Perry to propose a flat tax

[Core Imposter]

Love him or hate him, Rick Perry will go all in next week with a flat tax proposal that will likely propel him to the nomination or end his chances entirely.

The plan starts with tossing the current tax code. Combined with Perry's tort reform stance you can clearly see huge opposition forming across the tax and legal professions.

But flat tax systems are associated with growth and might be the only path that can get the economy moving without the risks of massive defict spending.

One plan that has made the rounds includes exemptions for the first $25K in personal income. This element is advertised as a way to prevent the plan from being regressive.

I'd like to hear from those here who think a flat tax could be beneficial and what structure it should take, as well as hearing from opponents.

 

[El_Machinae]

A flat tax with a personal exemption is the same thing as a graduated income tax, in the end. I guess it can be popular, because people like the flat tax idea, but it seems like bread-n-circuses to me.

That said, I quite like the $25 exemption. Too many times I've seen a flat tax with a $13k exemption, with the idea that that's the poverty line. But that seems to be arbitrary. Why not a flat tax with a $50k exemption? Or a $100k exemption?

Here's my thinking.

The mean life satisfaction seem to improve with income, but the correlation starts to break down above $40k. So, this means that we want people to get to $40k as quickly and easily as possible. After that, further happiness isn't gained with additional wealth, so we're not hurting citizen happiness by beginning to tax above that.

Those of us who want more than $40k are still going to get more money, no matter the tax rate. It's not like we won't work for more money. If we gain happiness through relative competition ('keeping up with the Joneses'), the flat tax keeps that an even field.

 

[Integral]

A flat tax with a personal exemption is the same thing as a graduated income tax, in the end. I guess it can be popular, because people like the flat tax idea, but it seems like bread-n-circuses to me.

That said, I quite like the $25 exemption. Too many times I've seen a flat tax with a $13k exemption, with the idea that that's the poverty line. But that seems to be arbitrary. Why not a flat tax with a $50k exemption? Or a $100k exemption?

Here's my thinking.

The mean life satisfaction seem to improve with income, but the correlation starts to break down above $40k. So, this means that we want people to get to $40k as quickly and easily as possible. After that, further happiness isn't gained with additional wealth, so we're not hurting citizen happiness by beginning to tax above that.

Those of us who want more than $40k are still going to get more money, no matter the tax rate. It's not like we won't work for more money. If we gain happiness through relative competition ('keeping up with the Joneses'), the flat tax keeps that an even field.

I have a quibble. It's an important quibble, though.

Your claim, "The mean life satisfaction seem to improve with income, but the correlation starts to break down above $40k." makes little sense to me.

What the graphs show is that life satisfaction is proportional to log GDP/capita: a $1 increase in income leads to diminishing life satisfaction, but a 1% increase in income has pretty constant returns throughout the distribution.

It's not that the "correlation breaks down", it's that we need to be careful about level and proportional increases in income.

Take $10 away from a rich person and his life satisfaction goes down by less than if you took $10 from a poor person. But taking 10% of a rich person's income hurts them in about the same way as taking 10% of a poor person's income.

--

So both Cain and Perry have flat tax proposals. (Cain's 9-9-9 plan is economically equivalent to a 27% flat income tax.) It's a common gimmick for Republican candidates. I'm honestly surprised it's taken this long for candidates to roll out their flat tax proposals.

 

[bhsup]

A flat tax with a personal exemption is the same thing as a graduated income tax, in the end. I guess it can be popular, because people like the flat tax idea, but it seems like bread-n-circuses to me.

Respectfully, El Mac, that argument is kinda ridiculous. It's a flat tax on taxable income, so if you exempt an initial amount of income from taxation, it's still a flat rate on the rest. We're kind of damned if we do, damned if we don't, those of us who support a flat tax. We say we want a flat tax, we're accused of being brutal to people in low income brackets. We say, okay fine then exempt whatever the poverty level is from taxable income, and then "oh, but that's not a flat tax anymore, it's graduated just like we have now."

