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 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% percent 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 IncomeTax Rate
$0 to $9,22510%
$9,225 to $37,45015%
$37,450 to $90,75025%
$90,750 to $189,30028%
$189,300 to $411,50033%
$411,500 to $413,20035%
$413,200+39.6%

And this is what we get for a married couple:

Taxable IncomeTax Rate
$0 to $18,45010%
$18,450 to $74,90015%
$74,900 to $151,20025%
$151,200 to $230,45028%
$230,450 to $411,50033%
$411,500 to $464,85035%
$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 IncomeIncome Tax Rate
$0 to $10,3000%
$10,300 to $19,52510%
$19,525 to $47,75015%
$47,750 to $101,05025%
$101,050 to $199,60028%
$199,600 to $421,80033%
$421,800 to $423,50035%
$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 IncomeTax Rate
$0 to $12,6000%
$12,600 to $31,05010%
$31,050 to $87,50015%
$87,500 to $163,80025%
$163,800 to $243,05028%
$243,050 to $424,10033%
$424,100 to $477,45035%
$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 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.

Further Reading