Flat Tax Plans and Growing Resentment on Both Sides

The problem is that neither side is willing to move towards the necessary actions required to get to a balanced budget. This is especially true of the Left which will not cut spending in any meaningful way. Of the various flat tax plans, Cain's 9-9-9 plan is revenue neutral, Perry's is set to create stimulus. But the real problem isn't with revenues, like Europe, the problem is with expenditures which are so high that it's estimated income taxes would have to rise to above 65% to bring the budget into balance, that is assuming there will be no drop in economic activity which defies standard economic theory.

It's also interesting to note that every tax plan is rigorously attacked for the "costs" of the plan by the left, but spending on social programs and such are never treated the same.

The demand for lower taxes reflects growing frustration with the current system where a shrinking few are increasingly asked to shoulder the burden. With around 47% of wage earners paying no income taxes whatsoever, the rest are being asked to pay more and more.

Reasonable people would adopt a revenue neutral plan that gets rid of tax breaks for special interests, corporations and the like, but unfortunately, there is an unreasonable side that refuses to bring expenditures in line with revenues.

I will ask this unreasonable side how they propose to bring the budget into balance using tax increases alone. As stated, income taxes would have to rise to above 65% and I've seen higher estimates. Add to that State income taxes, property taxes, and SS/Medicare taxes and the tax burden approaches 100%. This again assumes that there will be no change in economic activity with a nearly 100% tax on income. Once again, I ask how this proposal can be called reasonable by any thinking individual. Instead of rhetoric about the rich, I simply ask for a proposal that includes reality. There are simply some Americans that refuse to deal with the problem at hand and use rhetoric to try and preserve a system that is clearly unsustainable. We need to make changes because we have to. Unfortunately, the first stage is admitting that there is a problem in the first place and too many are not even at that first step.

Two Studies Prove Our Tax System Is Highly Progressive

Misconceptions and Realities About Who Pays Taxes, by Chuck Marr and Brian Highsmith, CBPP: Executive Summary A recent finding by Congress’ Joint Committee on Taxation that 51 percent of households owed no federal income tax in 2009 [1] is being used to advance the argument that low- and moderate-income families do not pay sufficient taxes. Apart from the fact that most of those who make this argument also call for maintaining or increasing all of the tax cuts of recent years for people at the top of the income scale, the 51 percent figure, its significance, and its policy implications are widely misunderstood.

* The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect. ... Both of these temporary tax measures have since expired. In a more typical year, 35 percent to 40 percent of households owe no federal income tax. In 2007, the figure was 37.9 percent. [2]
* The 51 percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay. As a result, it greatly overstates the share of households that do not pay any federal taxes. Data from the Urban Institute-Brookings Tax Policy Center show only about 14 percent of households paid neither federal income tax nor payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.[3]
* This percentage would be even lower if federal excise taxes on gasoline and other items were taken into account.
* Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers. (In a year like 2009, this group also includes a significant number of people who have been unemployed the entire year and cannot find work.)
* Moreover, low-income households as a whole do, in fact, pay federal taxes. Congressional Budget Office data show that the poorest fifth of households as a group paid an average of 4 percent of their incomes in federal taxes in 2007 (the latest year for which these data are available), not an insignificant amount given how modest these households’ incomes are — the poorest fifth of households had average income of $18,400 in 2007. [4] The next-to-the bottom fifth — those with incomes between $20,500 and $34,300 in 2007 — paid an average of 10 percent of their incomes in federal taxes.
* Even these figures understate low-income households’ total tax burden, because these households also pay substantial state and local taxes. Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2010.[5]
* When all federal, state, and local taxes are taken into account, the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010. The second-poorest fifth paid 20.7 percent. [6] ...

* The fact that most people who do not pay federal income tax in a given year do pay substantial amounts of other taxes, and also are net federal income taxpayers over time, belies the claim that households that don’t owe income tax will form bad policy judgments because they ostensibly “don’t have any skin in the game.”
* The federal tax system is progressive overall, but state and local tax systems are regressive and undo a significant share of that progressivity. There is nothing wrong with having one part of the overall tax system shield low- and moderate-income households, who pay substantial amounts of other taxes and who generally pay federal income tax as well in other years. ...

