13 March 2010

Flat Tax

  • Mar 13, 2010

Flat Tax

The science essay I told everyone I was working on has been written, and is in the final editing stages.  It will still be a while before it is ready for prime time though.
In the meantime, here is a short thing I wrote a while ago to someone (don't even remember who anymore) about the concept of a flat tax:
The standard arguments for a flat tax make a couple of giant - and totally false - assumptions:
1)That the money which the rich spend and invest creates economic activity, growth, and jobs
2)That the rich have earned and therefore are entitled to their money.
3)That taxing the working class would generate more total tax money because there are so many more of them to tax
1)The investments of the rich do not generate economic activity. If they were not hoarding it, that same money would still be around. Business could get capital from government and bank loans, and from the stock market. That is, in fact, the whole point of the stock market, that capital is obtained from many small sources instead of one giant one.
Its as if one person hoards all the hammers in town, and rents them out to people, then wants credit for the houses other people built with them. If they weren't hoarding the hammers, the hammers would still exist. If they were distributed equitably, no one would need to rent them, therefore building would be cheaper, therefore more would get built. In this way the fact that someone is hoarding and charging interest actually depresses economic activity, because those hoarding the cash skim a little off the top of every financial transaction thereby increasing its cost.
2)The super rich do not earn, and therefore are in no way "entitled" to or "deserve" the money they have. Extremely few of the top 0.1% of wealth holders got there from some brilliant invention, and even fewer of the top 0.01%, 0.001%, and so on. Those at the very top get their wealth primarily from inheritance, and then build on it by collecting dividends and capital gains. They do not actually go to a job and do useful productive work.
Those who do make a salary are not necessarily earning their money either. CEOs make multimillion dollar salaries plus bonuses even when they run their companies into the ground, as we saw just recently, with even companies that needed to be bailed out with tax dollars giving their CEOs multimillion dollar bonuses.
3)The bottom 40% averages about 20k a year. Total annual income is 2.4 trillion.
The top 0.1% averages 7 million a year. Total annual income is 2.1 trillion.
300k rich people have nearly the same total income between them as 120million working class people.
The top 1% averages over 1million a year. Total annual income is 3.3 trillion, far more than the sum of every working class person in the country.
You could tax the working class at a rate of 69% of income and still not bring in as much tax money as you would by taxing the rich at a rate of 50%.
You can't squeeze blood from a turnip.
Furthermore, if you did that, the rich are left with, on average, half a million a year.
Half a million which, remember, they didn't really earn.
The poor are left with $6200.

In order to make a flat tax even approach "fair", you would have to make several other large changes to level the playing field.

First off, you have to eliminate ALL inheritance.  That means 100% inheritance tax on everyone, from ultra wealthy to middle class.  You earn your money in your lifetime, and then it gets recycled back into society.  There is no justification to say that a person is entitled to money they did nothing to earn. 

Second, you have to make education both free and mandatory from pre-school to at least bachelor's degree, if not more.

Third, you have to distinguish between income that comes from doing productive work (wages) from un-earned income such as dividends, interest, and capital gains.  Someone who merely skims off the top of other peoples work should be taxed at a higher rate then someone who actually earns their pay by working for a living and positively contributing to society.

When libertarians and the wealthy begin to fight to level the playing field, then and only then can they claim that a flat tax is about "fairness"

A flat tax is both impractical and immoral.


  1. I've long thought a flat tax has some appeal if it came with a huge increase in the standard deduction. A business only pays tax on the profit once the cost of production and operation has been subtracted from revenue. What is the cost of production and operation of a laborer? It's the cost of living. And you can factor in adequate education and recreation to raise that cost to where everyone can live a good middle class life tax free. $40,000 plus $10,000 per dependent maybe? Then just across the board 50% tax on corporate profits and all income, whether earned or capital gains or gifts or inheritance or whatever. Add in maybe some more basic public services like health care and education, then we're all just being taxed on our luxury income but we all have that luxury income to motivate productivity.

    1. Hmm, you know, thats actually a very interesting idea.
      Although I think one could live a very good life on much less than $40 grand! I'd be even less generous than you were I to implement your plan. But, yeah, let me think about that some more...

  2. Thoughts on Fair Tax...?

    1. Well, for starters, the "Fair tax" IS a flat tax. As such everything I wrote here about flat taxes applies to it as well.
      A sales tax only scheme, since the sales tax would necessarily be so high, would encourage those with the means to purchase as much as possible out of the country, which would not be good for the American economy (not to mention the world environment, given the additional international shipping). It isn't clear how (legal) imports and exports would be impacted.

      To me the most important part is that, unlike with income taxes (or property, estate, and capital gains taxes), there would be no way to even theoretically consider whether wealth held was earned or not, and that seems to be to be an enormous component of whether or not it is actually "fair". I have trouble seeing any system where some people can skate by contributing nothing to society, while others put in 40+ hours of productive work, and they are both expected to make the same financial contribution on top of that, as fair.


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