A Flat Tax for the 99%

When Republicans say “flat tax” they usually mean yet more tax relief for the very rich. Such tax reform proposals are thus dead-on-arrival as soon as they get near Congress. Even conservative congressmen need votes from the 99%. Big donors can help only so much. Besides, the super rich have received so many tax breaks since Reagan was first elected that many billionaires such as Warren Buffet are begging to pay more taxes. Given the size of our chronic budget deficits, we might want to accept their offer.

Anyway, I have a tax plan that’s even simpler than Steve Forbe's Flat Tax, but provides the higher taxes on the super rich that Warren Buffet craves. Actually I could even raise Warren Buffet’s taxes even with a true flat tax. All I would need to do is close a few gigantic loopholes. But when billionaires and movie stars play Liberaller than Thou, and communists camp out on the sidewalks, methinks some kind of surcharge for the supremely wealthy is in order. So my plan is flat for only 99% of taxpayers. But for that 99%, it’s flatter than even Forbes' Flat Tax.

This makes my plan incredibly friendly for small business. Payroll calculations become trivial. Multiply wages by a constant and send a fraction to our friendly federal tax collectors. The only information employers would need to gather with W-4s are names, addresses, and Social Security numbers. Employers would not need to know whether their employees have families, or whether they (or their spouses) have other jobs. And you could simply pay your employees with plain old dollars. There would be no tax advantage for turning your business into a social program.

Big Business could use the competition.

If you are an employee, your tax filing becomes trivial. (If you are a business owner or investor you will still face some complexity. Income is not always easy to calculate.) If you are making millions per year, then you might face a higher rate than the masses, but you can afford an accountant to do what is still a really simple calculation. (I say “might face,” since with loopholes removed a flat tax out to infinity might still be more progressive than what we have. I’ll leave the ultimate decision there to experts like the Tax Foundation or the Congressional Budget Office.)

My progressive “flat” tax has three major components:

1. Replace most Deductions, Exemptions, and Tax Credits with a Citizen Dividend

The following would not be tax deductible under my plan:

• Dependents
• State income tax
• Property tax
• Mortage interest
• Margin interest

And the following would be taxable:

• Employer provided health insurance
• Interest on municipal bonds

Instead, every adult citizen would get a monthly check, and an annual coupon towards buying health insurance. Parents and guardians would also get coupons towards the health insurance of their dependents, and maybe a smaller check. (I say maybe. Paying people to have more children is a moral hazard given the world’s large population. I’d rather make the adult payment larger in order to break even for poor families or do even better than the current system.)

I would keep two tax loopholes: the charitable deduction, and have a deferred tax on savings. But even these would get simplified. The reason for keeping the charitable deduction is that businesses can legitimately declare charity like activities as marketing activities. I want individuals to have a similar tax treatment. As for savings, we desperately need to improve the individual savings rate if we are to have a freer more egalitarian society. The best replacement for the idle rich is a middle class that saves more. And a population with money in the bank is a population less dependent on social programs.

I’ll have more details on how and why I would get rid of the various deductions. Obviously, we’d need to be very careful with phasing out the home mortgage deduction. Do it wrong and an economic depression ensues.

By replacing deductions with a citizen dividend instead of a large tax exemption, we achieve several important benefits:

1. Employers don’t need to know anything about their employee’s tax status, be it number of dependents, spouse’s employment status, or second jobs.
2. A citizen dividend provides a bridge from welfare to work. (Welfare payments should take into account the value of the dividend and be reduced accordingly.)
3. A citizen dividend applies to citizens only. Granting our welfare system and/or progressive tax system to the entire world is not affordable. Making this separation reduces the call for a border wall or mass deportations. Guest workers become taxpayers.
4. A citizen dividend arrangement is free agent friendly. This is very important given the rise of the Gig Economy.
5. We no longer need unemployment insurance.
6. A citizen dividend sets up infrastructure to moving away from an income tax if desired.

As for how much this should be, in the previous chapter I came up with a rough estimate of $8,000 per adult and $4,000 per child to be neutral with respect to the current tax system – assuming a 25% income tax rate. We may need to shrink this a bit, as I want to shrink the marginal rate the working class faces. This brings up to Step 2:

2. Merge Income, Medicare, Social Security, and Unemployment Insurance Premiums into One Tax

For workers, the U.S. federal government collects six different income taxes: the income tax proper, employer portion of Medicare, employee portion of Medicare, employer portion of Social Security, employee portion of Social Security, and unemployment insurance premiums. This is complicated. Small business struggles.

