One tax rate for all, levied on gross income, with no deductions or exemptions—how simple, almost elegant, the flat tax sounds in its purest form. A flat income tax like that, or even that plan with a few modifications, could make the filing of one’s federal income taxes a snap—with no assistance required, not even a software program. If the flat tax rate were low enough, many people would willingly give up their tax exemptions and deductions. At least they think they would.
But the flat tax is a bad deal for several reasons. And would-be supporters ought to ask serious questions of anyone who proposes it, especially in an election year, when it is being offered to voters like a bag of candy.
The key question is: What is meant by gross income? Does the term mean wages only, or wages plus Social Security and pension and all other income—like cash or stock bonuses, interest, investment dividends and capital gains, inheritances and other valuable gifts? Could one still stash wealth, for example, in nontaxable municipal bonds? Some billionaires currently pay very low taxes because their wealth does not depend on wages but rather on other sources of income that is taxed at lower rates. If all sources of income are not included in a federal flat tax plan, then the major sources of income “earned” by the wealthiest Americans may not be subject to the tax.
That brings up the primary drawback of a federal flat tax: it cannot pass a fairness test. Consider a hypothetical case of two earners, one with a $50,000 annual income and the other with a $5 million income and a flat tax rate of 20 percent for both. The first earner would pay $10,000 in taxes; the second, $1 million. Yet the lower earner still carries the greater burden, because it is much harder to live on $40,000 a year after taxes than to live on $4 million. The price of a sack of groceries, a gallon of gas, a doctor’s visit or a new car does not vary much, regardless of the purchaser’s income. That is why consumption taxes and flat income taxes are both deemed regressive. A flat tax rate, many economists say, places a disproportionate burden on middle and low earners.
Catholic social teaching adds much to this discussion. The reflection “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority,” published by the Pontifical Council for Justice and Peace on Oct. 24, applies basic ethical principles to the global economy and the goal of the common good. It also notes that although the average per capita income has risen over the last 100 years, “the distribution of wealth did not become fairer but in many cases worsened.”
In their pastoral letter “Economic Justice for All” (1986), the U.S. Catholic bishops promoted commutative and distributive justice. The former pertains to fundamental fairness in agreements and exchanges, like that between employers and workers; the latter pertains to the allocation of income, wealth and power, judged in light of its effects on the poor (Nos. 59, 60). The bishops, concerned to remedy the “inequitable concentration of privilege,” supported the view that tax assessments should be based on the “ability to pay” (No. 72). Taxation, they wrote, ought to “raise adequate revenues to pay for the public needs of society”; follow “the principle of progressivity, so that those with relatively greater financial resources pay a higher rate of taxation”; and exempt those with incomes below the official poverty line. The bishops also noted that “most sales taxes and payroll taxes place a disproportionate burden on those with lower incomes” (No. 202).
But the Tax Policy Center found that Herman Cain’s 9-9-9 tax scheme would raise $300 billion less than the current tax system. Low revenue would force the government to cut services or to borrow, adding to the deficit, or to levy additional taxes like a V.A.T. or national sales tax. Governor Rick Perry’s flat tax aims to cut government services, which would exacerbate the “inequitable concentration of privilege.”
Since 1913, when the federal income tax was instituted, U.S. tax policy has followed the principles of progressive taxation, based on fairness and the taxpayer’s ability to pay. Without doubt, current tax policy has become overly complex and riddled with loopholes. The tax code needs to be simplified and reformed next year, when the Bush-administration tax cuts are set to expire (again). In fact, the tax rates are not nearly progressive enough, especially for high earners. The millionaire pays the same rate as the billionaire, even though the gap between them is enormous—a situation that cries out for adding more tax rates at the top end of the spectrum. But while tax reform and simplification are critical needs, these ought not be confused with untested notions like the flat tax and its various modifications. Better to simplify the current system and make it more progressive and more fair. At best, the flat tax is simplistic; at worst, it could prove devastating.
