Problems with the Flat Tax (was "Re: Forbes Camp.")

From: The Baileys (nanotech@cwix.com)
Date: Fri Mar 19 1999 - 17:14:52 MST


Michael Lorrey wrote:

>Those critics at the time failed to do two things:
>a) they expected to keep all existing loopholes (most would be closed under
>Forbes' plan)

This is incorrect. The CBO estimates use pure gross income numbers. They
do not incorporate any existing Internal Revenue Code provisions. Actually,
the Forbes plan includes huge "loopholes" for the ultra-wealthy in that it
exempts dividends and capital gains from taxation. Such a loophole would
dwarf all existing loopholes of the existing tax system.

>b) they refused to utilize dynamic scoring (which we can see by today's
>unexpected surplus is in fact the proper way to calculate tax revenues.)

"Dynamic scoring" is the new word for supply side economics (aka
Reaganomics). While I agree that the effects of tax changes should be
determined on a dynamic economic landscape, it is too easy to manipulate
this method to make the tax outcome be whatever you want. Additionally, the
effects of tax cuts are not understood well enough to start quoting figures.
Historically, significant tax cuts have been followed by years of growing
deficits and average to below average economic growth. The years following
Reagan's effective tax rate reduction are a perfect example. Even if you
remove the spending increases beyond the average for the prior 20 years, the
result is still ballooning deficits. Furthermore, GOP pundits forcasted
5-6% GNP growth if the tax cuts of the early 80s were adopted. This never
occurred.

>
>When these two factors ARE taken into account, the 17% flat tax is in fact
>revenue neutral.

No is isn't. There has yet to be any detailed analysis that shows a 17%
flat tax (or any other proposed rate) will not result in huge deficits.
Forbes, the Kemp Commission and other conservative think tanks have produced
vague, "scrawled on a napkin" calculations that yield a revenue neutral
result, but when questioned on the details they dodge the issue.

>The top marginal tax rate may be set at that level, but the only people who
pay
>it are those who do not follow the advice of their tax accountant. former
Pres.
>George Bush, for example, and his wife filed a tax return in either 90 or
91
>which showed that their income was nearly a million dollars, yet their
final tax
>bill came to only 14% of their income.

I think you need to take a closer look at Bush's 1991 tax return. His
extremely low effective tax rate is because he had a huge charitable
contribution deduction that year. In 1991, Bush had approximately
$1,300,000 in gross income. His itemized deductions were $670,000.
$550,000 of that were charitable contributions. By giving away 40%+ of his
income he reduced his taxable income considerably resulting in only $200,000
in taxes owed. You've picked an anomalous case to claim the wealthy will
pay more in taxes under the 17% flat tax system. As you might guess, the
average high income earner doesn't give away 40% of his income every year.
At income levels above $1,000,000, the average taxpayer only gives away 2%
of their income. President Clinton, in 1997, earned $570,000. He had
charitable contributions of $270,000 (roughly 48% of his income) and still
paid $92,000 in taxes (an effective rate of 15%).

Instead of handpicking a case that supports an argument, lets look at the
effective tax rate for the average ultra wealthy taxpayers. In 1995,
according to the Internal Revenue Service, the average effective tax rate
for the top 1% of all taxpayers in terms of gross income was 38.9%. Top 5%
was 30.6%. Top 20% was 26%. The top 40% excluding the top 5% was 19.9%.
The middle 60% (the middle class) was 18.9%. The lowest quintile was 0%.
The overall effective tax rate for all taxpayers was 15.9%. Clearly, the
ultra wealthy will receive a HUGE tax windfall as a result of the
implementation of the flat tax system. Lets not forget that all these
effective tax rates include taxes on capital gains and dividends (70% of
which inure to the top 5% of all taxpayers) which will not be taxed at all!

What will happen if a flat tax is implemented? The same thing that happened
when Reaganomics was implemented in the early 80s. The rich will receive
the lions share of tax cuts generated by the flat tax regime. Government
revenues will go down. The GOP will not have the political will to support
the drastic spending cuts required to preserve the budget surplus or even
minimal deficits. The federal government will resume the its huge
borrowings on the capital markets. Guess who will have cash in hand to loan
to the federal government? All these ultra-wealthy taxpayers who've
received these huge tax cuts. Thats the infamy of it all. The rich will
take the money they would have been paying under the old system and then
loan it to the government and earn interest on that money.

Forbes, Archer, and the rest of flat tax/national sales tax camp are clearly
wrong. A comprehensive and objective review of the available data can yield
no other conclusion.

Doug Bailey
doug.bailey@ey.com
nanotech@cwix.com

Look at Bush's 1990 return, that year he had $456,000 in income and paid
$101,000 in taxes, an effective tax rate of approximately 23%.

>Your claim about the tax benefits going to the top 3% are true only if you
keep
>existing tax loopholes, and expect (paradoxically) that everyone is now
paying
>the maximum percentage for their tax bracket, as if they were not using and
tax
>loopholes. Obviously this is cooking the books.
>
>> The flat tax promotes the myth that a simpler tax code must incorporate a
>> single tax rate regime. This is absolutely wrong. Forbes, Archer and
other
>> GOP disciples are attempting to capitalize on the average American's
>> ignorance of the complexities of the tax system. The complexity in the
>> current tax system is not the progressive tax rate (there are 4 or 5 tax
>> rates which are very easy to follow). The complexity in the current tax
>> system is determining what is "taxable income".
>
>The problem with a 'progressive' system is that it is easy to hide
loopholes for
>the rich in there, but not so easy with a flat system. The rich get 90% of
the
>tax loopholes.
>
>> We can keep the progressive
>> tax concept (i.e., higher income earners pay a larger portion of their
>> earnings than lower earners) while simplifying the tax code. But why
would
>> Forbes and others want to do that when they can captalize on the public's
>> distaste for the current tax system by deceiving them into supporting a
huge
>> tax cut for Forbes and the rest of his wealthy buddies.
>>
>
>How about because, as the stock market indicates, when people are allowed
to
>keep their money, rather than it being confiscated, the economy grows
faster,
>thus increasing tax revinues. Its called dynamic scoring.
>
>Mike Lorrey
>
>
>



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