How does a flat tax simplify anything?

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How does a flat tax simplify anything?

Postby cgervasi » Sat May 18, 2013 7:32 pm

How does a flat tax simplify anything? Dan's claim is that having a flat rate could be linked to having no deductions. How do we know that? Wouldn't the same pressures to offer deductions for "good causes" exist regardless of the rate structure?

Suppose for a moment that you could link the two, maybe in the form of a Constitutional amendment that requires a flat tax and no deductions. That would do absolutely nothing for businesses calculating their income. If they buy a large machine this year, can they deduct it all at once or must they depreciate it? What depreciation formula should they use for each type of machine? Can you depreciate real estate? What if they sell one item and buy something substantially similar? They can choose to make that a taxible event? Can choose to ignore and realize any gains and loses at a later time?

Consider personal taxes. Is income taxes at the same rate as investment income? What about realized gains on long-term investments whose increase in value is mostly due to inflation?

These are the things that make taxes complicated. It's not your mortgage interest deduction.

People who want a flat tax sell it by saying it would simplify that tax code, but I see no reason for that.
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Re: How does a flat tax simplify anything?

Postby Halgy » Mon May 20, 2013 8:50 pm

A flat tax would be much, much simpler than the tax code we have now; there can be little doubt about that. Any problem that exists with the flat tax (i.e. the depreciation of equipment) would exist under any system. And, at least to me, things like a separate tax rate for investment income would be considered a credit or a deduction and thus eliminated.

However, I don't think a flat tax is necessary to simplify the tax code. The real problem with the US tax situation is the issue of credits and deductions. We could have a progressive tax structure (e.g. tax 0% of income up to $x, 10% of income between $x and $xx, et cetera) without credits or deductions. Since there would be no schemes to lower one's reportable income, it wouldn't really be any more complicated than a flat tax and it wouldn't be regressive.

A leftie I may be, but I'd be fine with eliminating all deductions and credits, especially if the social safety net (i.e. food stamps, home heating assistance, free public education, et cetera) were kept in place or (I wish) expanded to cover everyone who needs them. Most poor and middle class Americans don't itemize their deductions anyway; they really only exist to help those who don't need it (at least as much).
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Re: How does a flat tax simplify anything?

Postby Fast Eddie B » Tue May 21, 2013 5:24 am

As usual, the devil is in the details.

I just wonder how many pages it would take to define "income".

I just faced this when I tried to contribute to my IRA a couple years back. The income I had was not "earned income", and hence did not qualify.

Not opposing the idea of a flat tax, mind you - it will just be complicated keeping it simple!
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Re: How does a flat tax simplify anything?

Postby Atanamis » Tue May 21, 2013 5:35 am

Fast Eddie B wrote:I just wonder how many pages it would take to define "income".

I just faced this when I tried to contribute to my IRA a couple years back. The income I had was not "earned income", and hence did not qualify.
If the goal were simplification, it would define all incoming transfers of money to an individual as income, whether earned, capital gains, or inherited. As I've said in other threads, my preference would be more like Halgy's of using progressive marginal rates without itemized deductions. Add up all your income from any source, apply the marginal rates to it, and send in your return. That should be as complicated as it gets.
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Re: How does a flat tax simplify anything?

Postby Dr. Strangelove » Tue May 21, 2013 6:13 am

A consumption tax is flat. Everybody pays the same rate for the same goods and services. Nobody's wealth is confiscated either.

No loopholes. No deductions. No drain on investments. Corporations don't pay taxes other than what they purchase. If they make a huge amount of profit, then good for them. Employees don't pay income taxes. Investors don't pay capital gains taxes.

You just have a hefty consumption tax (but without the huge amount of property, wealth, capital gains, income, and payroll taxes you pay now).

If you gave each American a piece of that tax income which would cover the basic necessities for a very modest life, then nobody can claim wealth was stolen from them. Property doesn't get seized when people can't pay property taxes. Retirement accounts don't get slammed with taxes.

Everything is voluntary. Rich people spend more money, so they end up paying more. They don't have to live rich if they don't want to. It's their choice. Freedom (for real).

It's not utopia. It's not perfect. But it's better than this.
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Re: How does a flat tax simplify anything?

