I have been toying around with the idea of a free money allowance as a prebate for a unified flat income tax. The numbers are interesting, if a bit disheartening. I had hoped to push a 25% flat rate with possibly a higher rate for the really rich. (As long as Warren Buffet, George Soros, and Hollywood vote Democrat it is fair to say the really rich could use a bit more taxes.) Alas, it looks like a higher rate would be needed to break even for the well off.
Anyway, I think you will find the current tax rates to be instructive. I took five of the federal income taxes collected on working class. (I omitted unemployment insurance.) Then, I did a bit of algebra in order to to treat employer portions of FICA and Medicare as part of salary in order to be able to compare a single flat tax with the current array. For tax filers who simply take the standard deduction and personal exemptions, the following tax rates hold.
For single taxpayers:
| Nominal Income | Total Income | Payroll Tax | Income Tax | Total Tax | Average Rate % | Marginal Rate % |
|---|---|---|---|---|---|---|
| 14500 | 15609 | 2219 | 1209 | 3427 | 22.0 | 28.1 |
| 25000 | 26913 | 3825 | 2784 | 6609 | 24.6 | 28.1 |
| 30000 | 32295 | 4590 | 3534 | 8124 | 25.2 | 28.1 |
| 40000 | 43060 | 6120 | 5269 | 11389 | 26.4 | 37.4 |
| 50000 | 53825 | 7650 | 7769 | 15419 | 28.6 | 37.4 |
| 60000 | 64590 | 9180 | 10269 | 19449 | 30.1 | 37.4 |
| 75000 | 80738 | 11475 | 14019 | 25494 | 31.6 | 37.4 |
| 100000 | 107650 | 15300 | 20687 | 35987 | 33.4 | 40.2 |
| 200000 | 209522 | 19043 | 49912 | 68955 | 32.9 | 35.4 |
| 300000 | 310972 | 21943 | 82912 | 104856 | 33.7 | 35.4 |
| 500000 | 513872 | 27743 | 151366 | 179110 | 34.9 | 37.4 |
| 1000000 | 1021122 | 42243 | 326366 | 368609 | 36.1 | 37.4 |
| 2000000 | 2035622 | 71243 | 676366 | 747609 | 36.7 | 37.4 |
| 5000000 | 5079122 | 158243 | 1726366 | 1884610 | 37.1 | 37.4 |
For a couple without children:
| Nominal Income | Total Income | Payroll Tax | Income Tax | Total Tax | Average Rate % | Marginal Rate % |
|---|---|---|---|---|---|---|
| 14500 | 15609 | 2219 | 720 | 2939 | 18.8 | 23.5 |
| 25000 | 26913 | 3825 | 1818 | 5643 | 21.0 | 28.1 |
| 30000 | 32295 | 4590 | 2568 | 7158 | 22.2 | 28.1 |
| 40000 | 43060 | 6120 | 4068 | 10188 | 23.7 | 28.1 |
| 50000 | 53825 | 7650 | 5568 | 13218 | 24.6 | 28.1 |
| 60000 | 64590 | 9180 | 7068 | 16248 | 25.2 | 28.1 |
| 75000 | 80738 | 11475 | 9318 | 20793 | 25.8 | 28.1 |
| 100000 | 107650 | 15300 | 15538 | 30838 | 28.6 | 37.4 |
| 200000 | 215300 | 30600 | 42200 | 72800 | 33.8 | 40.2 |
| 300000 | 317593 | 35186 | 74372 | 109558 | 34.5 | 35.4 |
| 500000 | 520493 | 40986 | 142753 | 183739 | 35.3 | 37.4 |
| 1000000 | 1027743 | 55486 | 317753 | 373239 | 36.3 | 37.4 |
| 2000000 | 2042243 | 84486 | 667753 | 752239 | 36.8 | 37.4 |
| 5000000 | 5085743 | 171486 | 1717753 | 1889239 | 37.1 | 37.4 |
And for a family of four (with no child tax credits applied; I am not up to date on the latest law on this score):
| Nominal Income | Total Income | Payroll Tax | Income Tax | Total Tax | Average Rate % | Marginal Rate % |
|---|---|---|---|---|---|---|
| 14500 | 15609 | 2219 | 0 | 2219 | 14.2 | 14.2 |
| 25000 | 26913 | 3825 | 1040 | 4865 | 18.1 | 23.5 |
| 30000 | 32295 | 4590 | 1540 | 6130 | 19.0 | 23.5 |
| 40000 | 43060 | 6120 | 2973 | 9093 | 21.1 | 28.1 |
| 50000 | 53825 | 7650 | 4473 | 12123 | 22.5 | 28.1 |
| 60000 | 64590 | 9180 | 5973 | 15153 | 23.5 | 28.1 |
| 75000 | 80738 | 11475 | 8223 | 19698 | 24.4 | 28.1 |
| 100000 | 107650 | 15300 | 13713 | 29013 | 27.0 | 37.4 |
| 200000 | 215300 | 30600 | 40156 | 70756 | 32.9 | 40.2 |
| 300000 | 317593 | 35186 | 71963 | 107149 | 33.7 | 35.4 |
| 500000 | 520493 | 40986 | 140198 | 181184 | 34.8 | 37.4 |
| 1000000 | 1027743 | 55486 | 315198 | 370684 | 36.1 | 37.4 |
| 2000000 | 2042243 | 84486 | 665198 | 749684 | 36.7 | 37.4 |
| 5000000 | 5085743 | 171486 | 1715198 | 1886684 | 37.1 | 37.4 |
As we can see, the marginal rates get up to 28% rather quickly, and peak at a bit over 37%. Dick Armey’s call for a 17% flat tax is a huge giveaway to the rich compared to current law.
