Arkady
President
A lot of conservatives would like to see some kind of flat tax, whether that be a Steve-Forbes-style flat income tax, or the so-called "Fair Tax," which would be a national sales tax. But I think few have ever bothered to crunch the numbers. So, in the interest of creating a more educated debate, I'm sharing the numbers here. I hope someone will take the challenge and show me how they think a flat tax could work.
Currently, the federal government spends $3.796 trillion per year. So, to have a balanced budget, that's the amount you need your tax plan to bring in. If you think you can cut 10% out of the budget, then your tax plan needs to bring in about $3.416 trillion. So, pick your target spending level, within reason, and see whether you can get tax revenues there.
Now, decide what taxes you're looking to replace with your flat tax. Are you just replacing individual income taxes? All individual taxes (including payroll taxes)? All federal taxes (including corporate and excise taxes)?
Let's say you're looking to replace all individual taxes. In that case, you can subtract from your target $463 billion (the amount the government will continue to bring in from those non-individual taxes). So, your target is now $3.333 trillion, if you're trying to replace current federal spending, or $2.953 trillion, if you're assuming you can find 10% savings in the budget.
Here's the raw data to work with:
http://www.census.gov/hhes/www/cpstables/032011/hhinc/new06_000.htm
For now, all you really need is the "total" row. It tells you there are 118,682,000 households in the US, with a mean income of $67,530. Multiply these, and you'll see that you have approximately $8 trillion of total household income to work with. So, if you want to get $3.333 trillion with a flat tax, the math is simple. You need a flat tax of about 41.5%.
That probably seems high, and that's partly because I rigged the calculation by starting with the assumption that we're trying to create a balanced budget. If you run the numbers again with the assumption we're cool with the current deficit continuing indefinitely, then you only need $2.469 trillion in receipts, of which $463 billion will come from non-individual taxes, leaving you about $2 trillion to get through your flat tax, meaning a 25% flat-tax rate will work.
So, what would a 25% rate mean? Well, for lots of rich people, it would be a nice windfall. I'm fairly well-off, and I currently pay around 23%, effectively, for income taxes. I pay about another 12% on payroll taxes (discounting the SS holiday, considering the SS tax cap, and including the employer portion, plus Medicare). So, the total effective individual tax rate for my household is about 35%, meaning I'd experience that flat tax as a big tax cut of about 10 percentage points. But, that isn't "free money." It has to come from somewhere, just as the vastly larger cut that the very rich would experience would have to come from somewhere. Where would it come from? Obviously, it would come from the poor and working class.
Let's say you are a pretty typical middle-class household, earning $50,000 per year. You currently pay around 14.2% in total federal taxes (Google "effective tax rate by quintile" for historical numbers on where effective tax rates come out). Add back the employer portion of SS, and you're up to 20.4%, as what a typical household is currently paying, directly and indirectly, to federal taxes. That means that typical person is going to experience the flat tax as a tax increase of 4.6%.... or, to put it in dollar terms, Uncle Sam's going to be taking an extra $2300 out of that family's tight annual income. Basically, there goes the family vacation.
Things are even rougher near the bottom. Say you're a member of the lower-middle class (the second income quintile). Currently, counting the employer portion of SS, you pay 16.1% in total federal taxes. So, the 25% flat tax would be an 8.9% tax hike for you. That's the kind of thing that would require very serious economizing, and would trigger massive bankruptcies and other problems. And for a bottom quintile household, it would be a 14.5% tax hike -- enough to make a poor family utterly destitute. But even the upper-middle class would be paying a bit more under the flat tax. Only when you get up around the top 10% of earners would there be any savings associated with the change. Essentially, you're pushing through a tax hike for 90% of Americans in order to create a big tax cut for the richest 10%.
So, will any of the flat-tax proponents here rise to the challenge? Where, exactly, would you set the flat tax rate? Which taxes would you eliminate in the process? How much would you need to count on finding in budget savings? Where, exactly, would you find them? What would the resulting deficit be? And what percentage of Americans would have higher taxes under your system?
If you go to the link I provided above, you can also crunch the numbers for a progressive tax system. For example, you can see that raising the effective tax rate on those making $250,000 and over by 10 points would bring in nearly a hundred billion dollars (while only impacting the richest 2% of the population). You can copy the data from that table into Excel and play around with it, to create what you think is the most fair and reasonable tax structure, to get you to $2 trillion (or $3.333 trillion, if you'd like a balanced budget). If you play around with that, you'll find it's not that hard to get to a good number once you embrace the concept of progressive taxation, but if you make the system less progressive that currently, it becomes impossible to generate enough revenues without absolutely devastating the working class.