Postby drtrech » Tue May 21, 2013 6:36 am

With a high consumption tax, the wealthy will simply outsource and offshore their spending.
You know what the sad thing is?

We spend 90% of our lives ducking shit storms, begging for money and whoring for votes.

And why do we put ourselves through all that? In order to hold onto jobs that are 90% ducking shit storms, begging for money, and whoring for votes.

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Re: How does a flat tax simplify anything?

Postby Atanamis » Tue May 21, 2013 7:10 am

drtrech wrote:With a high consumption tax, the wealthy will simply outsource and offshore their spending.
If they want to use it here, they would have to import it and could be charged a use tax equal to the consumption tax rate. This is a well understood problem with a commonly used solution.

To reiterate Dr Strangelove's consumption tax goal, he has suggested essentially a 50% inclusive (half the total sale price) consumption tax combined with a $10k per adult automatic tax prebate. So at the beginning of the year, every adult would get a $10k payment from the government to cover essential expenses and any new products they bought would send half of the sales price to the government as tax revenue. This would completely replace all other federal taxes, so there would be no income tax or corporate tax or payroll tax. Running through the math, I had found that this should be close to revenue neutral for the government. It also might allow for reductions in current social services spending, since that is covered by the prebate structure. Most economists (from both socialist and libertarian persuasions) tend to support the idea that it is better to tax consumption than income, the consumption index has historically been more stable than that for income, and even Milton Freedman stated that the ideal form of social welfare (if a society wants to have it) is in the form of tax rebates such as this. I'm not sure I favor this solution, but I've heard enough economists from all ideological sides support it to be curious about the result.
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Re: How does a flat tax simplify anything?

Postby ryanm » Tue May 21, 2013 7:28 am

A wealthy family doesn't drink more milk than a poor family, so they end up paying similar baseline tax rates with a consumption tax. You have to assume the wealthy will buy ferraris and summer homes, which isn't guaranteed, especially with higher sales taxes. The upside being that drug dealers and money launderers buy milk too, so even illegal money gets taxed. The downside is that hoarding is encouraged, which hurts the economy.

I've thought about this a lot, from my own uneducated perspective, and I came up with too many ways around a consumption tax, without the benefit of specialized lawyers to help me, for it to be feasible. I don't claim to know the answer, maybe there isn't a tax plan that you can't work to your advantage, but something like a flat tax without deductions would definitely be more equitable. Even at 14% across the board tax revenue would be up by tens of billions and it would be a tax cut for the majority of Americans.

I also agree that the real complication here is taxing corporations. I don't have any brilliant ideas how to solve it, but if you don't tax corporations they become income shelters, encouraging hoarding, which, again, is bad for the economy. Why buy houses and cars when a company can own them and you can use them, without paying taxes on the income? Hell, I have an LLC, why not just put my house and car in the company's name, let all my income go to the company, and accept housing, a vehicle, phone service, etc as a benefit? It would increase my effective income by more than 30%.
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Re: How does a flat tax simplify anything?

Postby Atanamis » Tue May 21, 2013 8:11 am

ryanm wrote:The downside is that hoarding is encouraged, which hurts the economy.
The upside is that reinvestment and making income are encouraged, as is consumption of used goods (which are exempt from consumption tax). It does indeed assume the wealthy will continue to consume, but then an income tax assumes they will continue to amass wealth. Any tax scheme makes assumptions. That said, I would be perfectly willing to layer a 2% wealth tax on all wealth over $5 million. I picked that number as one that would readily cover all middle class retirees. That way we have a tax on hoarding, in addition to the one imposed by intentional currency inflation. You are simply wrong in suggesting a 14% flat tax would bring in more revenue, the mean effective tax rate in 2009 was 17.4%, and was the lowest it has been in 30 years. It would take at least an 18% flat tax to remain revenue neutral, and a 22% one to return to historical norms.