If we look at “taxable income,” the 2015 tax rates for single income tax filers look like this (source: tax foundation):

Taxable Income	Tax Rate
$0 to $9,225	10%
$9,225 to $37,450	15%
$37,450 to $90,750	25%
$90,750 to $189,300	28%
$189,300 to $411,500	33%
$411,500 to $413,200	35%
$413,200+	39.6%

And this is what we get for a married couple:

Taxable Income	Tax Rate
$0 to $18,450	10%
$18,450 to $74,900	15%
$74,900 to $151,200	25%
$151,200 to $230,450	28%
$230,450 to $411,500	33%
$411,500 to $464,850	35%
$464,850+	39.6%

But these tables don’t include even the obvious adjustments. Let’s at least apply the standard deduction ($6,300) and the personal exemption for our single filer.

Taxable Income	Income Tax Rate
$0 to $10,300	0%
$10,300 to $19,525	10%
$19,525 to $47,750	15%
$47,750 to $101,050	25%
$101,050 to $199,600	28%
$199,600 to $421,800	33%
$421,800 to $423,500	35%
$423,500+	39.6%

And for a married couple with no children, we have a standard deduction of $12,600 and two personal exemptions to get:

Taxable Income	Tax Rate
$0 to $12,600	0%
$12,600 to $31,050	10%
$31,050 to $87,500	15%
$87,500 to $163,800	25%
$163,800 to $243,050	28%
$243,050 to $424,100	33%
$424,100 to $477,450	35%
$477,450+	39.6%

These all look kind of progressive, but note how fast the brackets climb for ordinary folks and how little the difference between a local doctor’s tax rate and a Fortune 500 CEO’s tax rate is. If you want to close the gap between the super rich and the rest of us, you need to consider a very different tax bracket structure. And check out that marriage penalty for the upper classes! It makes me wonder if Congress is made up of expensive divorce attorneys.

But, of course, the tables above are horribly simplistic! They don’t take into account:

• Health insurance exemptions and ObamaCare subsidies.
• The Earned Income Credit
• The Home Mortgage Deduction
• Deductions for state and local taxes.
• Payroll taxes!!!

If we take such things into account we get rates like the following for a single taxpayer who earns all his income in the form of wages:

Current tax rates over a range of scenarios going from aggressive tax reduction (heavily mortgaged home; silver health coverage either from employer or ObamaCare exchange, whichever is best subsidized) to passive filing (no health insurance, renting a home). For a family of 1 adults and 0 children .
Nominal Income	Total Income	Payroll Tax	Potential ObamaCare Subsidy	Income Tax	Total Tax	Average Rate	Marginal Rate
$5,000	$5,383	$765	$3,484	$-3,866 to $-383	$-3,101 to $383	-57.6% to 7.1%	9.6% to 7.1%
$10,000	$10,765	$1,530	$3,334	$-3,702 to $-368	$-2,172 to $1,162	-20.2% to 10.8%	24.4% to 25.0%
$20,000	$21,530	$3,060	$2,603	$-1,993 to $994	$1,067 to $4,054	5.0% to 18.8%	33.1% to 28.1%
$30,000	$32,295	$4,590	$1,123	$362 to $2,494	$4,952 to $7,084	15.3% to 21.9%	38.5% to 28.1%
$40,000	$43,060	$6,120	$0	$2,514 to $3,994	$8,634 to $10,114	20.1% to 23.5%	23.8% to 28.1%
$50,000	$53,825	$7,650	$0	$3,543 to $5,719	$11,193 to $13,369	20.8% to 24.8%	23.8% to 37.4%
$60,000	$64,590	$9,180	$0	$4,572 to $8,219	$13,752 to $17,399	21.3% to 26.9%	23.8% to 37.4%
$70,000	$75,355	$10,710	$0	$5,898 to $10,719	$16,608 to $21,429	22.0% to 28.4%	30.1% to 37.4%
$80,000	$86,120	$12,240	$0	$7,613 to $13,219	$19,853 to $25,459	23.1% to 29.6%	30.1% to 37.4%
$90,000	$96,885	$13,770	$0	$9,328 to $15,719	$23,098 to $29,489	23.8% to 30.4%	30.1% to 37.4%
$100,000	$107,650	$15,300	$0	$11,043 to $18,219	$26,343 to $33,519	24.5% to 31.1%	30.1% to 37.4%
$110,000	$118,415	$16,830	$0	$12,758 to $20,987	$29,588 to $37,817	25.0% to 31.9%	30.1% to 40.2%
$130,000	$139,232	$18,464	$0	$17,030 to $26,531	$35,494 to $44,995	25.5% to 32.3%	24.2% to 29.1%
$150,000	$159,522	$19,044	$0	$21,704 to $31,851	$40,748 to $50,895	25.5% to 31.9%	26.8% to 29.1%
$175,000	$184,885	$19,769	$0	$27,764 to $38,501	$47,533 to $58,270	25.7% to 31.5%	26.8% to 29.1%
$200,000	$210,247	$20,494	$0	$33,824 to $45,151	$54,318 to $65,645	25.8% to 31.2%	26.8% to 29.1%
$300,000	$311,697	$23,394	$0	$60,646 to $76,777	$84,040 to $100,171	27.0% to 32.1%	32.1% to 34.8%
$500,000	$514,597	$29,194	$0	$118,664 to $144,469	$147,858 to $173,663	28.7% to 33.7%	31.0% to 39.9%
$1,000,000	$1,021,847	$43,694	$0	$289,853 to $332,569	$333,547 to $376,263	32.6% to 36.8%	36.6% to 39.9%
$2,000,000	$2,036,347	$72,694	$0	$632,682 to $708,769	$705,376 to $781,463	34.6% to 38.4%	36.6% to 39.9%
$5,000,000	$5,079,847	$159,694	$0	$1,661,169 to $1,837,369	$1,820,863 to $1,997,063	35.8% to 39.3%	36.7% to 40.0%

