Cynical Nation

This is certainly a tax issue the Democrats can score points on.

The AMT is an abomination...and not just because my wife and I get hit by it.

The question is, what'll they try and balance the "revenue loss" with?

Some have suggested dropping the home mortgage deduction to $500K, down from the current $1 million.

The problem with the Bush tax cuts is that they expire (many of them after this year) and the Dems ca simply let them expire.

Of course the GOP can rightly calim that "the Democrats raised your taxes...AGAIN."

But I'm equally certain the Dems will counter by disingenuously claiming, "No the Republicans raised them."

Blaming that sunset provision for the increase.

I doubt many people will be fooled. People care about their tax burden too much, not to ask, "Why weren't these righteous and necessary tax cuts (cuts that halved the defiit in record time) not extended, even made permanent?"

But yeah! I support the repeal of the AMT.

Another alternative would be to drop all deductions and exempt a substantial amount --perhaps the median income (around $44,000 for households) -- from taxable income. Everyone would get the same exemption. If you make less than the exemption amount, no tax for you. If you make more than the exemption amount, you pay on the amount above the exemption.

This would relieve everyone below that level from payroll deductions and from filing more than a postcard sized return. That could also pave the way for a flat tax on the amount above the exemption. It would also put an end to the entire tax dodge industry since there would be no more dodges.

I've done the calculation before, but don't have it handy. My recollection is that if the exemption level was set at the median household income, the flat rate, for this to be revenue neutral, would be about 27.5%. If median income for individuals is used as the exemption level, it's about 30%. That would actually be noticable, though not severe increase in tax burden for the featherless family, but I would have the satisfaction of knowing that Theresa Heinz and her gold-digger husband would finally be paying their fair share.

Interesting idea, WF. But it sounds very similar to scrapping the existing tax code in favor of the AMT to me, no?

I hadn't thought of it that way, but yes, you're right.

Anyway, what's wrong with the AMT isn't the method -- indeed, the AMT is an acknowledgement that the best results (for obtaining revenue) comes from the simplest calculation method -- it's the fact that it is aimed at extracting the most from a specific group of taxpayers.

I'm not opposed to efficient tax collection. I'm opposed to tax collection aimed at punishing success.

> Anyway, what's wrong with the AMT isn't the method... it's the fact that it is aimed at extracting the most from a specific group of taxpayers.

I agree. And the target group isn't even the super-rich, but rather the upper, upper middle class. I suppose the case could be made for allowing the AMT to slowly subsume the individual income tax via inflation and to eventually replace it altogether. But since that'll never happen.... ;-)

I agree that the AMT is an abomination that should be stopped. The very fact that it exists leads me to believe that the current structure is so flawed that a second system must exist to make sure that certain people pay at least a minimum amount of tax. It's like driving on a spare tire for too long. Eventually it's best to fix your original tire, or buy a new one.

Withoutfeathers, your idea, while appealing in its simplicity, is still a flat tax. I like the progressive nature of our current system. I would take your plan, keep the exemption as is, but start with a lower bracket rate, say around 20%, for $44,000 to $70,000, increasing to 30% for $70,000 to $150,000, and getting up to around 50% once you get to the $1 million plus area. (I haven't run any revenue-generation studies, so who knows if these numbers would bring about the proper revenue.)

I would keep deductions for charitable donations (except those to churches), medical expenses (including drugs), and school expenses (including tuition for private schools). The school expenses deduction I would phase out after about $200,000 of income.

I would add one additional step (that would admittedly be diffucult in its development): I would provide some type of exemption to those city dwellers to try to compensate them for their increased cost-of-living, so that those folks in NYC and SF would have a better chance.

> Withoutfeathers, your idea, while appealing in its simplicity, is still a flat tax.

Lots of people (myself included) don't have a problem with that. Still, is what WF's talking about (essentially a modified AMT) actually a *flat* tax? I would argue no.

