plan. Primarily because it no longer does what it is a major piece of what it should do: target the wealthy.

11-23-2004, 11:55 PM	#70 (permalink)
Manx Loser	Empass didn't look right - so I dictionary'ed impass first - got the same acronym listing. My evening is only getting started - gotta finish up some work here - early training so that I am good and rich. Enjoy!

11-24-2004, 09:50 AM	#76 (permalink)
kutulu Junkie	Adding sales taxes to houses and rentals would be terrible. Real estate is one place where prices will not go down. All of a sudden your amount financed goes from 200k to 240k. To make things worse it would only apply to people who purchase a house AFTER the tax goes into effect, meaning first time home buyers and current renters get screwed the hardest. The only way to remedy that would be to retroactively add a tax to all currently owned homes. As if that would happen.

11-25-2004, 06:23 AM	#79 (permalink)
Sun Tzu Conspiracy Realist Location: The Event Horizon	Abolish the IRS and break all ties with the Federal Reserve Bank for starters. Here's a few sources to view the different angles. 1 2 3 __________________ *To confine our attention to terrestrial matters would be to limit the human spirit.- Stephen Hawking*

11-25-2004, 06:58 AM	#80 (permalink)
SecretMethod70 Human Administrator Location: Chicago	Sun Tzu beat me to it. The more I slowly learn about the Federal Reserve system, the more disturbed I become. __________________ Le temps détruit tout "Musicians are the carriers and communicators of spirit in the most immediate sense." - Kurt Elling