Arkady
President
Rand Paul is advocating moving to a single flat tax, as opposed to a graduated income tax. He is also advocating a move that would make it so those who live off unearned investment income get a free ride at the expense of those of us who do productive labor.
It's worth taking a look at the math behind this, and what it would mean to most people. Currently the average effective federal tax rate is around 17.6%.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456
Therefore, in order to be revenue neutral, a new tax system would also have to have an average effective federal tax rate of around 17.6% (probably around a 25% nominal flat tax, with minimal exemptions and some allowance for tax dodging and other collections issues). So, if it was flat, here's what would happen to the effective tax rate of each of the following income percentiles:
0-20th: +15.7
21-40th: +10.6
41-60th: +6.4
61-80th: +2.4
81-90th: -1.0
91-95th: -3.5
96-99th: -6.7
Top 1%: -11.4
If you're lower class, it's a crippling tax hike, which would either force a radical expansion of social spending or would result in mass starvation and homelessness. If you're middle class, it's still a big tax hike. For those right in the middle, they'll be handing Uncle Sam $1.57, under the new system, for every $1 they currently hand him. Even the upper-middle class will be getting hosed.
If you're lower-upper-class, it's a small tax cut, while for those in the upper reaches, it becomes a more significant cut. And for the very richest, it's a gigantic cut. In fact, those numbers don't do justice to just how much a tax scheme like Paul's would favor the wealthy, since he couples it with an elimination of taxes on investment income, the lion's share of which is "earned" by the rich.
If you're cutting out the $100 billion or so of capital gains tax revenues, plus around $20 billion in estate and gift taxes (another sweetheart deal from Paul to the wealthy), and who knows how much more in interest and dividends taxes, and you want revenue neutrality, you're going to need to hike taxes on the working classes even more than the figures above indicate. You wind up with an effective income tax hike on over 90% of Americans.
For the ultra-rich, the Paul tax cut would be truly epic. Take Mitt Romney, for example. Using the numbers he filed in 2012, when he earned $13.7 million, only $200,000 of which was for actual labor (the rest being investment income), Romney would pay an effective tax rate of less than 0.3% -- down from an already shockingly low 14.1%. So, for him it would be a reduction of 13.8 points, and he'd pay less, not just as a rate but even in dollar terms, than millions of hard-working professionals who earn a fraction what he does. For Romney, it means approximately $1.9 million more in his pocket per year. I'm sure that'll help finance the next dancing horse or car elevator.
It's not hard to get why super-rich people love the idea of a flat tax. It's just not clear why anyone else does.
Just to clarify, Rand Paul doesn't propose a 17.6% rate. His proposal is 17%, and he allows for various exemptions. However, if you're starting out below the current 17.6% effective rate, just for the nominal rate, and allowing exemptions, then the effective rate will wind up far below the current effective rate, meaning a massive revenue shortfall and a gigantic increase in deficits. My math is for a revenue-neutral tax cut, not one that would drive the country into financial ruin like Paul's. Paul's own campaign admits his plan would cut revenues by $700 billion per year. So, it's a fairy-tale tax scheme based on the idea that we can radically slash federal spending even as we hike the tax bill for the vast majority of Americans, all to make the wealthy few even richer.
And as horribly as this scheme would work right from the start, it would get even worse with time. Given the free ride for investment income, employers would soon realize that they can hire people cheaper if they make their incomes tax-free by disguising it as investment income rather than salaries and wages. We already see some of that today, with senior execs and hedge fund managers getting a big part of their pay disguised in those ways to take advantage of lower taxes on investment income, but there's little incentive to do that for those who aren't very rich today, since their income tax rates aren't appreciably higher (and are sometimes lower) than rates on investment income. But if you have a 0% rate on investment income, the incentive will be there to structure everyone's compensation in such a way as to characterize as much as possible as investment income. For example, give all employees special "preferred stock" that pays most of their incomes as "dividends," and leave them with only a minimum-wage income taxable at income tax rates. And that will further crater revenues, requiring still higher tax rates on those still paying income taxes. It's a death spiral that anyone could see coming.