The flat tax that Freedomworks proposed in the 2007 (HR3818) session would have been for families 10% of income up to $100,000 and if income is over $100,000 then $10,000 plus 25% of anything over $100,000. For individuals, it would be 10% up to $50,000 and 25% of everything after that.
Standard deductions would be $25,000 for a couple, $12,500 for individuals. That would make the tax curve fairly simple, $0 up to your deduction, 10 cents on the dollar up to the single inflection point of 50k/100k and then 25% thereafter.
In your hypothetical, an individual earning $50k would subtract out $12.5k and owe $3750. A $5M earner would pay $1.240M. And the entire country would save ~$75B in saved compliance costs. I fail to see how the result of real "flat tax" proposals that have gone before the Congress is in any way incompatible with the Church's social teaching. I see instead a way to improve economic efficiency and undistort our politics so that the true costs of policies can no longer be hidden in the complexity of the tax code.
The reality is that if we are to have freedom, the rich can lobby as well as the poor and the rich have the demonstrated ability to pay less the more complex the code becomes. This is history and it is a history that today's progressives do not wish to acknowledge.
With respect, I thik the Editors are missing the point, and quite a bit off-base here.
Simply because a novel idea - one that works across Europe by the way - begs some front end questions does not mean that "it's a bad idea". Some good ideas simply need understanding first. Next, the fact that it is more difficult for someone making $50,000 to live on $40,000 than it is for someone earning $5 million to live on $4 million is both intuitively obvious BUT also true under the present tax system.
The present proposal - and I have never been known as a conservative Republican - is an attempt to introduce a better level of fairness into what is a really poor tax code right now. I think we all might feel better about ourselves and our country if we all think that everyone is being asked to pay a fair share of cost of government. That is clearly missing right now, and, I submit, to the detriment of our society.
Starting with an "all-in" approach to the top line - wages, investment income, interest and dividends, rentals, etc. is a good start. Once you start exempting something - Social Security income being just an example, or start crediting something - like Child care credits - you start showing favoritism, and that is what we need to try and avoid.
Everyone pulling on the same oar seems ike a reasonable aproach - certainnly better tan what we have now. Maybe yu need to tweak numbes - and certainy there is othing magic about 9-9-9. But the idea is not, despite the editorial opinion intrinsicaly flawed at all.
The older Roosevelt era tax scheme rates were confistacatory. Income groups existed with extremely high rates of taxes of 40%, 50%, 75% all the way to 96% existed. In other words for every dollar earned the government would always get more than a third and usually nore than half of people income. With this high rate progressive tax schemes the government took the overwhelming majority of personal income as taxes. Relatively little of the nations aggregate income was avaible for private sector investment and job creation because the govenment took most income in taxes.
The next step in tax refrom is to eliminate income groups altogether. We currently have only three arbitrary income groups that are taxed at different rates. Administrately we only need one tax rate for everyone - the flat tax. So if you do pay taxes after deductions and credits and and other tax adjsutments everyone under a flat tax system would have the same lower tax rate. The lower rate allows more income to remain in the private sector for investment that create jobs.
The difference in these tax schemes is that government should not receive the lions share of the aggregagte income. When governement takes too much income private incvestment is inadequate and fewer jobs are created. Today we have an urgnet need for economic growth and job creation in the private investment. Tax policy needs to be reformed to better allow more private investment and job creation.
It the rich are singled our for higher taxes they have the option of not investing in a high tax country and can move their invesmtnet and earnings tothe global economy or put their investment in different forms to very effectievely and legitimately avoid higher taxes. One of the reasons we do not have job creation in America is the tax rates are much higher than most other developed countires. Investment, jobs and income move to other parts of the globe with lower taxes.
It is in the best interest of the United States to be competive and keep a robust economy by encouraging private sector investment by lower tax rates. As in the past lower rate always cause the economy to grow and tax revenue in a few years to be larger than with the higer tax rates.