With a generous exemption of more than $60,000 dollars, the effective tax rate starts out at zero for most families. It gradually starts to rise as income increases, and then asymptotically approaches 28%. That doesn't seem at all flat to me. It addresses the fact that lower-income families have less disposable income after meeting life's necessities. To me, that is the only kind of progressivity that makes any sense.

I like the progressive nature of our current system.

I'd also argue that our current system isn't progressive. Not consistently, anyway. Up here in NJ, there was a recent news story about how our Republican candidate for Senate, Tom Kean, Jr, paid an effective tax rate of something like 4 percent. He is, of course, a pretty wealthy dude, but he gets a (legal!) pass, because our current system is so riddled with exemptions, credits and loopholes, that it cannot in any sense be considered "progressive," if by that you mean that a wealthier person will consistently pay a higher percentage of his income in taxes. WF's proposal would see quite a few rich people shoulder a larger tax burden than they do now, I'd say.

BNJ,

When people talk of a flat tax, they are usually referring to the marginal tax rate, which in withoutfeathers' plan is always the same. If the graph of tax rate versus income is a straight line (regardless of where the y-intercept is), it is a flat tax.

Now, of course, I understand what you are saying about the EFFECTIVE tax rate being progressive in this scenario. This measures your ratio of total federal income taxes paid to your gross income. And of course this number varies based on your exemptions and credits.

Still, withoutfeathers' plan is not progressive enough for my tastes, with the exemption amount becoming increasingly irrelevant the higher your income. I like the idea of paying a higher percentage of your income the more income you make. The guy who makes $100,000,000 per year SHOULD pay a higher percentage of his pay than the guy who makes $100,000 per year, because he can better afford it. If you don't tax the higher income more, the fact that you have less revenue will have to be balanced with fewer expenditures or higher taxes elsewhere. Or, alternatively, increasing the budget deficit, the current administration's plan.

But you're right about there being too many exemptions, credits, and loopholes.

"I would take your plan, keep the exemption as is, but start with a lower bracket rate, say around 20%, for $44,000 to $70,000, increasing to 30% for $70,000 to $150,000, and getting up to around 50% once you get to the $1 million plus area." (Tracy Miller)
(Tracy Miller)


Why should those earning an arbitrary amount ($1million in yoour example) pay 50%?!

With the current top rate at 35% the top 10% of income earners pay over 90% of all income taxes. The top 1$% pay nearly half!

That's "progressivity" right there.

No one's going to argue that income equals wealth, any more than anyone's going to argue that the economy is a "fixed pie" in which one earner's gain is another earner's loss.

The top 1% of income earners is not the same as the top 1% of the wealthiest Americans.

In fact, there is little overlap between those two groups, as truly wealthy people (the Trumps and Gates, etc) don't rely on income to generate their wealth.

High income tax rates punish high income earners, NOT the wealthy. Physicians who perform surgeries that few people have the skills to master, command very high salaries, but the value they bring to market is, especially for those who come to need those skills, more than worth their high level of compensation.

The problem with the current tax system is that 50% of the American people don't pay the income tax and the wealthy pay very little (remember Thereza Heinz-Kerry paid only 4%, even on her millions in interest income because of various deductions, and the fact that the bulk of her wealth came from investments, Capital Gains, Trusts and exempted dividend income.

A "Flat Tax" is a poor answer.

The Flat Tax still won't address the huge "underground (off the books) economy," nor get the wealthy to pay any appreciable tax burden.

The Fair Tax http:www.fairtax.org/ DOES.

A consumption based (national retail sales tax) can be set to kick in after, say the first $30,000 spent each year (to exempt very low income earners) and it would replace not only the personal income tax, but FICA taxes, the corporate income tax (yeah we pay that as consumers as it's passed along in the final cost) and it would spread the tax burden to every segment of the economy, including the truly wealthy.

One of the major problems with the current tax system is that it taxes income NOT wealth. Consumption is generally a far better indicator of actual wealth.