To answer your "corporate tax shelter" question, the answer is that what you describe is already illegal, and would remain illegal. It is absolutely not legal to use your corporation to buy houses and cars for personal use through a corporation without having them reported as individual income. If we were to remove corporate taxes, we would need to enforce these laws more strictly but the laws themselves are already in place. Any private use of company resources legally needs to be reported as part of your compensation, and that includes car mileage driving to and from your primary place of employment since that isn't legally permitted to be filed as a business expense. And currently, those expenses aren't taxable to the business anyway. They are considered business expenses, and therefore are NOT taxed at the corporate tax rate. Only profits are taxable, not revenues or total corporate value. If you truly own an LLC, I would highly recommend you talk about this with your accountant or tax attorney since you don't seem to understand the law in this area.
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Re: How does a flat tax simplify anything?

Postby Fast Eddie B » Tue May 21, 2013 8:54 am

Atanamis wrote:If the goal were simplification, it would define all incoming transfers of money to an individual as income, whether earned, capital gains, or inherited.


Sounds simple enough.

Would that include...

Life insurance proceeds?

Social Security distributions?

IRA distributions (simple)?

IRA distributions (Roth - already taxed)?

Stock options (not exercised)?

Capital gains on the sale of a house if those gains are reinvested in a new house?

And so on.

If you say "yes" to all of the above, one could make the case that it violates prior obligations. For instance, the whole idea of the Roth IRA was to bite the bullet and pay taxes now on the condition they not be taxed later.

Again, these questions are just off the top of my head. Again, how many pages to answer questions like these and others?
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Re: How does a flat tax simplify anything?

Postby Dr. Strangelove » Tue May 21, 2013 11:22 am

I don't think you can really turn corporations into income shelters without some seriously egregious legal loopholes. If you didn't tax companies but ensured you taxed every dime in salaries, wages, options, and dividends, then there are no real ways for money to leak out of the company. Of course people can put money into the company, but by doing so, they automatically turned it into taxable income when they try to take it back out. So they have to do so with some real investment goal in mind to recover anything.

If you were to continue the present income and capital gain tax model, then I would argue we ought to combine the two rates into a single rate. If your tax bracket puts you at 15% tax rate, then that's what you pay in capital gains and income both. Likewise, if you are a one percenter, then you would likely pay closer 50% capital gains. But a corporation I don't think should be charged. They should operate like there exist no such restraints. People can put money into a corporation to trade for them, and it can do so without income taxes while it controls those funds, but as soon as they try to recover their profit, they are taxed on that profit.
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Re: How does a flat tax simplify anything?

Postby ryanm » Tue May 21, 2013 9:48 pm

Atanamis wrote:The upside is that reinvestment and making income are encouraged, as is consumption of used goods (which are exempt from consumption tax).

Hmmm... Apple seems to be holding several billion in foreign shelter companies that aren't taxable, and simply keeping that money outside the US so they never have to pay taxes on it.

It would take at least an 18% flat tax to remain revenue neutral, and a 22% one to return to historical norms.

Either would be a tax break for me. But you're also assuming no corporate tax. If corporations paid the same rates it would balance out at a much lower percentage.

If you truly own an LLC, I would highly recommend you talk about this with your accountant or tax attorney since you don't seem to understand the law in this area.

I truly do. I haven't used it for anything in several years since I'm no longer self employed, and my employer manages payroll taxes for me. When I was doing business for myself I had an accountant that managed the taxes for me, being not at all interested in the day-to-day paperwork, and focusing on the actual work. I may need to close it, since its not making any money anymore.
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Re: How does a flat tax simplify anything?

Postby Atanamis » Wed May 22, 2013 8:26 am

Ryanm, you are correct that corporate stockpiling would remain untaxed, but it wouldn't need to be held in stockpiles without corporate taxation. It would instead be more likely to be reinvested, throwing off salaries and benefits. And the wealth tax I mentioned would hit even stockpiles, since growing corporate assets increases the value of that corporation and would result in wealth taxes for those affected.

ryanm wrote:
It would take at least an 18% flat tax to remain revenue neutral, and a 22% one to return to historical norms.

