What are the objections to implementing a flat rate income tax in the United States?

Question

Some of the most heated politics debates are about taxes, and who should get taxed more and who should get taxed less on their income.

But there rarely seems to be any debate in US politics as to whether everyone's income should get taxed at an equal rate - e.g. flat tax. (aside from one GOP presidencial candidate in 2012, no other major political figure openly advocated this), which may be argued is the fairest approach as far as people being treated equally under the law.

What are the main stated objections to implementing stated tax in the United States?

Answer 1

There are two stated disadvantages:

1. A completely flat tax rate is frequently considered unfair to people with incomes that are below or at minimal survival (poverty) level.

   Let's assume that we have 3 people, one making $10k/year, another making $11k/year, and a third making $40k/year; with an effective state+federal flat tax rate of 10%; and a minimal cost of living in their area of $9,500/year (e.g. rent+food+other non-luxury expenses).

   Now, after taxes,

   • the first person's take-home income is $9k/year. He basically can no longer survive on his own income (whereas he could before the tax).

   • the second person's take-home income is $9.9k/year, down $1.1k. This leaves him $400/year surplus, which is 26% of what his surplus would have been pre-tax. He's better off than the first person, but still, his surplus income just got cut by a factor of 4!

   • Third person's take-home is $36k, down $4k. A pretty annoying hit, but his surplus income is down only 14%, compared to before taxes. Not pleasant, but not nearly as impactful to, say, ability to invest in his future.

   Therefore, a completely flat rate is generally heavily detrimental to people who are close to poverty level.

   As such, at least SOME degree of un-flateness (via tax credits or lower rate) seems to be a reasonable enough policy, since driving people below poverty level is a much heavier hit on the economy (as they would simply drop the job and go on welfare).

   Now, having said that, there is something to be said for flat income tax rate at the income bands where the hit to surplus isn't as drastic, if your goal is fairness and equal treatment under the law.

   For example, if you tax a guy making $100k a year an effective rate of 33% (which sounds about right for federal+state taxes combied), his surplus rate is down ~37%, at 63%. Hardly fair since it's over 2 times the impact compared to the guy making $40k.

   If he was only taxed at the same 10% as #3, his surplus impact would only be 12%, not 37% (to make it completely fair in terms of surplus impact, his effective tax rate should be a shade higher than 10% (13% by my back of the envelope calculations).

   This is where we come to the second state objection comes in.

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2. Now, the second stated disadvantage of a flat tax policy is that it is "unfair" in terms of the absolute amount of after-tax surplus income that people get.

   In other words, people claim that with 10% flat rate (or even the "more-fair 13% I calculated above), the $100k/year guy will take home $80.5k surplus income, which they claim is "unreasonably high" enough to be unfair to the guys making $11k (who only takes home $1.5K even with no tax) or $40K guy (who takes home "only" $26.5k surplus with 10% tax).

   The general counter-argument to that is that is "any measure based on absolute amount of take-home pay will be 100% arbitrary - meaning, some person in government gets to decide how much money is 'enough' for you to make and how much is "too much". So $80.5k is too much to be fair, but $57k is fair enough.".

   If you don't see anything wrong with that, imagine that some day, another person comes to power (let's call him 'Ilyich'), and declares that everyone - you personally included - can only take home no more than $800 above poverty level. What makes that amount any less arbitrary than your decision that $80k is "unreasonably high"? You literally have absolutely no logical, moral or philosophical ground to claim that $80k is "too high" and "$800" is "not too high", aside from utilitarian "there are too few guys making $100k/year who vote, so they are powerless to stop me".

Answer 2

The essence of the objection to a completely flat tax rate is based on a notion of cardinal utility that many find intuitively appealing. It is asserted that an extra dollar is worth less to someone who already has $1,000,000 (Person A) than to someone who has only $10,000 (Person B).

Therefore, the argument goes, taking a dollar from Person A would decrease her happiness less than it would increase Person B's happiness, leading to an overall increase in total happiness in society.

As an economist who subscribes to an ordinal view of preferences, I cannot accept that as a justification. The cardinal approach allows a person to claim that your property in his hands would make him happier than you losing your property would reduce your happiness, and can be used to justify almost any grab.

In practical terms, I think the argument is invalid because income is a flow, and actual wealth is a stock concept.

For example, if Warren Buffett chose to stop making income tomorrow, he would be in the position of Person B, but still live a very good life.