Lower income people are protected by appropriate credits, deductions and adjustments as needed. But if you owe taxes everyone pays at the same low rate. This prevents too much wealth from being taken out of the private sector that is urgently needed for private economic economic growth by private investment.
The flat ?tax system ?a?n?d? ?i?t?s? ?l?o?w?e?r? ?t?a?x? ?r?a?t?e? allo?w????s?????? ??????????the private sector to have more of a role in the economy to create economic growth and job creation th?at evey society always needs.
You are not following the argument. The 50 year trend in tax reform to the present has been away from the Roosevelt era high income tax rates and away from numerous income tax groups. The tax rates of the Roosevlet era were indeed as high as 96% which is higly confisicatory and the income tax rates were high for all income groups. At the high end if you made a dollar you had to pay the government .96 cents. At the middle rate a taxpayer would pay a tax of at least 50 cents for ever dollar earned. The Roosevelt tax schedule was in effect from the 1930s to the early 1960s.
All reforms since the Kennedy tax reforms of the early 1960 have consistanly lowered the income tax rate actross all income levels. Remember the Roosevlet rate wer sky high across the board so income rate could be lowered from the 1960s to the present and we still woule have income tax rates as high as 35% as you point out we have today. Also fewer and fewer income tax groups were used. So for 50 years we have been lowering income tax rates, This is a half century trend that flattens taht has been flattening out our tax rate across all income groups away from steeply graduated income tax rates of the Roosevelt era, 1932 -1960.
The trend of flattening our tax code income rate should continue to the ultimate logical end of having one low rate. - the flat tax. The trend away from the progessive taxes keeps more income in the private sector for new private investment and job creation as shown by the consistant growth of the economyc and job creation following across the board lowering of income tax rates.
We need a falt tax system that is structure to keeps most aggregate income in the private sector for private sector investment, grouwth and job creation. We do not nned a progressive tax system which is structured to tax most aggregate income and give it to the public sector to grow the governenment.
A flat tax involves income tax rates not capital gains taxes on investments. The capital gain rate is a separate question, not involved with income tax rates. Foriegn investors earn much of the capital gains so the rates must be lower to attract foriegn investors who provide a hugh part of the capital investments in America. a completely separate taxing question.
More importantly, I think the Bishops have veered out of their domain. Paul said:
2 Corinthians 8:13-14
For I mean not that others should be eased, and you be burdened, but by an equality. In this present time let your abundance supply their want, that their abundance also supply your want, that there may be an equality.
and
2 Corinthians 9:7
Every one as he hath determined in his heart, not with sadness, or of necessity: for God loveth a cheerful giver.
The Bible calls for each of us to give proportionally to provide relief to others and to do so with gladness. The Bishops (and the America Editors), on the other hand, are advocating the taking by force from both Catholics and non-Catholics alike to send their time, talent, and treasures to a central authority and farm out our charity. The Bishops might take Paul's lead and work to change the hearts of those who are blessed and not to petition governments to win some politically correct public policy. If all we do is covet from one group and to give to another then, as the previous letter to the Corinthians notes, we end up like a "sounding brass, a tinkling cymbal" as there is no love or charity.
Capital gains tax hs always taxed at a different rate than wages, salary, dividends and inierest income come atreated differently than
The Warren Buffet is a stock investor who makes all his money in buying and selling stock, He owes capital gain taxes on any increase in stock values This is taxed at a capital gains rate. Captial gains taxes are separate from income taxes and are taxed at different rate .
Buffet does not make that distinction of tax he is paying compared to his secretary. he is paying a lower capital gains tax rate while his secretary is paying a higher income tax rate on her salary. - two different taxes.
But flat tax or progressive tax is income tax not capital gains tax. We are taking about income taxes not capital gains taxes which is a separate discussion.
The IRS 1040 form assesses taxes for both ordinary income and captial gains. - two different taxes that are treated differently, has different rul?e??s? ?a?n?d? ?d?i?f?f?e?r?e?n?t? ?t?a?x? ?r?a?t?e?s?.? ??????????????????????????
