Did you catch that? Just complying with the tax code will cost us $338 billion this year. That’s equal to 35.5% of the entire federal income tax. Over a third! It equals 15.3% of all federal taxes being paid this year, including Social Security and Medicare taxes.
More: we’ll spend 7.6 billion hours complying with the U.S. income tax code this year: that’s a full workyear for 3.8 million people. Every adult in Wisconsin, plus a few hundred thousand border-jumpers. Working for a year, just to pay the taxes.
And we have to do it, because the tax code has become so enormous, and unwieldy, and complex that even professional tax accountants – even the IRS itself – can't always get it right.
Now: imagine the flat tax. No deductions; no credits; no formulas or schedules or running to the computer again and praying you’ve got enough ink left to print out one more form.
None of that. Just a single, constant exemption – the first $10,000 of income per family member, I believe is the usual amount – and a flat tax rate after that.
Bam! If we were reducing tax revenues by that much, it would mean a 13.25% nationwide “tax cut.” Nearly 4 million worker-years of time saved.
But…a flat tax? Poor people paying the same as rich people?
Actually, those per-person exemptions will progressivise tax rates, even with a flat tax. Take a family of four: their first $40,000 of income is exempt. Let’s just assume a flat rate of 20%. A family of four making $40,000 would have taxable income of zero, and an effective tax rate of 0%.
A family of four making $60,000 will have taxable income of $20,000. They’ll pay $4,000, making their effective tax rate 3.3%. A family of four making $80,000 will pay an effective tax rate of 10%; at $100,000, the effective tax rate is 12%; at $250,000, it’s 15.2%; at $1,000,000, it’s 19.2%.
Naturally, for some people, that’s not nearly progressive enough. But it is progressive.
But, fine. You want more progressivity? Build it in. Given the structural benefits of moving from our current library-sized tax code to a fast, simple flat tax means we could still have progressive tax rates, and it would still be worthwhile.
Ouch. The fiscal libertarian in me just punched me in the liver. I’d better mention that the IRS’ budget is over $12 billion this year alone. That’s money we won’t have to spend – or, rather money we can spend elsewhere – if we institute a flat tax. Or even a sorta-flat tax.
I know what you’re thinking: what about all those IRS agents? And their accountants, and secretaries, and middle managers?
While we’re at it, what about all the private-sector tax accountants, and all the people they employ? All the businesses which do business with them? Won't we be putting most of them out of business? Aren't we better off having all those people working in the fields they've spent their lives training to work?
Remember under the Reagan administration the tax code was simplified? Well, what happened then, gradual inflation of the code as each interest wormed their way in. I am in favor of a flat tax but with graduated rates. I don't believe someone making $20MM a year should essentially pay the same marginal tax tax as someone making $250,000 per year. But that is in fact a detail. What will happen to business taxes? Remember there are plenty of distorting events in the code for businesses.
dave allen (Tue Apr 20 06:31:38 2010)
A flat tax with graduated rates? Why am I now thinking "jumbo shrimp"?
My proposed tax code would include a post card mailed out (or even better, downloadable) on the first business day of the year.
Line 1 - Gross income from everything:
Line 2 - Multiply Line 1 by .15:
Line 3 - Amount paid during prev. year:
Line 4 - Subtract Line 3 from Line 2:
If Line 4 is a positive number, mail a check ... if it is negative, we'll send you a check.
NO manipulation of the code. NO exceptions. Done.
Jeff Riedl (Tue Apr 20 08:14:28 2010)
Dave, what, exactly, is the guy making $20Million a year getting more than the guy making $250K that he deserves to pay a higher rate? I have never understood the logic here. Never. Is it because the gov NEEDS to come up with sufficient funds? Hmm. I'm one guy running a household, and I can budget. Need to squeeze? Efficiencies and cutbacks here and there. Gov can't squeeze enough? Spread the burden FAIRLY.
I work in sales. It really hit home for me last month that the harder I work, the lesser my renumeration. Really gives working people great incentive to be prosperous.
The graduated tax is nothing more than a cheap rip-off of the wealthy. Whether they've earned it or not, whether they need it or not, it's not yours, or mine, or the government's to just take away.
It rings loudly of "from each according to his ability, to each according to his need."
To call a spade a spade: "graduated socialism" seems a pretty apt term.
Andrew Ellis (Tue Apr 20 08:32:09 2010)
Dave, you're right, even after the flat tax was instituted (with or without graduated rates), we'd have to really watch to make sure all the crap didn't sneak back in.
Business taxes - I believe most flat taxers want one rate for individual income taxes, one for corporate income taxes. Same deal: a flat rate, no exemptions. Then eliminate all double taxation on things like investment. But those are details to be considered. You know me: I'm all for eliminating business taxes completely.
Lance (Tue Apr 20 09:13:48 2010)
Any scheme that involves the abolition of the IRS will never come to pass.
"I know what you’re thinking: what about all those IRS agents? And their accountants, and secretaries, and middle managers? "
And this is why. All those bodies and their bosses and their union have a lot of sway in D.C. - way more than you or I.
If it's gonna fly it's gonna have to include the IRS, and preserve their budget, and not demonize the rank and file of the IRS.
Brian Dunbar (Tue Apr 20 10:39:25 2010)
That's exactly why the Founders wanted a 'district' where the seat of government was, not a voting state. It's pretty obvious that the District of Columbia is now running our country, and feathering their nests while they're at it.
And I think a flat tax is the best tax!
Duke (Tue Apr 20 15:00:21 2010)
"That's exactly why the Founders wanted a 'district' where the seat of government was, not a voting state. "
- A lot more government workers live in Maryland and Virginia than live in D.C.
- And so? I wasn't speaking of 'guys who vote' but the influence and power an established bureaucracy has.
Brian Dunbar (Tue Apr 20 17:28:42 2010)
Exactly my point. The geographical cancer has just spread over two centuries into the surrounding areas. I imagine the Founders would have wanted the boundaries of D.C. to shift outward in order to hold the burgeoning bureaucracy. Their fears, now reality, were of a machine that could feather its own nest at the expense of the rest of the nation. Just exactly what we've got.