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I know quite a few people who support the flat tax, and those folks all have one thing in common: They think a flat tax will make their own taxes lower. That's why the flat tax is bullshit. It can never live up to its imagined promise of lowering taxes for every individual while keeping tax revenues neutral or higher.

I think most people like the idea of a simpler tax code. No argument there. But I've never met a person who would volunteer to pay higher taxes in exchange for simplicity.

The flat tax idea is a brilliant bit of psychological class warfare. At least I hope that's what it is. I'd hate to think the people in the highest tax brackets, i.e. my peeps, are as dumb as the people they hope to screw with promises of unicorns and flat taxes.

The flat tax diversion is a deliciously cynical way to maintain the status quo while appearing to be in favor of change.  The diversion works because the middle class has been duped by the media into thinking high income people pay a lower tax rate than the general public, so maybe a flat tax will set things right. That's the power of anecdotes. If you hear a few stories about Warren Buffett paying a lower tax rate than his secretary, you assume your dentist is beating the system too. He probably isn't.

Another brilliant aspect of the flat tax argument is that it's simple to explain, and our brains are wired to perceive simple solutions as better than complicated ones. In reality, the simplest solution is usually the one that comes from someone who is either trying to screw you or who isn't capable of understanding the full situation.

The flat tax diversion is weasel-clever because it shines a light on the absurd "fairness" argument coming from the folks who want to raise taxes on the rich. Fairness is an illusion our parents taught us as kids to make us stop fighting with our siblings over the appropriate division of candy. Fairness isn't an objective quality of the real world. The reality is that the rich willingly pay higher taxes for the same reason that the British monarchy willingly converted from a dictator model to a symbolic role: If you want to avoid being beheaded, sometimes you need to be flexible.

Personally, I'm quite comfortable paying taxes at the highest rate. It's like paying protection money to the Mafia, and I mean that in the best possible way. High taxes reduce the odds that jealous mobs will kill me for succeeding in my chosen field. Oh, and my taxes are also helping fund national defense, education, social program, and other good stuff. That's a win-win. But please don't insult me with arguments of fairness. Save the fairy tales for your kids.

I know some of you will leave comments about your own fairy tales of Laffer Curve economics, in which lower tax rates stimulate the economy and fill the treasury with free money. And then someone will point out that economic growth in the Unites States has often coincided with higher tax rates. Can we agree that the Laffer Curve has been debunked everywhere but on Fox News?

 
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Oct 31, 2011
Scott,

Great blog as usual.

What about eliminating the income tax, but apply a VAT-like tax with essentials excluded? This extends the idea that rich people will pay more because they buy more, but will make everyone who buys something non-essential pay taxes on it at the rate they do so.

So a poor person who spends all their money on non-luxury food, lodging, and clothing doesn't pay any taxes, the poor person who buys just essentials plus Air Jordans and a nice engagement ring pay taxes on the ring and the shoes, but nothing else, and the rich person who eats nothing but caviar and smokes $200 cigars pays taxes on all of it.

So, the more non-essentials you enjoy, the more taxes you pay, and the poor who are just buying essentials pay nothing. It's also easy to apply, as every item purchased would fall into one category or the other.

Of course that raises the question of who defines essential and luxury, but it seems that some ground rules could apply (how about "if food or clothing costs more than 4x the cost of the unprocessed ingredients/materials, it's a luxury food, so it is taxed", or "lodging more than 300 sqft/person is taxed").

Phil
 
 
+1 Rank Up Rank Down
Oct 28, 2011
Great post Scott, one of your better entries. When debates on taxation break out, I am often reminded of idiots who still insist that one day we'll create a machine that can generate more energy than it consumes. Same concept here - lower taxes and we'll all be rich. Right.....

Although, I am more with the commenters on the laffer curve debate. The theory is real, it's just that the max rate/revenue point is much higher then everyone wants to admit. Fox news and their legions of morons are simply misusing the concept to convince us that at our current tax rates we are on the right side of the curve, which isn't even close.
 
 
Oct 24, 2011
Oh, and a quick link to an interesting Podcast on the discussion:

http://www.econtalk.org/archives/2007/04/rabushka_on_the.html

 
 
+4 Rank Up Rank Down
Oct 24, 2011
Hi Scott

Great post, as always! At one point I held a very similar point of view as you do, but it's changed over the last few year. The point I always missed, was that a flat tax is not at all about reducing the tax burden for any individual, or all individuals - it's about reducing the complexity of the tax code, and about allowing all of the individuals who currently dedicate themselves to being tax lawyers to go and do something else innovative and interesting. Furthermore, to the extent that there will be tax decreases for individuals the goal is not for other individuals to subsidise those tax decreases, but for the decreased costs of enforcement and compliance to allow lower taxation (looking at overall taxation costs), while the government still gets the same revenue. A quick and dirty example:

Under the current regime, Corporation A pays $100 million in taxes. They also spend $10 million a year complying with the tax code, and making sure they are paying as little taxes as possible without breaking the law. The Government spends $1 million making sure that this is the case.

