US Taxes are Insane

It's not just 138 pounds of tax law... It's 138 pounds of tax law that changes on a yearly basis. The common man has no hope of reading, much less understanding, the current tax law in any given year. I seriously doubt I could read half of it before something I've already read changes. Tax simplification is needed, but there are many (H&R Block, Turbo Tax, any large corporation) with a vested interest in keeping the tax laws complicated and confusing, and those parties throw big wads of cash at the people who write the tax laws.

Give me the FairTax plan NOW!!!!!

Give me the FairTax plan NOW!!!!!

fairtax.org

Killfile, good job. Good reminders in your piece too, I liked it. It really is insane in many ways...thanks for putting the info out there once again. I don't think this subject is talked about enough...good job.

Killfile, you are so right. Tax reform is necessary, but we have to uncouple it from the flat-tax, which is unfair in a basic way. If you have half as much money as me, and we pay the same tax, it clearly hurts you more than it hurts me. This I can figure out with just my common sense -- unlike the US tax code.

theannalog, you don't pay the same absolute amount of tax under the flat tax, you pay the same percentage. In other words, if the flat tax is 10% across the board, and you made $100,000 per year, you would pay $10,000 in taxes. If I made only $10,000 per year, I would pay only $1,000 in taxes. It's the same percentage, but not the same amount. In any case, even a flat rate is still regressive, because the poor pay a larger amount of their nondisposable income than the rich.

Thanks for the clarification, brainwidth. It's not quite as much of a no-brainer as I implied -- but yes, a flat percentage is still fundamentally regressive.

How is a flat tax regressive when the percentage is the same? If a progressive tax system charges a higher percentage tax on higher income then it follows that a regressive tax system would charge a higher percentage tax on lower income. A flat percentage is what it is. Flat and fair across the board.

We very nearly have a flat (percentage) tax system right now when you consider all the funds required for government at all levels. When you add up federal, state, payroll, sales and fees it breaks down like this. The poorest among us pay 19.7% of their income. The wealthiest among us pay 32.8% of their income. Big spread, huh? So the next time someone says "yeah, the tax cuts went to the wealthy - because poor people don't pay taxes!" remind them that we all pay pretty much between 20 and 30% of our income, all things considered.

Kevin, there are two primary reasons that a flat tax is considered regressive.

• First, people with higher income a higher percentage of disposable income. The poor and lower middle class have little disposable income, and therefore the tax burden, even a flat tax across income strata, tends to impose a disproportionate burden on their nondisposable income. Instead of giving up that sports car or yacht to pay their taxes, they give up medication or groceries.
• Second, most flat tax proposals are limited to paid wages. In doing so, wealthier people who earn proportionally more money from investments and savings are not taxed for their additional revenue at all; similarly, the loss of deductions means that some tax reliefs for the middle class will disappear. The wealthy would actually be paying less, as a percentage of their monetary gains, than the less wealthy. Therefore, the flat tax is deceptively advertised as fair, when in fact it shifts the tax burden off the upper class onto the middle class -- the real issues are deductions and what money counts as "income", not where the tax brackets are set.

First, people with higher income a higher percentage of disposable income.

A person's so called "disposable" income is none of your or anyone else's business.

Instead of giving up that sports car or yacht to pay their taxes, they give up medication or groceries.

Perhaps if more yachts and sports cars were purchased more people would be employed and earning more.

wealthier people who earn proportionally more money from investments and savings are not taxed for their additional revenue at all

A true flat tax will tax all income at the same rate regardless of how it is earned. So passive as well as active income is taxed at the same rate.

Deductions and special exceptions is how loop holes are created. Eliminate deductions and exceptions tax all income at the same level, eliminate taxes on food and clothing, and set the floor requirement to pay taxes at $30,000/year of income per taxpayer. That way the truly poor do not pay any taxes (as if they do now) and the rest of us are taxed fairly.

I just don't believe in taxing someone with a higher income at a higher rate because some people believe he has more "disposable" income. To me there is no such thing as disposable income. It all goes somewhere.

The FairTax plan is great -- if you can some how work around the idea that you're taxing the ever-living crap out of the lowest rung on your economic ladder and relying on a delayed refund to balance out the equation.

Fair Tax's major weakness is the same as that Hard Drive with the $150 mail in rebate at Best Buy -- if you don't have the extra $150 up front, you can't buy the drive... and you can't afford the tax.

Fundamentally -- fair tax isn't fair.

You're not understanding the concept... the only thing you're taxed on is what you BUY at the retail level... IE: No income taxes, no corporate taxes, etc. Everyone gets 100% of their paychecks every month. So how is that a weakness? That's putting the money into the lower income hard workers' pockets to save and invest and live on! I suggest you pick up the book on the FairTax and give it a read with an open mind. It may open your eyes to the possibilities. It makes perfect sense.

The concept of disposable income needs to be eradicated. The money is not thrown away. In private hands money is used to purchase goods and services, invest, or save.

From those to whom much is given, much is required -- John F. Kennedy.