Ordinary income is wages, salary, interest income and dividends. This is the income assesses at a rate depeeding on your income which this article is talking about. Th?e flat tax would hav?e only one rate for all ordinarly income. The the progressive income tax that we now have has several rates that get higher as your ordinary income gets higher.
Capital gains tax assesses increase value of an asset such as a stock that has been sold during the year??.? If ??y?o?u? ?o?w?n?ed? ?t?h?e? asset for more than a year when you sold it ????which is the usual case this is ??c?a?l?l?e?d? ?a? ?l?o?n?g? ?t?e?r?m? ?c?a?p?i?t?a?l? ?g?a?i?n. ??? The long term ?capital gain rate is 15% for everyone in the 25% and higher ordinary income tax bracket otherwise if you have lower ordinary income you are not assessed a captial gains tax?.
So captial gains has its own tax assessment rules that ?reference ?a single o?rdinary income tax ??bracket but ?has a different rate stucture. But for most assets and people,?? the ?captial gain rate is a single rate of 15%.
And all the GOP candidates want it to go to ZERO and I guess you agree but won't say ... right?
Dividends and interest ARE income; I live on them! No salary nor wages for me anymore.
Why should income derived from inverstments be taxed at a lower rate than income derived from work?
Jim McCrea (#15)
Capital gains economically are different than ordinary income of such as wages, salary, interst income and dividends.
Captilal gans comes from th?e? ?s?a?l?e? ?o?f? ????????????investment? ??a?????s???????????sets?? ?l?i?k?e? ?s?t?o?c?k?s. Any economy ?n?e?e?d?s? ??????to have lots of investment? ?t?o? ?g?r?o?w??? ?a?n?d? ???????????????????????????b?e? ?m?a?i?n?t?a?i?n?e?d? . Investment allo?????w bui??????????ness to come into exitan?ce. expand and create new jobs all? of which provide lot?s of taxes. So you do not want a high capital gains tax discouraging investments.? And of course ?i?nvestment?s ?a?re made to make money.?
?
In the g?logal economy we have today ??a large percentage - m?ore than a third - comes from foriegn investors. We be a ?poorer country with higher unemploynebt without foreign investments. So a high capital gains rate would very definetely discourages foreign investments in the United States as it does even at a 15% rate. Most other countries have very low captial gains rates. ??
And a sales tax(Fair tax) would gather revenue from the underground economy (illegal aliens, criminals, other outlaws) that currently pay nothing in taxes.
From my perspective, the current tax code is not only not progressive, it actually encourages and rewards unlawful behavior.
Dear Cardinal George,
Pope John Paul II was was a leading opponent of atheistic communism and 'liberation theology' the armed and often violent revolutionary idea for redistribution of the wealth and the installation of socialist/communist governments by force. Today in America the seemingly peaceful application of 'liberation theology' by President Obama and the democrats in Congress is being accepted and even encouraged by the American Bishops, collectively and individually, by their public silence on a number of issues, the most egregious being Obamacare. "Silence signifies assent" and the proposed health care package is the epitome of the 'cultural of death' with its government funded abortion on demand and the rationing of needed and available best care medical practices especially for the elderly, replaced by government counseling on 'end of life options, euthanasia being an option.
For some reason the leadership of the Catholic Church appears to have been seduced into actively supporting him and into public silence on his actions perhaps by President Obama's glib promises intended to salve the conscience of liberal Catholics, government programs to reduce abortions, tax the wealthy to achieve the 'common good' and reduce tax deductions for charitable contributions to be replaced by government programs probably not available to religious organizations, separation of church and state.
Instead of speaking out frequently, forcefully and publicly against the evils inherent in Obamacare as Saints Peter, Paul, Pope John Paul II and the thousand of martyrs who died for for the Faith would have done, our leaders cower in the upper room, afraid to defend the faith and protect their flock from a socialist/communist President.