In the new example, Corporation A pays $105 million in taxes. But they only spend $1 million a year complying with the tax code, and the government only spends $100 000 on ensuring they comply - and this is all allowed by a vastly simpler tax code.

Knowing how inefficiently Government does some things, and knowing how ridiculously complex the tax system is, I changing the system to be simpler can only be better. For example, it's like a toll road - sure, charging per user is great - but it only makes sense if the additional cost of doing so is low.

Keep writing great posts and creating awesome comics!
 
 
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Oct 24, 2011
so you like paying protection money to the mob to get away with earning your own money?. Well the mob have just raised the protection money percentage to 500% which means you owe them your future. you are essentially a slave. How much is more do you think they will want? Are you hoping that they will let you survive? think they would be foolish enough to kill the hen?. Scott, wake up they are hoping for the hens to lay eggs and come forward to get its head chopped. Stop standing on the platform and crowing this idea to your fellow hens. Well if they follow you they deserve it.
 
 
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Oct 24, 2011
@fledder, of course, you're right, in Holland that rule is for "government" employees and in Germany CEO pay is self-regulation. However, in Holland, TV news anchors fall into that category, so it is a much broader restriction than someone from a non-socialist country might expect. And CEO pay in Germany (and the Netherlands, Spain, Norway, Italy... the whole EU perhaps?) is far more reasonable than in the US by and large. But the point is that, self-regulation or not, the idea of income equality is much more deeply ingrained in most European countries than in it is in the US.

@leora, you don't tax money, you tax people. When money changes hands, one or both !$%*!$%* involved are often taxed based on the nature of the transaction.
 
 
Oct 23, 2011
The only point I would like to make is that correlation does not imply causality. Perhaps a high tax rate causes economic growth, and perhaps economic growth causes a high tax rate. The evidence does not state one way or the other, only that they often (not always) go together.
 
 
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Oct 23, 2011
>The problem I see with the Laffer Curve is that it ASSUMES that economic activity would drop to zero at 100% taxation.

Actually, it assumes that tax revenue would drop to zero, not economic activity. Basically, the high tax forces all economic activity onto the black market. Sounds pretty far fetched, but then again, so does 100% taxation. The laffer curve is just a picture to help you imagine things. It isn't a precisely defined formula.

 
 
+4 Rank Up Rank Down
Oct 22, 2011
I am happy to pay higher taxes in exchange for simplicity. But it's a fallacy that it's necessary.

Remember, there are substantial costs imposed due to the complexity of the tax code. A simpler tax code could lower the cost of compliance and increase tax revenue while lowering overall tax costs.

And, simpler taxes will decrease distortions, increasing economic efficiency. This should lead to increased growth.
 
 
+2 Rank Up Rank Down
Oct 21, 2011
Fairness is a concept that was invented so that children and idiots could participate in arguments.
-Scott Adams

You said that several years ago in here somewhere. I try to only use the word 'fair' to describe a gathering of people around things that could kill them (rides, food, shifty people). If I'm trying to argue with some one, and the only thing I can come up with is "That's not fair!" clearly I have lost.
 
 
Oct 21, 2011
Here's an idea.

Since flat taxes are so bad, let's set them at 50% for the poorest people (defined as those at or below the poverty level) and 1% for the top 1% of income earners. Basically a reverse progressive tax for the goal of taxing people into being wealthy. Since the poor folk take more out of the economy than they put in, they should pay a higher rate. It's fair that they pay more, the leeches. At the top, there'd be competition to be in the top 1% so you'd have the lowest taxes possible so the rich people would try to out grow one another, so they can pay less in taxes legally, and constantly push that top 1% up.

If people want to pay less than a 50% tax rate, do what the 53% are doing: stop whining about their own stupidity, the trolls, and get a job. As an added bonus, let's not give any income tax refunds to anyone who takes more out of the system than they put in.

Since the rich and the powerful are always going to get a tax break, let's just take the loopholes out of it, make it simple, and use it as a carrot for the rest of us to be smart and earn more. Likewise, they can also ask for entitlements to be cut so if the system gives them less, they will get a lower tax burden.
 
 
Oct 21, 2011
The problem I see with the Laffer Curve is that it ASSUMES that economic activity would drop to zero at 100% taxation. That means that everyone would have to decide to sit home and do nothing, buy nothing, eat nothing, etc. This is obviously false. It also seems to assume that the government takes all the money and does nothing with it. To me, it looks like 100% taxation is communism, and, while it does not work all that well (check your history), it does function on some levels. I will agree that 0% results in no revenue. I also did some research and the average assumed tax rate at which revenues peak is around 70%. Believing this does require assuming that economists know what they are talking about, but we're talking an average, so there's probably some validity to it.

