You know it is that time of the election cycle when the flat-taxers come out in force trying to convince the poor and middle class that they would be better off paying the same low rate as hedge fund managers and Paris Hilton. They make specious claims about revenue neutrality (or increases!) and broadening of the tax base (to people earning less than poverty wages). In reality, the party that wants to drown society in a bathtub is not about to give the government more money, nor are they about to piss of the Koch brothers by increasing their taxes. Flat taxes are, and have always been, BS.
Flat income taxes generally lead to higher sales tax, higher property tax, and other fees and surcharges to make up for the revenue shortfall. Because poor people tend to consume every dollar by necessity, they will end up having a higher effective tax rate. Here’s how this might look:
Say, for example, that Joe Worker earns $20,000 per year and consumes all $20,000 in living expenses. His boss, Mr. Successful, earns $1,000,000 per year and consumes $100,000 in living expenses. Assume a flat 15% tax rate on income. Joe Worker has net income of $17,000. Mr. Successful has net income of $850,000.
Social Security and Medicare are a combined 7.5%, capped at $118,500. Now Joe Worker has net income of $15,500 and Mr. Successful has net income of $841,112.50.
Joe Worker is too poor to afford a home so they pay no property tax. Mr. Successful owns a home worth $500,000 and pays a 2.5% property tax of $12,500.
Sales tax is different from state to state, but just for comparison sake, let’s assume a 5% sales tax on all consumption. Joe Worker consumes all $15,500 of his net income and pays $775 in sales tax. Mr. Successful is wealthier and consumes $100,000 of income and pays $5,000 in sales tax.
At the end of the year Joe Worker pays $5,275 in taxes which is 26% of his income. Mr. Successful pays $176,387.50 in taxes which is 17.5% of his income.
Now, tell me again how the poor person is better off?
Under our current system …
Now let’s change the scenario so that we have a higher marginal income tax rate. Joe Worker has a top marginal rate of 15% and Mr. Successful has a top marginal rate of 40%.
Joe Worker and Mr. Successful still earn the same amounts, but Joe Worker is now taxed at 10% due to tax credits and deductions and Mr. Successful is taxed at 30% due to tax deductions and credits.
In addition, let’s assume that because income taxes are higher, sales tax and property tax drop to 4% and 2% respectively. (There’s no guarantee they’d drop, of course, but that’s often how the system works.)
At the end of the year Joe Worker will pay $4,160 in taxes which is 21% of his income. Mr. Successful will pay $322,887.50 in taxes which is 32% of his income.
In addition, the governments (local, state and federal) will have $145,385 more in tax revenue than under the flat tax scenario.
So, tell me, who should pay more as a percentage of their income: a person who makes a million dollars, or a person who makes $20k? And don’t forget, the government gets more revenue in scenario two. So all the deficit hawks can quit squawking when the government has more money to pay back debts with.
In essence, a flat tax is nothing more than a wealthy Republican scheme to pay less, while shifting the burden to poor and middle class people. Remember, no Republican politician will ever propose a higher tax on their wealthy constituents. A flat tax is nothing short of a scam.
KIENAN MICK is a resident of the beautiful, lake filled Twin Cities. He has a degree in Economics from the University of Minnesota, and an MS in Applied Economics from the University of North Dakota. In his spare time, he enjoys amateur photography, nature hikes, and bird watching. His interests lie in “alternative” economic systems where the public, unions, and co-ops take a greater stake in our economy.