On the other hand, a budding actor may get her first (and maybe only) major movie deal, and make a boatload of money in just a single year (Person A), only to have it taken away to help poor Person B.

Answer 3

First off we do have a flat tax in the U.S. - Sales tax is flat by most every definition. And property tax is flat by the definition of the owner's income level does not impact the tax (the owner's income level does impact what property they can buy).

For income tax, what is equality? Is it the same percentage, the same total dollars, the same level of pain, the same benefits you accrue from our system, the same level of opportunity, or ...

Key to your question is what do you want to have equal.

Answer 4

The reality is a flat tax has no practicable advantage over a progressive tax system.The tax introduces no real complexity to the system. At the end of the tax preparation process, you look your net income up in a table that gives the income tax. That process is no simpler with flat tax than it would be with a tax rate involving complex transcendental functions.

The main objection to a "flat tax" is that it does not address the complexities in the tax code. It is a political distraction from more significant taxation issues.

Answer 5

the big issue have already been addressed, I won't reiterate them too much. The short version being that 10% of someone right at poverty does them far more harm then 10% of someone totally rich. Part of this is because there is a certain minimum amount everyone must spend to survive, so a 10% tax on income may drop a poorer person disposable income (income after minimum cost to just survive) by 99% and a rich persons disposable income by 10.2 %. It's argued that it's the disposable income which really affects ones satisfaction, so the guy who loses 99% of it suffers greater.

Studies do show that the very poor money is a major factor, and an increase of a small percentage of income can have a very real affect on happiness (more by removing stress that they won't have enough to survive), as income goes up the difference in happiness that extra income provides starts to drop quite rapidly. By middle class the difference is actually pretty minimal as income increases. by upper class it has no real affect on happiness. Of course this is only one factor in considering taxes.

However, I wanted to focus on the other issue, our complex tax laws. We have more then just the flat percentage we pay, we have all kinds of deductibles, credits, etc etc that are factored into our taxes.

Some argue that these are too complex, making it impossible for anyone to know how to pay their taxes. When you have to factor in the price of a tax consultant to figure out what you owe then perhaps things are a little too complex? I won't speak to the complexity issue, because it's sort of arbitrary (how complex is too complex?). For now lets look at the difference between a flat tax rate and just one or two of these sort of adjustments, something small enough to not make taxes too complex; is it worth doing?

There is a reason for all these laws, they are designed to encourage behaviors we want. For instance I donate quite a bit of money to charity...or did last year (personal investments mean I won't get to this year sadly). I was not forced to pay taxes on my charitable donations, so I'm encouraged to give my clothing to charity rather then throwing it out because not only will it help people, but it will save me a tiny bit of money. To those who are not motivated by helping others the tax savings can still result in charitable donations, and those donations can help the goverment (better to give a 30% tax savings to someone donating their old clothes to the poor then to pay 100% of the clothes costs in welfare for someone below the poverty line to buy clothes).

I'm looking to buy a new car soon. I seriously looked at an electric partially because of the tax savings on it (turns out it can't manage my long drives). My parents looked into solar panels for their house for the same reason. These savings aren't much, but they can be just enough to push those who are undecided towards these options. In both cases these options help the enviroment, which the goverment feels is worthwhile. By applying tax savings they can better encourage these investments. Ironically my parents didn't get the solar panels because their retired and wouldn't be able to gain much of the tax savings, if they were able to they would have bought the panels.

The point is, by applying adjustments the goverment is able to provide subtle encouragement to every day folks to do things they approve of. While there are other ways to do some of this, for instance subsidizing the solar panel and electric car industry so they can offer cheaper services, doing it through taxes is deemed the best approach (it's more direct control over the results for limited logistical overhead, and allows more competition and market forces over subsidization). Other things, like encouraging people to donate their clothes instead of throwing them out, is really hard to do without taxes refunds.

The goverment feels that this bit of extra complexity in taxes is worth it because taxes are the main way the government can encourage positive activities without mandating them by law.

Personally, with everything so automated I would love for the government to automatically communicate with banks and businesses and generate my basic taxes for me; there is little need for me to manually enter this all when the goverment is already collecting and correlating it! Just let me add in the deductibles I get for obscure things. I should never ever ever have to calculate my tax on stocks, which is annoying enough to make me want to just stop investing in the stock market lol. Ah well, maybe in another 20 years it will happen lol.

Answer 6

What are the objections to implementing a flat rate income tax in the United States?

I'd imagine accountants wouldn't like it at all, considering it would make people's lives much easier, and their services much less necessary.