That said, even though I fervently support a flat tax, I can't support Perry. Still standing with Mitt.

 

[Truronian]

Respectfully, El Mac, that argument is kinda ridiculous. It's a flat tax on taxable income, so if you exempt an initial amount of income from taxation, it's still a flat rate on the rest. We're kind of damned if we do, damned if we don't, those of us who support a flat tax. We say we want a flat tax, we're accused of being brutal to people in low income brackets. We say, okay fine then exempt whatever the poverty level is from taxable income, and then "oh, but that's not a flat tax anymore, it's graduated just like we have now."

So what? Yes, the system you propose (with an exemption) isn't a mathematically flat tax system, but that doesn't really matter unless you believe that there is intrinsic value in a tax being 'flat'. Why not just be happy that the system you're proposing is an alternative graduated tax set up?

 

[Crezth]

Take $10 away from a rich person and his life satisfaction goes down by less than if you took $10 from a poor person. But taking 10% of a rich person's income hurts them in about the same way as taking 10% of a poor person's income.

Taking 10% of a rich person's income has less of a noticeable effect on that person's quality of life than it does in the poor person's case. The poor person, for example, may now have to choose between clothes or food this month, if his budget was sufficiently tight. The rich person will barely notice it, especially if it costs him a comparatively small amount of his income to live.

For example, let's assume a case where a poor person needs 90% of his income to live, and a rich person needs 10% of his income to live. If you take 10% from both of these people, the poor person is now unable to pocket any money for personal use or leisure, whereas the rich person is still in a workable scenario - except he "only" gets 80% of his income for leisure.

The problem with the regressive tax is it ignores this subtlety for the sake of "fairness." Income taxes weren't instituted to be fair, though. They were instituted as a practical solution to a problem.

It's not practical to take away most of someone's living wage and then the walking-around money of another person simply due to gaps in their income.

A regressive tax might be a more acceptable solution if the income gap weren't so dramatic to begin with.

 

[Antilogic]

...

But flat tax systems are associated with growth and might be the only path that can get the economy moving without the risks of massive defict spending.

...

The data disagrees with the point you made here. Previous changes to our tax code, which has made it more flat/less progressive (pick your descriptor, I don't care) have not significantly increased growth. Quite the opposite has happened over the last 70 years. We are experiencing the effects of austerity as we speak, since the ARRA programs are expiring, government spending has decreased, people working for federal and state governments are being laid off, etc. Where's the growth?

So what? Yes, the system you propose (with an exemption) isn't a mathematically flat tax system, but that doesn't really matter unless you believe that there is intrinsic value in a tax being 'flat'. Why not just be happy that the system you're proposing is an alternative graduated tax set up?

These are my thoughts exactly. I think it is a 'marketing' concept--the idea of a flat tax sounds fair, so they want to stick with the name.



On taxation policy: the strive to reduce the number of brackets as a goal unto itself always struck me as nonsensical, and I'd love for a flat-tax proponent (or a two-bracket graduated tax proponent, to work with Truronian's language) to explain why. As far as simplifying the tax code goes, wouldn't eliminating some of the slew of deductions make more sense? Or simply counting all income as income, irrelevant of how you got it?

 

[Crezth]

On taxation policy: the strive to reduce the number of brackets as a goal unto itself always struck me as nonsensical, and I'd love for a flat-tax proponent (or a two-bracket graduated tax proponent, to work with Truronian's language) to explain why. As far as simplifying the tax code goes, wouldn't eliminating some of the slew of deductions make more sense? Or simply counting all income as income, irrelevant of how you got it?

I agree with this greatly. I have never understood why capital gains weren't as heavily taxed as "income."

 

[bhsup]

Hey, I personally would be fine with a true flat tax with no exemptions at all. But the social liberals cry about that so I am okay with an exemption for a set amount of initial income. Either way, it IS a flat tax because there is not a progressive rate scale. the rate is the same on all taxable income.

