Fixing a Flat

Taxes.  What a concept.  Is there any way to satisfy those who believe progressive taxation is a more fair distribution of burden, those who believe the only fair formula is that everyone should pay the same percentage, and those who think that we should abolish federal taxes altogether and pay as we play?

Personally, I believe progressive taxation is the best way to keep capitalism running in perpetuity, but I’m listening…

It occurs to me that we are looking at the current tax structure incorrectly.  It seems that the general perception of our current tax rate is that its around 23%, but that the high earners pay more at 36%.  I’d like to flip our perspective in order to make a case.

Try thinking of our current tax rate as being 36% and that middle and lower class earners pay less, averaging 23%.

That may seem pedestrian, but it makes a point; it alters the perception that many have that wealth accumulation is punished and I’m suggesting that we, instead, look at it as if lower incomes are being incentivized to invest and spend.

The question now becomes, “Is 36% too high?”

Well, if you consider that 50 years ago the highest marginal tax rate was 91% and people still accumulated vast amounts of wealth an argument could certainly be made that a rate that is 55% less is astonishingly low.

If you consider that the transfer of wealth toward the upper class has amassed three times higher in 30 years than for middle class Americans, a case can clearly be made that tax rates are working in favor of the higher earners, but I’m going to go out on a thlimb here and say, “Yeah, I think 36% is high” (don’t get too excited, conservative friends- there’s more…)

It’s also pretty close to irrelevant.

If progressive tax tables unfairly tax the rich, why has income inequality between the top 1% and middle incomes tripled over the past 30 years?  How have the wealthiest Americans managed to increase their holdings in that span by 250% if taxes are unfairly repressive for them?

In 1979, the middle 20% of Americans averaged $54,000 annual income (higher than the “average” household income).  The top 1% averaged $550,000.  Today, the middle 20% have increased their average earnings by 8% while the top 1% have increased their average by nearly 29% to 1.9 million dollars a year.

If progressive taxation is unfair, then it has been unfair in favor of the rich.

The tax code has been modified over the past 99 years to work toward incentivising investment and sheltering wealth by lowering capital gains tax, creating S Corp status and all sorts of investment protections and deductions.  What has clearly happened, now that we know that one of the richest men in history pays an average personal tax around 15% and a wealthy, former presidential candidate has revealed the same, is that the tax codes have been their friends.

The conversation we should be having should not be about the higher bracket (which no one with even a decent accountant pays) and it should be about reforming breaks, loopholes and deductions so that the investment class remains incentivised, while the middle and lower classes are given better opportunity to spend and invest.

Many people argue that a Flat Tax is the cure to end all inequities and I’ve found that the more information I offer to counter it, the less those who think a flat tax makes sense, will listen.  But, here I go….

A Progressive tax is based on a simple idea that it is more fair for those who have the ability to pay the most, to be the ones who pay the most.  The argument against a Progressive system is equally logical; it is the idea that success is being punished when rates become higher for higher incomes.

In a flat tax system, however, the lower the income, the greater the tax burden and the difference between tax percentage and tax burden needs to be understood.

Take sales tax, for example, that is a regressive (or flat) tax where everyone pays the same percentage of a purchase.  For the sake of an illustration I’ll use low numbers, but you can add all the zeros you’d like.  If a person who makes $10,000 a year makes a purchase on a $100 item and pay a fixed sales tax of 9%, that’s .0009% of their income.  A $100,000 earner making that same purchase pays .00009% of their income; the reality of that tax as a percentage of income is, therefore, 10 times greater for the lower income; that’s tax burden.

“But, a Flat Tax means that those making less are paying less!”

Actually, no.  The Americans who could barely (or not at all) afford a minimal standard of living would be paying taxes they didn’t previously pay and middle income families, while some will pay less in federal taxes, are still shouldering a greater burden from regressive taxes and rising costs of living.

Take an average American household income of about $50,000 a year and compare that to a very comfortable annual income of $250,000.  Presume that a Flat Tax is adopted and everyone will pay 20%.

The 50k family is bringing home $40,000. They live within their means and have a modest house payment (property taxes included) of $1200 a month.  With 2 kids, groceries are $400 a month, utilities $200, car payments with insurance is $500.  Miscellaneous (gasoline, parking, etc) is $500.  Health insurance is $5500 annually.  At the end of the year, after modestly calculated hard costs, they might have a thousand dollars in discretionary money.

Christmas is on a credit card, and there’s nothing put into savings or for a college fund.  If a water heater breaks or there’s a serious health issue, they borrow.

This, by the way, is exactly what is happening to the Middle Class.

Now, at $250,000, they pay taxes at 20% too and bring home $200,000.  They can afford to live in a $600,000 house and the mortgage is $4500 a month.  They have an SUV and a nice car with payments that total $1500.  The kids are in private school adding $10,000 more a year, plus they can put 10,000 a year into funds (college or trust) for two kids.  They buy groceries and often entertain and that costs $2000 a month.  Basic utilities are $1000 a month.  They have a stellar health plan and pay $10,000 a year.

After expenses for a very comfortable lifestyle, they have $62,000.  They can take a family vacation for $7,000 and still save $55,000. They put half into retirement accounts and have $27,500 still for discretionary spending and so over two thousand dollars a month goes into the stocks and investments.

They are entitled to live this way and that is the reward of their income – no one is arguing thatbut, now here’s the tough part –  every dollar is more valuable to the first family and their meager $1000 is more precious than the $62,000 is to the second family.  And collectively it is more valuable to our economy – because the first family is 90% of America.

It is the aggregate of that disposable income that drives consumerism and feeds our economic system—allowing for success.

There is nothing wrong with having the lifestyle your earnings provide to you, but when tax rates are the same, the tax burden is not and if participation in consumerism is predicated on having a high income, the system will fail.  The reason we have economic deterioration isn’t because the progressive system is failing, it’s because we have allowed for massive loopholes, shelters and minimal capital gains tax, to where, in fact, it isn’t really progressive anymore- it favors the top.

Sprinters and distance runners are measured in terms of their speed to the finish line, but we don’t race sprinters against distance runners in the Mile and then judge them as “slow” because they didn’t have the stamina to finish the race; we change the criteria to match the event.

In golf, a handicap is given based on an amateur’s ability on a given course so players of different proficiencies can play competitively against each other.  You could call that a “Progressive” golf system- and the reason for it is to increase membership at the club and keep the course open (you can replace “course” with “economy” if you’d like).

A Flat Tax will only exacerbate inequities, strangle the Middle Class and put more people into debt; it is not the solution to an ailing economy and will, in fact, make things worse…which brings us back to “Dough.”

The Buffet Rule, rejected by House Republicans, was designed to solve the conflict this essay started with.  Adjusting the code to close loopholes that allow high earners to pay a lower percentage than the rest of us and to bring marginal rates down.  I believe it put the high bracket at 30%.

Heavy sigh.

At what point might the wealthy say, “Thank you, America!  You’ve really been a friend!”

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