The chart is a bit complicated. I include columns for both “Nominal Income” and “Total Income.” This is because the total income paid to an employee is the sum of nominal income plus the employer portion of payroll taxes. All the rate figures in this table are with respect to the total income.

The tax and tax rate figures are expressed as ranges. The low values are for someone who either gets employer provided health coverage (as part of said total income) or gets the ObamaCare subsidy; itemizes deductions; and has a heavily mortgaged home. The upper range is for someone who uses the standard deduction and doesn’t get any health insurance exemption/subsidy. See my other site for the tax calculation details.

I do not include the effects of retirement savings deferrals or charity.

Let’s try approximating these rates with a flat tax combined with a citizen dividend. Let’s try a 30% marginal tax and a $5,000 prebate:

Simple tax with a rate of 30% and a prebate of $5000 per adult . Compared with current system. For a family of 1 adults and 0 children.
Total Income	Total Simple Income Tax	Simple Income Tax Average %	Change from Today
$5,383	$-3,385	-62.9%	$-3,768 to $-284
$10,765	$-1,771	-16.4%	$-2,932 to $402
$21,530	$1,459	6.8%	$-2,595 to $392
$32,295	$4,689	14.5%	$-2,395 to $-264
$43,060	$7,918	18.4%	$-2,196 to $-716
$53,825	$11,148	20.7%	$-2,221 to $-46
$64,590	$14,377	22.3%	$-3,022 to $625
$75,355	$17,607	23.4%	$-3,822 to $999
$86,120	$20,836	24.2%	$-4,623 to $983
$96,885	$24,066	24.8%	$-5,423 to $968
$107,650	$27,295	25.4%	$-6,224 to $952
$118,415	$30,525	25.8%	$-7,293 to $937
$139,232	$36,770	26.4%	$-8,226 to $1,276
$159,522	$42,857	26.9%	$-8,039 to $2,109
$184,885	$50,465	27.3%	$-7,805 to $2,932
$210,247	$58,074	27.6%	$-7,571 to $3,756
$311,697	$88,509	28.4%	$-11,662 to $4,469
$514,597	$149,379	29.0%	$-24,284 to $1,521
$1,021,847	$301,554	29.5%	$-74,709 to $-31,993
$2,036,347	$605,904	29.8%	$-175,559 to $-99,472
$5,079,847	$1,518,954	29.9%	$-478,109 to $-301,909

We have a nice subsidy for the lower working classes, and come pretty close to break even for professional class singles who currently itemize. It may be a tax increase for some in this range. The big problem is that we apparently have a tax windfall for people making a few million dollars in the form of wages. We may need a second rate to approximate the current system. That’s why I entitle this chapter “A Flat Tax for the 99%.”