And yeah, I think ALL income should be taxed equally, interest income, payroll income, capital gains income.

 

[Thoughtful Thug]

Debate all you want on trying to figure out the Texan governor's proposal of the flax tax.

Smokescreen really.

Want to find out what he really mean by it, just watch or read any of Rex Tillerson's take on it.

 

[Antilogic]

Holy cross-posting, Batman!

The problem with the regressive tax is it ignores this subtlety for the sake of "fairness." Income taxes weren't instituted to be fair, though. They were instituted as a practical solution to a problem.

It's not practical to take away most of someone's living wage and then the walking-around money of another person simply due to gaps in their income.

A regressive tax might be a more acceptable solution if the income gap weren't so dramatic to begin with.

To add on one of the points you have brought up: one of the original justifications for the implementation of a progressive income tax was to help rectify the income inequality. And it's shocking to think that so many different political ideologies once agreed with this sentiment.

I agree with this greatly. I have never understood why capital gains weren't as heavily taxed as "income."

The reason why I bring it up is that it would actually simplify the tax code. Changing the values on the chart people use in the back of the tax booklet isn't any more or less simple. So the justification for the flat tax as a matter of simplicity seems false to me.

Hey, I personally would be fine with a true flat tax with no exemptions at all. But the social liberals cry about that so I am okay with an exemption for a set amount of initial income. Either way, it IS a flat tax because there is not a progressive rate scale. the rate is the same on all taxable income.

And yeah, I think ALL income should be taxed equally, interest income, payroll income, capital gains income.

The point made was that having an exemption makes two tax brackets, non-taxable and taxable. Thus, it is a (barely) graduated system.

What this comes down to is a semantic matter of the purely mathematical definition of the term and the policy proposal.

 

[Zelig]

Tax curves!

 

[Neonanocyborgasm]

A flat tax is associated with a distribution of wealth that favors higher income earners and penalizes the lower. The lower earners spend a higher proportion of their income on essential items, such as food, rent, and utilities, and so are not only more inconvenienced but must also reduce their consumption, thereby reducing their contribution to the GDP. Higher earners are not inconvenienced by this, as essential items have a fixed price. One could argue that higher earners are left with more money with which they can invest, thereby increasing investment's contribution to the GDP, but I see no reason to believe this. There's no clear incentive for this money to be automatically invested. That's trickle down economics. I've never seen any evidence that a flat tax is associated with increased overall GDP. The only countries that practice it are from the former Soviet bloc, which had communism as an economic system until recently, and though many have grown since, that growth was, for all purposes, coming from nothing.

A flat tax minimizes the protections afforded to lower rungs of society, such as unemployment insurance, food stipends, etc, since less revenue is collected from the rich to redistribute to the poor.

It's natural that Rick Perry would propose a flat tax. It appeals to his corporate sponsors while creating the illusion among the masses that it's fair, since it's the same proportion in all tax margins.

 

[Integral]

Taking 10% of a rich person's income has less of a noticeable effect on that person's quality of life than it does in the poor person's case. The poor person, for example, may now have to choose between clothes or food this month, if his budget was sufficiently tight. The rich person will barely notice it, especially if it costs him a comparatively small amount of his income to live.

For example, let's assume a case where a poor person needs 90% of his income to live, and a rich person needs 10% of his income to live. If you take 10% from both of these people, the poor person is now unable to pocket any money for personal use or leisure, whereas the rich person is still in a workable scenario - except he "only" gets 80% of his income for leisure.

The problem with the regressive tax is it ignores this subtlety for the sake of "fairness." Income taxes weren't instituted to be fair, though. They were instituted as a practical solution to a problem.

It's not practical to take away most of someone's living wage and then the walking-around money of another person simply due to gaps in their income.

A regressive tax might be a more acceptable solution if the income gap weren't so dramatic to begin with.