Either would be a tax break for me. But you're also assuming no corporate tax. If corporations paid the same rates it would balance out at a much lower percentage.
This is a nonsensical statement. Who do you believe would pay paying this "corporate tax"? Do you think this would just be magical money that would be paid by a "legal person"? This money would come from real people, just like it does today. The entire POINT of a flat tax system is to simply the tax code, and maintaining a ridiculous corporate tax system in parallel would defeat the entire point.

ryanm wrote:
If you truly own an LLC, I would highly recommend you talk about this with your accountant or tax attorney since you don't seem to understand the law in this area.
I truly do. I haven't used it for anything in several years since I'm no longer self employed, and my employer manages payroll taxes for me. When I was doing business for myself I had an accountant that managed the taxes for me, being not at all interested in the day-to-day paperwork, and focusing on the actual work. I may need to close it, since its not making any money anymore.
I know many people in your position, including several who will be big trouble if they ever get audited. Be very careful about thinking that you can hide personal benefits you consume by packaging them as "corporate expenses". Doing this is entirely illegal, and if you ever get audited you will pay damages for the violation. Make sure you discuss with your accountant "work" expenses that are in fact personal. Like I mentioned, even things like driving to your primary place of employment are technically not considered work expenses, and claiming them as such is illegal:
http://www.foxbusiness.com/personal-finance/2011/03/31/dont-dare-deduct-expenses/ wrote:You can't deduct the cost of your main home telephone land line, even if you primarily use that phone for your business. The IRS says that the first hard-wired phone line in your home is considered a nondeductible personal expense.
....
The cost of getting to and from your workplace is never deductible. Taking public transportation or driving to work is a personal expense, regardless of how far your home is from your office. And no, you can't deduct commuting expenses even if you work during the commute.
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Re: How does a flat tax simplify anything?

Postby drobviousso » Wed May 22, 2013 8:43 am

cgervasi wrote:Suppose for a moment that you could link the two, maybe in the form of a Constitutional amendment that requires a flat tax and no deductions. That would do absolutely nothing for businesses calculating their income. If they buy a large machine this year, can they deduct it all at once or must they depreciate it?


I just want to highlight this part right here. The answer is no. If there are no deductions, there are no deductions for capital investments.

The flat tax and no deductions are actually 2 different concepts that are often tied together because people who like one usually like the other.

The purpose of the flat tax is to eliminate the perverse incentive to make your next hour of work / dollar of income less valuable than your first. This perverse incentive causes people to work and earn less than they normally would. (Arguably. This point is debated by people smarter than me) (Usually, the first $x of income is not taxed at all, creating a bit of perversion around $x of income a year, but that would probably result in less perversion than a progressive tax, like we have, while still being progressive in practice)

The purpose of no deductions is primarily to avoid the tangled morass of a tax code we are currently working under. It distorts behavior in ways that no one intends, and has a very high compliance cost. Those two things are drags on the economy that have no public benefit. They are great for tax prep and attorneys, also for people with large tax burdens that get a ROI on hiring tax prep and attorneys to find and lobby for loopholes. Those are at best 0 sum transfers but more likely net drains on the economy.

The no deductions rule would give up the theoretical free lunches in the tax code (deductions for capital investments on the theory that the resulting productivity will be taxed, to the good of all) in exchange for eliminating unanticipated or just plain bad distortions. You can use the fact that they are called "theoretical free lunches" to guess my opinion on the validity of them.

I think most no deduction advocates think that if you are going to subsidise activity or apply pigovian taxes, it is better to do it with direct subsidies or direct taxes/fines, not shoe-hored into the income tax.
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Re: How does a flat tax simplify anything?

Postby Halgy » Wed May 22, 2013 2:56 pm

What if the consumption tax is structured like some of those in Europe? That is, with some stratification. Necessities (e.g. food) are taxed at low (or non-existent) tax rate, normal things at a higher tax rate, and luxury goods (e.g. yachts) at a higher rate still. This helps preserve the progressivity of tax at the high end while preventing a tax from being regressive on the low end. It would also eliminate (or significantly reduce) the need for a prebate. All in all, pretty simple.

This method would also allow for some 'discouragement tax'. While I know Mr. Carlin (and probably many of you) don't like the government meddling with the populace this way, some products produce negative externalities*1 and therefore create problems. A typical example is the health cost that comes from using tobacco, the monetary cost of which is passed onto society at large. A "sin" tax has the dual purpose of covering the healthcare cost and discouraging use in the first place (an ounce of prevention and all that).

Thoughts?

*1 http://en.wikipedia.org/wiki/Externality#Negative
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