Barry, guys like Tom Keane Jr and Thereza Heinz-Kerry don't pay much in income taxes because the bulk of their wealth is generated via other vehicles, as is true for most wealthy people.

Yes, many of those investments create numerous deductions that can be applied to one's overall tax burden, thus lowering their overall tax burden, even on things like interest income. Those deductions exist to spur investment.

Most people think Donald Trump, Mike Bloomberg or Tom Keane Jr when think "the wealthy," not the surgeon who performs grueling open-heart surgeries.

The income tax will NEVER touch those people (the truly "rich"), because it's the wrong vehicle to reach those people.

The Flat Tax is just another version of the income tax.

ONLY the Fair Tax (1) hits the truly wealthy and (2) also taxes the underground (off-the-books) economy, by taxing people on their consumption, not their earnings.

> The guy who makes $100,000,000 per year SHOULD pay a higher percentage of his pay than the guy who makes $100,000 per year, because he can better afford it.

He can also better afford the bottles of bourbon I have in the kitchen. Maybe he should pay for those as well. ;-)

Such logic troubles me, I suppose.

That "logic" SHOULD trouble you, Barry.

25% of $100,000 = $25,000, while 25% of $1,000,000 is a whopping $250,000!!!

The same percentage already has progressivity BUILT-IN.

At the above rate 100 taxpayers earning that $1,000,000 will pay as much in taxes as 1000 $100K earners!

Beyond that point, we enter the realm of punishing people who hold more valuable skills, who provide more benefit or are in greater demand, merely because of some perceived "unfairness."

INCOME inequity and disparity is not unfair, since we all know that some skills are simply more valubale than others - fewer people can master neuro-surgery and patent law than can teach geometry or develop computer code.

I have, at various times in my life, thought favorably of a consumption tax, as long as provisions are made to make sure the lower income groups are permitted the appropriate exlusions to prevent it from becoming a regressive tax.

As I read more and more about, I realize how complex and difficult the application would be, and I realize the horrendously complex effects on the economy. As a result, all I know is that the current system stinks, and I don't want a flat tax.

Here's a great article about a consumption tax. It's long, and will make your head ache if you read it all without simulataneouly sipping a Brandy or chugging a Budweiser, depending on your preference.

http://www.mises.org/story/1768

As others have pointed out more articulately than I: The so-called "progressive income tax" isn't progressive at all because it is so easy for high-earners to evade the higher rates. This table: Effective Federal Tax Rates Under Current Law, 2001 to 2014 moved little more than 10% (26.8% to 23.8%) under extraordinary circumstances and is already back to 26.3% (for 2005) despite the "whopping" tax cuts for the rich under Bush. Basically, high-earners have worked out how much they want to pay and what they have to do to keep their effective rate at the level and so much for progressivity.

If the tax is already effectively flat, let's just dispense with the annual rituals of tax "calculation" and tax "planning" and drive a stake through the heart of the IRS.

I have two problems with the so-called "fair tax" which is, of course, just a national sales tax. First: Why on earth would we want to turn merchants into tax collectors? Second: Just like rich people don't need income to be rich, they don't need to buy things to have a lot of stuff. Any time the rich -- and the near rich -- felt that the consumption tax was a little too high, they could just go on spending holiday for a while, which will not only spare them the tax liability, but would probably also be an effective bludgeon to force congress to lower the rate.

In fact, what we probably need is a combination of income, consumption and property tax to catch everyone. If we skip the social engineering aspect of tax collection, we can also simplify it to the point of making it practically invisible to the average American.

ALL taxes are painful.

There's no getting around that.

Tax rates above 20% tend to become viewed as punitive by taxpayers - that is, as "disincentives" to carry out that action being taxed.

The primary problem with the income tax is that it's a productivity tax. It taxes the reward/income for the effort/work needed to produce various goods & services.

One of the reasons our underground (off-the-books) economy is so large is because many workers are motivated to take less money (straight time, off the books, compared to time and a half on) to avoid the higher tax rates that would come with that higher documented income.