It's worth taking a look at the math behind this, and what it would mean to most people. Currently the average effective federal tax rate is around 17.6%.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456
Therefore, in order to be revenue neutral, a new tax system would also have to have an average effective federal tax rate of around 17.6% (probably around a 25% nominal flat tax, with minimal exemptions and some allowance for tax dodging and other collections issues). So, if it was flat, here's what would happen to the effective tax rate of each of the following income percentiles:
0-20th: +15.7
21-40th: +10.6
41-60th: +6.4
61-80th: +2.4
81-90th: -1.0
91-95th: -3.5
96-99th: -6.7
Top 1%: -11.4
If you're lower class, it's a crippling tax hike, which would either force a radical expansion of social spending or would result in mass starvation and homelessness. If you're middle class, it's still a big tax hike. For those right in the middle, they'll be handing Uncle Sam $1.57, under the new system, for every $1 they currently hand him. Even the upper-middle class will be getting hosed.
If you're lower-upper-class, it's a small tax cut, while for those in the upper reaches, it becomes a more significant cut. And for the very richest, it's a gigantic cut. In fact, those numbers don't do justice to just how much a tax scheme like Paul's would favor the wealthy, since he couples it with an elimination of taxes on investment income, the lion's share of which is "earned" by the rich.
If you're cutting out the $100 billion or so of capital gains tax revenues, plus around $20 billion in estate and gift taxes (another sweetheart deal from Paul to the wealthy), and who knows how much more in interest and dividends taxes, and you want revenue neutrality, you're going to need to hike taxes on the working classes even more than the figures above indicate. You wind up with an effective income tax hike on over 90% of Americans.
For the ultra-rich, the Paul tax cut would be truly epic. Take Mitt Romney, for example. Using the numbers he filed in 2012, when he earned $13.7 million, only $200,000 of which was for actual labor (the rest being investment income), Romney would pay an effective tax rate of less than 0.3% -- down from an already shockingly low 14.1%. So, for him it would be a reduction of 13.8 points, and he'd pay less, not just as a rate but even in dollar terms, than millions of hard-working professionals who earn a fraction what he does. For Romney, it means approximately $1.9 million more in his pocket per year. I'm sure that'll help finance the next dancing horse or car elevator.
It's not hard to get why super-rich people love the idea of a flat tax. It's just not clear why anyone else does.
Just to clarify, Rand Paul doesn't propose a 17.6% rate. His proposal is 17%, and he allows for various exemptions. However, if you're starting out below the current 17.6% effective rate, just for the nominal rate, and allowing exemptions, then the effective rate will wind up far below the current effective rate, meaning a massive revenue shortfall and a gigantic increase in deficits. My math is for a revenue-neutral tax cut, not one that would drive the country into financial ruin like Paul's. Paul's own campaign admits his plan would cut revenues by $700 billion per year. So, it's a fairy-tale tax scheme based on the idea that we can radically slash federal spending even as we hike the tax bill for the vast majority of Americans, all to make the wealthy few even richer.
And as horribly as this scheme would work right from the start, it would get even worse with time. Given the free ride for investment income, employers would soon realize that they can hire people cheaper if they make their incomes tax-free by disguising it as investment income rather than salaries and wages. We already see some of that today, with senior execs and hedge fund managers getting a big part of their pay disguised in those ways to take advantage of lower taxes on investment income, but there's little incentive to do that for those who aren't very rich today, since their income tax rates aren't appreciably higher (and are sometimes lower) than rates on investment income. But if you have a 0% rate on investment income, the incentive will be there to structure everyone's compensation in such a way as to characterize as much as possible as investment income. For example, give all employees special "preferred stock" that pays most of their incomes as "dividends," and leave them with only a minimum-wage income taxable at income tax rates. And that will further crater revenues, requiring still higher tax rates on those still paying income taxes. It's a death spiral that anyone could see coming.
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