Let’s try being a bit more progressive and throw in a 40% rate for the truly well off, and bump the prebate up by a thousand dollars:

Two-tier simple tax with a lower rate of 30%, a prebate of $6000 per adult and a higher rate of 40% starting at a per adult income of $400000. Compared with current system. For a family of 1 adults and 0 children.
Total Income	Total Simple Income Tax	Simple Income Tax Average %	Change from Today
$5,383	$-4,385	-81.5%	$-4,768 to $-1,284
$10,765	$-2,771	-25.7%	$-3,932 to $-598
$21,530	$459	2.1%	$-3,595 to $-608
$32,295	$3,689	11.4%	$-3,395 to $-1,264
$43,060	$6,918	16.1%	$-3,196 to $-1,716
$53,825	$10,148	18.9%	$-3,221 to $-1,046
$64,590	$13,377	20.7%	$-4,022 to $-375
$75,355	$16,607	22.0%	$-4,822 to $-1
$86,120	$19,836	23.0%	$-5,623 to $-17
$96,885	$23,066	23.8%	$-6,423 to $-32
$107,650	$26,295	24.4%	$-7,224 to $-48
$118,415	$29,525	24.9%	$-8,293 to $-63
$139,232	$35,770	25.7%	$-9,226 to $276
$159,522	$41,857	26.2%	$-9,039 to $1,109
$184,885	$49,465	26.8%	$-8,805 to $1,932
$210,247	$57,074	27.1%	$-8,571 to $2,756
$311,697	$87,509	28.1%	$-12,662 to $3,469
$514,597	$159,839	31.1%	$-13,824 to $11,981
$1,021,847	$362,739	35.5%	$-13,524 to $29,192
$2,036,347	$768,539	37.7%	$-12,924 to $63,163
$5,079,847	$1,985,939	39.1%	$-11,124 to $165,076

Now, we have a simplified tax system that is clearly more progressive than what we have today. In fact, it becomes even more progressive after we factor in the final reform:

3. Treat Capital Gains and Dividends as Ordinary Income

The long term capital gains rate exclusion is the biggest loophole today for the super rich. If you have to work for your big bucks, you have to pay close to 40%. If you buy an investment and simply wait, you pay 20%. The arrangement strikes me as backwards! Not only that, you get to defer your taxes when you invest for capital gains. To be fair, the capital gains rate should be higher than it is for dividends and interest!

There are two mitigations.

1. Nominal capital gains include the effects of inflation. (But this is true for savings account interest as well!)
2. Corporations pay income tax as well, so there is some double taxation.

Today, inflation is low, and multinational corporations are adept at dodging the corporate income tax. Moreover, today’s Internet billionaires often attain their status well before their startups actually earn taxable income.

Is it any wonder why so many billionaires are either liberals or war hawks?

But a 30% Flat Tax Rate Seems so High!

Steve Forbes promised a mere 17% tax rate in his Flat Tax Revolution. Here I am calling for something on the order of 30%. Does that make me a commie or something?

No. Mr. Forbes cheats a wee bit. He doesn’t include payroll taxes in his 17% figure. The current payroll tax is 6.2% + 1.45% = 7.65% for both employer and employee portions. This is approximately 14.2% of total income (15.3% / 1.0765). So for working class people, the marginal tax rate works out to be around 31% under the Forbes plan.

Of course, working class Americans get their payroll taxes back in the form of retirement benefits should they live long enough. Then again, the rich get more protection and legal infrastructure service from government than the rest of us. Winning the Cold War was rather useful to fat cat capitalists. It’s high time to pay the bill. When the national debt is paid off, we can revisit the idea of tax cuts for the wealthy.

But still, a 30% tax rate produces some serious sticker shock. It invites doing business under the table. There is something to be said for dividing up the tax burden into separately monitored choke points in the economy. It wouldn’t be too hard to collect the first ten percentage points of that burden as a carbon tax. Good luck hiding oil refineries and super tankers! And if we want to have a working class middle class like in the 50s, we need to tax imports as well – whether we call it tariffs, a VAT or a national sales tax is a matter for another day.

A flat 15-20% withholding rate is in the collectable range, methinks. If we have higher rates for the truly rich, the IRS can send them a notice or something. The federal government has this thing called a “post office.” Might as well use it.