Your heuristic argument makes sense but there are data on this: see September 2010 PNAS for a study using very large sample of Americans. Abstract:

Recent research has begun to distinguish two aspects of subjective
well-being. Emotional well-being refers to the emotional quality of an
individual’s everyday experience—the frequency and intensity of ex-
periences of joy, stress, sadness, anger, and affection that make one’s
life pleasant or unpleasant. Life evaluation refers to the thoughts that
people have about their life when they think about it. We raise the
question of whether money buys happiness, separately for these two
aspects of well-being. We report an analysis of more than 450,000 re-
sponses to the Gallup-Healthways Well-Being Index, a daily survey of
1,000 US residents conducted by the Gallup Organization. We find
that emotional well-being (measured by questions about emotional
experiences yesterday) and life evaluation (measured by Cantril’s Self-
Anchoring Scale) have different correlates. Income and education are
more closely related to life evaluation, but health, care giving, loneli-
ness, and smoking are relatively stronger predictors of daily emotions.
When plotted against log income, life evaluation rises steadily. Emo-
tional well-being also rises with log income, but there is no further
progress beyond an annual income of ∼$75,000. Low income exacer-
bates the emotional pain associated with such misfortunes as divorce,
ill health, and being alone. We conclude that high income buys life sat-
isfaction but not happiness, and that low income is associated both
with low life evaluation and low emotional well-being.

Source: Kahneman and Deaton, "High income improves evaluation of life but not emotional well-being," PNAS September 21, 2010.

We can sort of recover El_Mac's original claim for incomes over $75,000 and for emotional well-being, but not for the specific case of life satisfaction.

 

[Core Imposter]

That said, even though I fervently support a flat tax, I can't support Perry. Still standing with Mitt.

Good for you. Although I've yet to find a conservative that supports Romney down here in NC, I do know some rhinocrats who do, and though that support might not have weakened in the moment at the sight of a battered and confused Romney begging Anderson Cooper for a eight count last night, once the highlights from the knockdown are edited and run though the ad cycle ad infinitum I am pretty sure it will evaporate. Nelson Romneyfeller is a contender only in the pale gleam of a passing thought.

 

[Archbob]

The reason for the lower capital gains rate is because its taxed by sale and trade and not by year unfortunately. It creates a lock-in effect and makes people not want to trade because if you want to trade 50 shares of company A for 50 shares of B, you have to pay the tax on 50 shares of A first, therefore you would only be able to buy 40 shares of B now. It discourages trading because in that case, it might just be better to keep company A's shares instead of losing 35% first and then buying B's shares.

 

[Integral]

Tax curves!

I remember this post and I remember that I failed to comment on it.

My short comment is: I see nothing wrong with it in principle and I could probably figure up a not-too-hokey example in which such a curve would be welfare-enhancing.

 

[Bootstoots]

On taxation policy: the strive to reduce the number of brackets as a goal unto itself always struck me as nonsensical, and I'd love for a flat-tax proponent (or a two-bracket graduated tax proponent, to work with Truronian's language) to explain why. As far as simplifying the tax code goes, wouldn't eliminating some of the slew of deductions make more sense? Or simply counting all income as income, irrelevant of how you got it?

The idea I have is that it would make sense to radically simplify the tax system in one stroke - by eliminating all deductions (except a large personal exemption), counting all income including capital gains as income, and cutting out all the brackets all at once. The countless thousands of pages of tax code would be replaced with a new code containing few hundred, and all tax returns would be a single page in length, plus supporting documents.

So this sort of tax would just be a vastly simpler scheme overall, and by including all income and exempting ~25k/person, I doubt it would be any less progressive than the convoluted one we have today. I suspect it would also markedly reduce overhead just by being far simpler.

 

[Archbob]

So this sort of tax would just be a vastly simpler scheme overall, and by including all income and exempting ~25k/person, I doubt it would be any less progressive than the convoluted one we have today. I suspect it would also markedly reduce overhead just by being far simpler.

But it will increase unemployment because a lot of accountants and lawyers would be out of work.

 

[ParadigmShifter]

But it will increase unemployment because a lot of accountants and lawyers would be out of work.

What's the downside?