Flat Tax Plans: Unfair, Complicated, and Unproductive

The flat tax plans I've heard are faulty. The first thing most people offer is "there would be no deductions." I offer that two people who each make $100,000 a year would pay the same amount. They agree. I then offer that one earned his in wages, and the other spent $30,000 on materials to make his money.

The inequity of both paying the same amount in taxes is obvious. However, they most often agree that materials would be deductible. 

You've now got a hole that can't be plugged. We already have a tax structure that allows deductions, so all you're really talking is tax rates and what would be deductions.

Let’s forgive the flaw that really eliminates a flat tax rate as a total concept, and allow for reasonable deductions. 

Reasonable deductions, for the purpose of expanding an economy, would include those things that if people were to spend money on would expand an economy. For example, wages expand economies; wages paid would be deductible. Second homes for personal use do not expand an economy, except the costs paid in wages for maintenance; the home would not be deductible, but the wages paid to maintain it would be.

We would have to consider other deductions, such as deductions for dependents, or else the same tax rate on two incomes with only materials and wage deductions becomes obviously inequitable. We can go on and on with things ranging from day care expenses to uninsured catastrophic property losses as potential deductions because they meet the provision for expanding the economy. 

What we are left with is a flat tax rate on income adjusted for deductions. 

What that really means with the current employment taxes is that anyone whose income exceeds $150,000 per year will actually get a tax break on all income above that amount. It also presumes that the income is earned income and not passive income. Passive income is not subject to Social Security or Medicare taxes, which is an obvious inequity. So, too, would simply eliminating those incomes from those taxes. Rental income is not the same as wages, and is more difficult to earn than royalties or capital gains. It also comes with expenses not inherent in those other two types of passive income.

It gets really complicated to try to solve it simply with some saying we liked on a bumper sticker. Heck, it gets really complicated to try and solve with complex math variables applied to each of a various types of income for the sole purpose to tax it at an equal rate with other types of income. It is far simpler to leave the several types of income as they are (i.e. earned income, passive income, capital gains, etc.), and apply or not apply taxes to each as is appropriate.

If we somehow evaporate that problem, too, as if it also does not end the debate that flat tax theory is viable in the least, we are left with the concept that taxing the first taxable money earned, meaning the first dollar, at the same rate as that person would pay on the second hundred thousand or the seventh million dollars earned, is a rather preposterous concept.  It defies mathematical logic to think the top rate of 39.6% could be offset by a rate substantially less than that. 

One huge income offsets many people earning low incomes. One person earning a million dollars has the same income as fifty people earning twenty thousand dollars. For every dollar the person who makes a million dollars will save, each of those fifty people making twenty thousand per year will have to pay two cents more to retain the same projected revenue. 

That may not seem like a lot, but it doesn’t need to be. It adequately demonstrates that any slight decrease to the highest income earners comes at the expense of those with the lowest incomes. Compared to a graduated system that taxes earnings for all people at the same rates on all levels of income, but increases the rates on various levels of income as income rises, 99% of the people would get tax reductions instead of one person getting one percent more at the expense of the other 99%, with the poorest paying five to seven times as much in taxes as they would pay under a graduated system. 

That third flaw is just not worth trying to overcome. When you consider that we have already eliminated the “no deductions” aspect of it, and complicated it with other taxes like Social Security and with types of income, it was already blown out of the water before we could conclude that it only serves to increase income inequality. 

Since disposable income would go down for 99% of the people under flat tax theory, it is easily predictable that it would not work to expand the economy. It would, in fact, have the opposite effect because money that currently flows in the economy would be needed for taxation, while money that is currently used for investments would be taxed at a lower rate. Couple that with the fact that any growth in value of an investment is not taxable unless the investment is sold, and you have something akin to trickle-down economics.

Flat tax plans may sound fair on the surface, but one cannot think much past the surface and conclude it would be fair, would not be complicated, or would do anything but reduce the top tax rates insignificantly at the expense of everyone else.