I think the above proves that the American tax system is highly progressive, dispelling the myth that the rich aren't paying their fair share. In fact, a recent study by the OCED found that the American tax system was the most progressive of all of the countries studied including those in Europe.

http://www.taxfoundation.org/blog/show/23856.html

But a new study on inequality by researchers at the Organization for Economic Cooperation and Development (OECD) in Paris reveals that when it comes to household taxes (income taxes and employee social security contributions) the U.S. "has the most progressive tax system and collects the largest share of taxes from the richest 10% of the population." As Column 1 in the table below shows, the U.S. tax system is far more progressive—meaning pro-poor—than similar systems in countries most Americans identify with high taxes, such as France and Sweden.

As noted, the discussion has been mainly focused on income taxes, not on other types of taxes. The reason is that proponents of tax increases want to raise INCOME taxes, and claim that the current income tax structure is not progressive enough. It is natural, therefore, for opponents of income tax increases to point out the facts as laid out by the Joint Committee on Taxation along with the OCED.

What is often overlooked when discussing income tax rates are the numerous other types of taxes that must be paid in addition to income taxes. With State and local taxes already taking 12.3% of income from the bottom fifth, rates for the other four fifths are no doubt higher meaning that those who are in the top tax bracket pay more than 50% of their income when all taxes (gasoline, utility, etc.) are accounted for.

The level of taxation for all citizens is shocking in this country and needs to be decreased, not increased. While the Bush tax cuts reduced taxation for ALL income tax payers, I suspect this has been more than offset by increases in state and local government taxes along with property taxes and the like. No wonder there is backlash on the state and local levels. Ultimately, we have to ask, are we getting good value for the taxes we pay? I think the answer is a clear NO.

Using Social Forces to Raise Taxes

The focus of my post was to point out that we should consider using all the fields of social science to deal with broad based social issues such as greed and morality.

To continue as an example, tax rates could be raised much easier if social praise and reinforcement were given to those who paid the most taxes. Costless praise and other forms of recognition such as a "national taxpayers day" where high tax payers received kudos for their generosity and a brief statement by politicians acknowledging that the nation's operations rests on their shoulders (true or not) would lessen the opposition to higher taxes. Social rewards are a type of currency that can be used in exchange for monetary currency. That's why in previous large scale wars like WWII, every nation involved used praise and shame to raise enormous amounts of money and quell discontentment over the low level of consumer goods provided to society. Almost everyone bought War Bonds even though they knew the low interest and unfavorable terms were likely to produce an economic loss for the buyer. Yet the social rewards outweighed the economic gain. There is a case where "greed" and "self-interest" in economic terms were overcome by costless (economic) social forces at work. The same forces can be heralded again to produce positive outcomes.

Linking Government, Tax Rates, and Economic Growth

Tax policy does have an effect on the overall economy. However it's hard to measure because of the lack of a "control" group. How much would have economic growth grown had taxes been lower? Perhaps we would have had a 4% growth rate instead of 3%, it's difficult to determine what if.

That's why the studies referenced below are important.

http://www.voxeu.org/index.php?q=node/4144

http://www.asymptosis.com/an-open-letter-to-robert-barro.html

http://www.asymptosis.com/europe-vs-us-who%E2%80%99s-winning.html

Unlike other studies, they try and control for other factors leaving tax rates as the variable, this is how any good study of a variable should proceed. These are the only types of studies I know of that try and control for other variables. It's nearly worthless to compare tax rates across different eras to come to a conclusion because of the different conditions that exist. The best we can do is compare countries with similar conditions and with differing tax rates to get an answer. Yet there are so many variables that even those studies cannot completely eliminate outside factors. Still, the studies confirm basic economic theory, that taxes are distortionary and are a negative factor to economic growth. Now people should also see that taxes translate into government spending and that can have positive benefits. It is possible for those positive benefits to outweigh the negatives of a tax, an easy example is the construction of a bridge or road to reduce transportation costs which stimulates economic growth. So it seems that higher taxes can be positive ONLY if the taxes are spent in a way that produces more benefits than the cost of the tax. You can disagree with my analysis of the data, but you should visit the website anyway because there are good and constructive analysis from both sides. Given today's government with its high inefficient manner of allocating resources and spending, it seems highly unlikely to me that the proceeds from a higher tax would be spent wisely.

Rich Are Paying Their Fair Share

Carpe Diem neatly summarizes, "...the income share of the top 1% increased by about .55% per year from 1986 to 2006, compared to the tax share of the top 1%, which increased by about .75% per year."

Bottom line is that the rich are paying more than their fair share.

CARPE DIEM: The Increasing Tax Share vs. Income Share Gap