People have long said things like, "The rich could buy things overseas," and yes, we could & WOULD charge import duties (taxes) on those things, or "The rich can avoid spending on higher priced (and higher taxed) luxuries) luxuries," that too is highly unlikely, as the only value money has is in what it can get for you.

The corporate taxes are already passed along to us as consumers - no company pays ANY taxes "out of would-be profits," the costs of doing business, all the costs of doing business are passed along.

A consumption tax that would eradicate the personal income tax, FICA taxes and the corporate income tax would greatly improve the plight of the most productive (the higher income earners) slightly at the expense of the truly wealthy (those who do not rely on income for the bulk of their wealth), but mostly it would cease to punish productivity and shift that burden over to consumption, which would have the added benefit of having more people reconsider their spending priorities and curbing some of the worst effects of what is called "rampant consumerism," or "conspicuous consumption."

The innate unfairness in the income tax, or ANY productivity tax is that it relieves a huge portion of the population from paying for government.

Less than 50% of Americans now pay the income tax and the truly wealthy (folks like Ms. Heinz-Kerry and Tom Keane jr) pay a pittance because the bulk of their wealth is derived from investments and the resulting deductions reduce their overall tax burden (including their income tax burden) substantially.

A consumption tax spreads that burden out among a much larger swath of the public, as EVERYONE consumes.

It's not a bad idea to tax, and therefore punish, consumption. Americans overconsume, supporting countries like China who trade unfairly dumping mountains of ticky-tacky into Wal-Marts for us to waste our money on.

Punish consumption with taxes and the ungrateful parasites (the rest of the world) that live off of the American consumer will suffer, as they should.

Actually a consumption tax can be as harmful as any other tax, the ONLY real benefit is that it doesn't punish productivity, and thus spreading the tax burden around more equitably.

The idea of punishing trading partners is a dumb idea, I'd expect the likes of you to advance.

Seeking to harm trading partners is like gouging out your own eye, to get back at someone who slapped your face.

Having the tax burden spread around equitably would only be fair if income and wealth were spread around equitably, which they are not. The ones with the most means to pay should continue to pay the most. It will not alter productivity too much since most of the really high-income earners will continue to produce whether they have an effective tax rate of 30% or 40%. That is because they are driven to be successful, regardless of their marginal tax rate.

I've seen arguments that the top 1% of wage earners pay something like 30% of the total income tax. That doesn't bother me much. I doubt it bothers them too much, either. Most of them are proud to live in such a country that offers them so much opportunity for success. Most of them don't consider taxes a "punishment", but rather the cost of living in such a great nation that has such huge expenses.

If some of the truly wealthy are getting around income taxes, then those loopholes should be fixed. Also, I really hope the Estate Tax comes back to stay in 2010. Far too many progeny are getting rich off the work of their parents.

Wealth and income SHOULD NEVER be spread about "equitably Tracy." I'm certain you'd agree with that after giving it any thought.

Some skills are rightly valued much higher than others...in that regard, the "market is always right."

Moreover, there's no way to "fix the loopholes" in the income tax for such things as "depreciation," invetment losses, etc without greatly reducing capital investment, with disastrous effects on the overall economy.

I've said this before, poverty is never the result of any kind of "bad luck," or "victimization," it is always the result of behaviors - primarily recklessness, irresponsibility and slothfulness.

Thus the most basic solution to poverty can be found in the great Bill Bratton's admonition to the NYC "squeegee men" - "Get off the booze, get off the drugs...and get a job."

What the income tax does that is disastrous is that it punishes productivity (well, any cumulative tax burden on income above about 20% does) and provides a powerful disincentive to work.

A consumption tax is the ONLY vehicle that can touch the truly wealthy - those who don't rely on income for their wealth...the people, who through their investments create the jobs the rest of us rely upon.

The Fair Tax is without question the most equitable and efficient tax system available.