America Magazine, the Jesuit publication, published an article "For the Common Good" which is available at
http://www.americamagazine.org/content/article.cfm?article_id=11767
My comment on the Jesuit positions is below:
E. Patrick Mosman
49 Brook Manor
Pleasantville NY 10570
914 769 1562
What is the Church's and the editors' definition of "common good" from the 'economic' point of view if 50 percent of wage earners already provide 97 percent of the income tax receipts to the USA Treasury" What is the definition of 'common good' if approximately 50 percent of wage earners pay no federal income tax and most already receive welfare payments disguised as tax credits for 'unearned income,' for children, and in the form of SSI, food stamps, housing support and a host of other federal, state and local government programs available only to the needy. Is it the role of government to be the essential and probably soon the only source of Charity as the Obama administration plans to reduce the tax credits for charitable contributions for those who provide the most: mosthttp://www.commentarymagazine.com/viewarticle.cfm/the-war-on-philanthropy-15190
When does confiscatory tax rates in the guise of 'for the common good' on already stressed wage earners become a challenge to the ability of religious and non-government charitable organizations to carry out their own charitable functions?
It appears that Catholic Church does not even recognize that Obama plans to reduce or eliminate religious organizations and non-government groups, from their historic roles and replace them with socialistic government run programs.
The health care program advocated by Obama and pushed by the democrats promotes the culture of death at the beginning of life by supporting goverenment paid abortions without limits, (NB Obama also voted against providing medical attention to a child born alive after a botched abortion attempt,) and at the end of life as Obama has publicly declared that elderly patients should be denied the best life saving care and essentially prescribed "take two aspirin and prepare to meet your Maker.
While Pope John Paul II and Pope Benedict XVI may recognize the need for states to have some role in charitable acts for the common good, however, for those who claim that Jesus was a big-government socialist provider with regard to helping those in need and reducing individuals personal responsibility to "Love the Neighbor' and replacing it with government programs is a misreading of His message. Jesus Christ made the point "to render to Caesar the things that are Caesar's and to God the things that are God's" with no guidelines as to how the Romans were to spend the tax monies.
"For you will have the poor always with you" Matthew 26.11 and nowhere in the New Testament does Jesus Christ lay the responsibility for caring for the poor, the sick the hungry or thirsty, the homeless or any oppressed people on any governmental body. He did not cite King Herod, the priests of the temple, the local mayor or the Roman powers as the source of Charity. He made it an individual responsibility time after time in His sermons, in His parables and in His own acts. The Good Samaritan was not an example of "Love thy neighbor" because he stopped at the nearest inn and asked that a 911 call be made but because he acted, providing aid, comfort and financial assistance to his neighbor. Jesus Christ's teachings may be used to support charitable acts by states, however, they would not support programs that demean, denigrate or harms the individual's rights and have no regard for human life at all ages.
Fairness is a fantasy. Equity means all have enough to support life and dignity; if one has a small apartment and his neighbor a mansion, it's irrelevant.
In one example, fallaciously chasing "fairness" for its own sake, you note that a 20% flat tax is undesireable, as the remaining 80% of a 40k income is more difficult to live on than 80% of a millionaire's. Obviously, the entire 40k (or 50k, or 60k) would be more difficult to live on than even a tenth of the millionaire's income. There is no analogy of substance. No workable tax system will change the lot of these hypothetical parties relative to each other.
As regards Mr. Cain's 9-9-9 plan, there are competing analyses outstanding, and doubtless more to come if 9-9-9 gains traction. There is no reason to believe your analyst is the last word. Beside, any plan can be modified, and would be, whether flat, square, round, or whatever.
As far as Mr. Perry wanting to cut government services, I don't know exactly what he would do, but if, among other reforms, there was a great cut in waste, fraud, and redundancy, and consolidation of services, and common sense standards in determining eligibility and need, there would likely be little financial urgency to cut actual needed services.
Your magazine is called "America." Well, we are Americans! Is there any doubt that we can come up with a workable, equitable flat tax plan if we wanted to?!