Is A Flat Tax Fair?

Friday, 21 October 2011 12:43 By Dave Johnson, Campaign for America's Future | News Analysis
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Conservatives are always pushing for a "flat tax." It sounds so simple: One easy rate, so we all pay the same, easy to calculate... Get rid of deductions and lower the tax rates. So simple, but it turns out it is a simple trick, a scam to enrich the 1%, like so much else that conservatives are selling. Don't fall for it -- it means taxes will go up for the 99% of us who aren't really, really rich. See if you can guess what happens if you are in the top 1%. Or, just scroll down and see the the chart.

What We Have Now

We have what's called a "progressive' tax system. This means as you make more you pay more taxes. The first "bracket" of $XX dollars you make is taxed at a low rate. The next $XX dollars are taxed at a higher rate, and so on. Many people think if you "go into a higher bracket" you pay more on all the money you make, but that is not how it works. If a bracket starts at $1 million, and you make $1 million plus $1 you only pay the higher rate on the $1 that is in that bracket. Yes, that means that a 5% increase on taxes over $1 million would mean that person pays a nickel. Yes, all that screaming by Republicans is over a nickel. Screaming is what they do best.

The reason we have a progressive tax system is because we have a democracy. People who make more do so because of the investment in governent that We, the People make. We, the People pool our money collectively and use it to build the infrastructure that lets people make so much money. That's the roads, schools, police, courts, etc. -- they whole system -- that provides the foundation for our businesses to go out an compete in the world. And when our businesses do well, we ask them to pay back a dividend to the rest of us for enabling that to happen.

No Deductions

Conservatives always call for getting rid of deductions, because they are complicated. Get rid of deductions, they say, simplify the system, and you can lower tax rates. Here is the game they are playing. Suppose you have a small businesses, a grocery store. Suppose you buy $100,000 inventory and sell it for $130,000. If you get rid of deductions that means the small-grocery-owner pays taxes on $130,000 because that is the income of the store.

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If you say the business owner should be allowed to "deduct" the amount paid for inventory we're back to deciding which deductions to allow. So we are right back where we started, except now the conservatives have lowered tax rates (at the top) and their big corporate sponsors will be gaming the system to give themselves more and more and more deductions just like they already do.

What Happens With A Flat Tax?

Conservatives object to the idea of the rich paying back more. They say that taxes are theft -- government confiscating money that people have earned, ignoring that our democracy enabled them to earn it in the first place. They call taxation "redistribution" of wealth. Of course, as AlterNet's Joshua Holland points out, redistribution is the core job of government. He points out that when government collects taxes and builds a sidewalk that everyone can walk on -- or homeless people can sleep on -- that is redistribution. Courts, schools, police, ports, airports -- all of it is redistribution of wealth.

So conservatives call for a "flat tax." Most notably Republican Presidential candidates Rick Perry and Herman are calling for various forms of this. Cain This means everyone pays the same tax rate as everyone else, regardless of income. Because this is about scrapping democracy's progressive tax system this necessarily means that the rich will pay a lot less. Guess who pays more to make up for that? A good example of this effect is the 9-9-9 tax plan.

The 9-9-9 Plan

The Tax Policy Center takes a look at Repubican candidate Herman Cain's "9-9-9" tax plan, in a post titled, Herman Cain’s 9-9-9 Tax Plan

Herman Cain’s plan would eliminate the current individual income tax, corporate income tax, payroll tax, and estate and gift tax and substitute three taxes imposed at a 9 percent rate: 1) a 9 percent “national sales tax” 2) a 9 percent “business flat tax”, and 3) a 9 percent “individual flat tax.”

They have a table here that shows how people's taxes would change under the 9-9-9 plan. Jared Bernstein made a chart illustrating these numbers in his post 9-9-9 in One (Really Long) Graph.

So here you have it: the change in tax liabilities, compared to current tax policy, under 9-9-9, for different income groups, in one incredibly unsettling graph.

In the following chart the blue lines that are above zero illustrate how much more most of us will pay. The red lines below zero show how much less the rich and really rich will pay. The blue lines -- representing taxes on most of us -- go up. The red lines -- representing taxes on the top few -- go ... well, see for yourself.

Dave Johnson

Dave Johnson (Redwood City, CA) is a Fellow at Campaign for America's Future, writing about American manufacturing, trade and economic/industrial policy. He is also a Senior Fellow with Renew California.

Dave has more than 20 years of technology industry experience including positions as CEO and VP of marketing. His earlier career included technical positions, including video game design at Atari and Imagic. And he was a pioneer in design and development of productivity and educational applications of personal computers. More recently he helped co-found a company developing desktop systems to validate carbon trading in the US.

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