Currently, the federal government spends $3.796 trillion per year. So, to have a balanced budget, that's the amount you need your tax plan to bring in. If you think you can cut 10% out of the budget, then your tax plan needs to bring in about $3.416 trillion. So, pick your target spending level, within reason, and see whether you can get tax revenues there.
Now, decide what taxes you're looking to replace with your flat tax. Are you just replacing individual income taxes? All individual taxes (including payroll taxes)? All federal taxes (including corporate and excise taxes)?
Let's say you're looking to replace all individual taxes. In that case, you can subtract from your target $463 billion (the amount the government will continue to bring in from those non-individual taxes). So, your target is now $3.333 trillion, if you're trying to replace current federal spending, or $2.953 trillion, if you're assuming you can find 10% savings in the budget.
Here's the raw data to work with:
http://www.census.gov/hhes/www/cpstables/032011/hhinc/new06_000.htm
For now, all you really need is the "total" row. It tells you there are 118,682,000 households in the US, with a mean income of $67,530. Multiply these, and you'll see that you have approximately $8 trillion of total household income to work with. So, if you want to get $3.333 trillion with a flat tax, the math is simple. You need a flat tax of about 41.5%.
That probably seems high, and that's partly because I rigged the calculation by starting with the assumption that we're trying to create a balanced budget. If you run the numbers again with the assumption we're cool with the current deficit continuing indefinitely, then you only need $2.469 trillion in receipts, of which $463 billion will come from non-individual taxes, leaving you about $2 trillion to get through your flat tax, meaning a 25% flat-tax rate will work.
So, what would a 25% rate mean? Well, for lots of rich people, it would be a nice windfall. I'm fairly well-off, and I currently pay around 23%, effectively, for income taxes. I pay about another 12% on payroll taxes (discounting the SS holiday, considering the SS tax cap, and including the employer portion, plus Medicare). So, the total effective individual tax rate for my household is about 35%, meaning I'd experience that flat tax as a big tax cut of about 10 percentage points. But, that isn't "free money." It has to come from somewhere, just as the vastly larger cut that the very rich would experience would have to come from somewhere. Where would it come from? Obviously, it would come from the poor and working class.
Let's say you are a pretty typical middle-class household, earning $50,000 per year. You currently pay around 14.2% in total federal taxes (Google "effective tax rate by quintile" for historical numbers on where effective tax rates come out). Add back the employer portion of SS, and you're up to 20.4%, as what a typical household is currently paying, directly and indirectly, to federal taxes. That means that typical person is going to experience the flat tax as a tax increase of 4.6%.... or, to put it in dollar terms, Uncle Sam's going to be taking an extra $2300 out of that family's tight annual income. Basically, there goes the family vacation.
Things are even rougher near the bottom. Say you're a member of the lower-middle class (the second income quintile). Currently, counting the employer portion of SS, you pay 16.1% in total federal taxes. So, the 25% flat tax would be an 8.9% tax hike for you. That's the kind of thing that would require very serious economizing, and would trigger massive bankruptcies and other problems. And for a bottom quintile household, it would be a 14.5% tax hike -- enough to make a poor family utterly destitute. But even the upper-middle class would be paying a bit more under the flat tax. Only when you get up around the top 10% of earners would there be any savings associated with the change. Essentially, you're pushing through a tax hike for 90% of Americans in order to create a big tax cut for the richest 10%.
So, will any of the flat-tax proponents here rise to the challenge? Where, exactly, would you set the flat tax rate? Which taxes would you eliminate in the process? How much would you need to count on finding in budget savings? Where, exactly, would you find them? What would the resulting deficit be? And what percentage of Americans would have higher taxes under your system?
If you go to the link I provided above, you can also crunch the numbers for a progressive tax system. For example, you can see that raising the effective tax rate on those making $250,000 and over by 10 points would bring in nearly a hundred billion dollars (while only impacting the richest 2% of the population). You can copy the data from that table into Excel and play around with it, to create what you think is the most fair and reasonable tax structure, to get you to $2 trillion (or $3.333 trillion, if you'd like a balanced budget). If you play around with that, you'll find it's not that hard to get to a good number once you embrace the concept of progressive taxation, but if you make the system less progressive that currently, it becomes impossible to generate enough revenues without absolutely devastating the working class.