Here's another concept that needs to be eradicated. Nothing has been given to either family in your example. Each family has earned their income.

Taken Yearly that means:
Family A's Living Expenses: $14,400
Family A's Disposable Income: $7,024
Family B's Living Expenses: $14,400 (better car, bigger house, all those things are optional)
Family B's Disposable Income: $485,600

Tax Burdens:
Family A: $2,142.40
Family B: $50,000.00

Family A's Burden - as a percentage of disposable income: 30.5%
Family B's Burden - as a percentage of disposable income: 10.3%

This is exactly the wrong way to think about income and taxes. What would you do if the family with the higher income wanted to live like the family with the lower income? Or what if the higher income family wanted to live higher on the hog? What if he inflates his so called living expenses to more than what he earns so his disposable income is at a negative balance.

It's too convoluted. In my solution Family A would pay no tax and Family B would pay $75,000 (given a 15% tax rate). The public and the government stays out of everyone's expenses.

webquack writes:

You guys go ahead & try Save the World, I'm saving up to move to India, the Land of Opportunity.

You'll be back in a couple of days. I'm not worried.

Killfile,

You make some pretty decent arguments against the flat tax (and caused me to want to look into it a little more -- so huzzah!) but I do have a few questions:

1) In our current tax structure, Family A won't pay any federal income tax. So, maybe they're for the status quo (they are also a family living in poverty by the govt's definition) and they also receive state and federal tax dollars to subsidize their existence. So, I would disagree with your statement that the wealthier family would take advantage of more federal services -- I think it's the other way around. A wealthy family is more likely to be educated by a private school, they will have fewer tax breaks for their gas-guzzling cars, their mortgage is probably not tax-deductible, they are not eligible for the state's health care plans (which Family A would be at those income levels), they would not be eligible for many state-sponsored higher education grants or loans, they would not be eligible for food stamps or affordable housing grants, I could go on.

2) What is the basic philosophical foundation for taxing the wealthier at a higher (some would say disproportionate) rate? I'm very curious about this. I would consider myself middle-class (even at the tender age of 27) but I harbor no ill-will to those better off than me. I absolutely believe they should pay their fair share. You're correct in saying that today's tax structure favors those with the resources to take advantage of loopholes. But where is the justification for taxing someone who makes $250,000 at 45% and someone who makes $50,000 at 15%? And, after all is said and done, aren't these arbitrary numbers anyway? Why just tax those who make $250K at 45%? Why not $200K, or 100K, or 50K? I work in the area of public policy and tax issues and believe you me, when a politician enacts a new tax aimed at people or businesses making a certain amount of money, they will not rest until that threshold is lowered and soon includes a larger base (e.g. see the "Fair Share Acts" aimed at Wal-Marts around the nation). Basically, when you start taxing people at different rates, pretty soon the system will "have" to be tweaked to include a broader market whose tax liability just jumped up -- and hense we are back to numerous tax loopholes.

A good article though that makes me think and perhaps I'll write up my own column on this once I've conducted some more research.

The article Reads:

First, the tax code needs to be simplified. Proposals like the Flat Tax, the Fair Tax, and others of its kind unfairly place the burden of taxation, either directly or through a subtle withholding procedure, upon the poorest of Americans.

In regards to the Flat Tax, this is misleading. The Flat Tax lays the burden evenly amongst all people regardless of personal income. It will hit the poor harder as losing 5% of their income will likely hurt more than a rich person losing 5% of their income to the government. However, the poor use more gov't services than the rich and as such owe a greater debt to the government than the rich(under the Flat Tax system).

"There is all the difference in the world between treating people equally and attempting to make them equal. While the first is the condition of a free society, the second means as DeTocqueville describes it, a new form of servitude." - F. A. Hayek

"US Taxes are Insane"

The headline says it all.

Great discussion going on here. Keep it up, guys.

(I have yet to pay taxes... so there's little I can add other than encouragement)

That way the truly poor do not pay any taxes (as if they do now)

Uh, upthread I did point out that the poorest Americans still pay 19.7% of their income to fund government at all levels when you consider state, federal, payroll, sales taxes and fees.

I find it really amazing that the whole idea of progressive taxation always ends up in dispute when these discussions start. Are we really at a spot in our nation where so many people don't know why it is a good idea? I guess the question answers itself.

Hmm I don't know enough about or tax system to really make a decent comment, even though this article has got me to thinking. It would be nice if we could find some lawyers that read NewsVine and draft up something that might actually get passed. This may be a pretty unreasonable but I would still like to get it done and to add some "professional" (meaning those that are fully educated in our tax system and law) opinions to this debate.

We are indeed approaching a tax crisis in this nation. The Top 50% of wage earners pay 96.54% of All Income Taxes (2003 tax year). Imagine the situation we'll be in if this goes any further. The people who pay no taxes will have a majority voting power. Then we can all say goodbye to productivity and work-ethic.

Source: U.S. Internal Revenue Service (Excel file)