I crafted a flat 40% tax plan which merged all these taxes which comes out as a tax cut for everyone short of around $200K/year/individual by having a $12,000/year prebate. Not sure how this would come out for the treasury, but if we count the prebate against all welfare and Social Security benefits, we could get most people off those other programs.
Of course, those who game the system pay less than the rates above. For example, state income taxes alone take many high income earners above the standard deduction. Throw in mortgage interest and property taxes and my estimate for the professional class (doctors, lawyers, full professors, engineers, etc.) is low. Furthermore, pay in the form of health insurance is not taxed. (Or is that was? I am not up on the details of Obamacare.) And professional class workers can defer income through 401(k) plans, HSAs, etc.
So my evil plan may be a wash for professionals. But even if it is a wash monetarily, it eliminates the need to play the government’s game to keep your cash. Those who want to save to start a business instead of save for retirement. We could expect a mini boom in entrepreneurship. Furthermore, employing others would much easier. One simple tax to collect. Multiply by 0.4 and send it in.
What think ye?
You can’t do this on a single tax on individual income. The prebate is best distributed as a tax on employers, as you once said on the main web page. I did a similar chart on progressivity in the early 1990s. It is posted on my blog. I recently did an analysis of how to redo taxes as part of my submission to the Fiscal Commission, which is available on my web page. (Didn’t I send you a copy?). I divide the prebate into a state piece and a federal piece and have employers distribute it as an offset against a regional business income tax and state business income tax.
I have a separate 13.3% VAT to fund discretionary spending and a separate income tax to fund overseas defense and net interest/debt expenditure. There is also a separate privatizable tax for Old Age and Survivors Insurance. What is left is a 28% business income tax before credits – which becomes 33% if you add in credits for the health insurance exclusion and an expanded Child Tax Credit of $6000 federal. (this is from memory, it may be higher at 34%). That funds all entitlements save retirement (education, health, mental health, etc.). That figure is based on FY2012 outlay projections from OMB and Tax Policy Center estimates of what a VAT will bring in.
I’m trying to keep things brain dead simple for businesses. The concept of a VAT makes my brain hurt, and my brain is pretty big.
What is incorrect in my analysis above is assuming everyone takes just the standard deduction. For higher income people this is generally not the case. On the free money for all site I have charts for assuming a 15% rate of deductions (which is easy to get with just state income tax and a mortgage). This pulls down the marginal rate for the professional class substantially.
A 30% flat tax with $2500/adult prebate comes pretty close to the current system. I’ll need to figure out earned income credits and child tax credits to boost the fidelity further.
Carl: the other complication is that for higher levels of income, much of the income is coming as capitals gains and dividends, which have a 15% tax rate if “long term” or “qualified”, which basically just mean not playing the market frequently. If you’re an athlete or entertainer this probably isn’t true, but if you’re Warren Buffet or Bill Gates you don’t need fancy accountants and loopholes to pay lower rates than your secretary or someone on minimum wage, you just need stock income.
http://en.wikipedia.org/wiki/Warren_Buffett#Taxes
Buffett stated that he only paid 19% of his income for 2006 ($48.1 million) in total federal taxes (due to their being from dividends & capital gains), while his employees paid 33% of theirs, despite making much less money.[130] “How can this be fair?” Buffet asked, regarding how little he pays in taxes compared to his employees. “How can this be right?” He also added:
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”[131][132]