Beyond that, again, your arguments Tracy, fail to challenge the progressivity inherant in a flat income tax - as 25% of $100K is just $25,000, while 25% of $1 MIL is a whopping $250,000! The same degree of pain/burden in both instances.

As far as the Estate Tax goes, once again, Trusts, Foundations and Endowments allow the truly wealthy to avoid this tax bite...and rightly so - I think Paris Hilton and other such "heirs" deserve the money their families earned. I just hate seeing people with "lesser forrtunes" people who inherit valuable land, etc being slammed with that arbitrary and capricious tax.

Those fortunes are private property and free, self-owning people are "endowed by their Creator" with the right to dispose of their own acrrued private property as they see fit.

Freedom/LIBERTY isn't often pretty and it's certainly NOT, in any way, "fair," but then again, neither is the distribution of skills and motivations, either...some folks have an abundance and others have little of either.

> The ones with the most means to pay should continue to pay the most.

As they would do even under a flat tax, particularly one with a generous exemption. The more money you earn, the more you pay, in direct proportion to your income. That seems eminently fair to me, particularly when a universal exemption would make the effective tax rate even more progressive.

Under the current tax system the top 1% of income earners, a group with precious little overlap with the top 1% of the wealthiest Americans, pays over 50% of the income taxes. The top 10% of income earners pay about 90% of the income taxes!

That's more than progressive...in fact, it's punitive. The tax burden SHOULD be better distributed.

The problem with the income or productivity tax is that it makes productivity putative and doesn't touch the truly wealthy (the investor class) nor those who work in the large and growing underground (off-the-books) economy.

The Fair Tax solves that problem (getting both the investor class and the underground workers to pay), while lifting the disincentive to work/produce that higher income tax rates create.

JMK, you missed the point, as usual: if you punish consumption, you necessarily punish productivity.

By your own logic, when you tax (punish) people for doing something, they do less of that thing.

A consumption tax will therefore make Americans consume less. Less consumption, less need for products, less need for productivity.

I never said a word about punishing trading partners. That might be a natural outcome of punishing consumers, however, and a positive one in my mind.

I'm just trying to back you up, JMK.

"I never said a word about punishing trading partners." (BH)
"Americans overconsume, supporting countries like China who trade unfairly dumping mountains of ticky-tacky into Wal-Marts for us to waste our money on.

"Punish consumption with taxes and the ungrateful parasites (the rest of the world) that live off of the American consumer will suffer, as they should." (BH)

Yes, China IS a "trading partner," for better and for worse...some of both actually.

A tax rate above a certain amount becomes a disincentive, NOT strictly a "punishment." The term punishment is not entirely accurate, as it's overly simplistic.

People respond to INCENTIVES.

When income tax rates, for instance, rise, then higher income earners place more of their money in deferred compensation vehicles and other vehicles with tax advantages, in effect LOWERING ACTUAL TAX REVENUES.

When income tax rates, lower, down to about the 20% mark (below 20% revenue rates fall), more high earners pay their tax liabilities up front - RAISING ACTUAL TAX REVENUES.

A consumption tax relieves ALL taxpayers of the INCOME TAX, the FICA TAXES, the Cap Gains Tax, the CORPORATE INCOME TAX (a stealth tax we all pay as consumers, as those are all passed along to us), so there is actually NO diminution of consumer purchasing power.

In fact, for most working people, purchasing power increases as the tax burden (the top 10% of income earners now pay appx. 90% of all income taxes) will decrease as the investor class &/or the truly wealthy (those who don't rely on income for wealth) pay more of a share of that tax burden.

The tax burden would remain pretty constant for the bottom 50% of income earners (those earning from around $35,000/year and under pay ZERO...and still would), the tax liability for the top 20% of income earners would decrease somewhat, while the tax liability of those truly wealthy individuals (those who don't rely on income for wealth...about 4% of Americans) would pay a somewhat larger share of the tax burden.

I do appreciate you backing me up, it's only that your logic here and thus your defense are both somewhat flawed.

I'm not so much disagreeeing as clearing things up.