Someone said that taxes are a large part of the GDP. Check your facts. Federal taxes are at a 60 year low as part of the GDP.

Several posts mentioned the seemingly outrageous costs for military hardware, like $500 hammers. Much of the cost is due to exacting specifications the military demands and, if I was facing an enemy soldier, I'd want to be confident that my hardware works every time. I remember hearing of a data recorder that went into a nuclear sub. They needed one, but made two and tested one to destruction. Still way cheaper than losing the whole sub and it's crew.
 
 
Oct 21, 2011
Scott, are you saying that an economy with a 98% tax rate will outperform an economy with a 2% tax rate, in refuting Laffer? That seems a bit unlike you. But I get your point.

[If you're looking at the two end points of the Laffer curve to decide if it's valid, your brain is broken. -- Scott]
 
 
Oct 21, 2011
There have been a few comments about the need for corporations to pay taxes.

Has it occurred to you that corporations merely collect taxes for the government? If a corporation is profitable (i.e., they stay in business) then their tax burden must be covered in the price of their products.

The bottom line is that the consumer really pays the corporations taxes, one product at a time.

If you raise taxes on corporations you are really raising taxes on yourselves.

Check out fairtax.org for a truly remarkable taxing system.
 
 
Oct 21, 2011
The best tax plan is the Automatic Payment Transaction tax (http://www.apttax.com/)

In a nutshell, it's micropayments to the government, all handled electronically. It would discourage risky day-trading and hedge trading, and you could tweak it discretely. The best part is the author of the plan realizes that his .3% transaction fee might not be the revenue-neutral number, and has a plan to run a parallel pilot for a year to see how it would work. The actual APT might be .25% or .4%. But at least we'd know ahead of time.....
 
 
Oct 21, 2011
@MyNDIrish

It's possible to design a "progressive" sales tax, in which the wealthy basically pay a higher sales tax than the poor. Basically, you'd keep the existing income tax but add a deduction for all investment.

A sales tax is basically a consumption tax. Economically speaking, income = consumption savings. So a sales tax can be structured as Consumption = income - savings. That is, have an income tax with a deduction for savings.

This keeps the differential progressive rates under the current system, but is economically equivalent to taxing only sales.
 
 
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Oct 21, 2011
Scott wrote: "If you hear a few stories about Warren Buffett paying a lower tax rate than his secretary, you assume your dentist is beating the system too. He probably isn't."

I think it is not "fair" that you assume my dentist to be a male. Don't you think it is "fair" to label you as an anti-female-dentister? Anyway fairness is fairy tale so I will go ahead and label you an AFD.
 
 
Oct 21, 2011
I am no economist, but I'm trying to understand why we have an income tax at all? What would happen if we just increased sales taxes to a level that matched current tax revenues? I'm guessing that rich people buy more things than poor people do. I know this doesn't solve the corporate tax issue, but what about for just plain income taxes. What are the downside arguments for increasing sales taxes? And is there a way to tweak those to make it more palatable? One problem I see is that it is a "flat tax" and will add a burden to the poor. The rich will pay a less percentage of their income, but will pay more in taxes because they buy more. Is it possible to have some system where, if you make less that 20K/year you pay X% in sales tax and if you make more than 250K/year you pay Y% in sales tax? Its already starting to get complicated...
 
 
Oct 21, 2011
You have previously written on the danger of > 50% of voters paying no income tax at all. You are right in that the issue should not be fairness, but the issue should also not be the use of the tax system for social engineering, resulting in a degree of complexity that no one can understand. It costs a ridiculous amount of money just to manage and enforce our convoluted tax system. At least a flat tax would get back to the point of clarity, then the inevitable arguments about who pays for whom and why can resume on a clearer basis.
 
 
+6 Rank Up Rank Down
Oct 21, 2011
@Homr: "In Germany, for example, CEO pay cannot exceed a certain multiple of the lowest-paid employee. In Holland no one can theoretically be paid more than the Prime Minister"

Both statements are wrong. The German example is a moral code only enforced by self-regulation only. That's like asking a lion to become a vegetarian.

The dutch example is misleading since it only applies to government jobs, not private jobs.

Nevertheless, it would be good if the people in the US would set aside their cultural legacy for a moment and have a closer look at some European high-tax countries. They are outperforming you by almost every possible metric due to smaller income inequality. They're not perfect, but their rich people are still rich, and their middle class people have better education, retirement and healthcare than you do. Middle class people here cannot believe many of you face foreclosures, enormous education debts, living paycheck to paycheck, fear of not being able to pay for your healthcare or having to work 2 jobs to survive.

God bless the American way, but please realize it is an extremist way, no other 1st world country has the kind and size of problems your middle class has.
 
 
 
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