Flat Tax - please to esplain?

[merithyn]

With all of the noise going on about the budget, taxing the rich, taking from the poor, etc., I'm once again trying to wrap my brain around how a flat tax is a bad thing. Can someone please explain to me the arguments against a flat tax?

Thank you mucho in advance.

[garbon]

http://taxes.about.com/od/statetaxes/a/Flat-tax.htm

[Grey Fox]

The Albertan can tell you about it.

[Sheilbh]

Theoretically a flat tax is unfair in the sense that 20% of an income of £12 000 has significantly more effect on that person than the same amount on someone earning £100 000.  To overcome that difficulty it becomes necessary to include substantial deductions, or credits and often to take account of whether someone's got a family and so on.  All of that undermines the flat tax's central attraction which is that it's simple.

Practically they're not as low as I think people often think. Fla taxes have been effective in a number of Eastern European countries because their simplicity makes tax evasion more difficult.  But in the majority of cases the rate of the flat tax, or of flat tax + social security (especially on the employer side), isn't terribly low and would, I think in the US, probably be quite high.  There are, however, exceptions such as Russia.

You can see some of that here in the tax wedge column (by 2009 of this list Latvia, Lithuania, Estonia and, I believe, Romania had flat taxes):
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Tax_rate_indicators_on_low_wage_earners.png&filetimestamp=20110712142515

Personally I support what the New Zealand government are working towards.  Low rates, broad base, few deductions.  The challenge is making the rates low enough that you don't need to complicate the system with credits and deductions while keeping the base broad enough that you don't end up with a situation like the US or Ireland.

[MadImmortalMan]

Most of the flat tax proposals include an exemption on the lower income, so it's kinda meh.

[merithyn]

I think the part that I'm confused on is that if Warren Buffet is correct and he is indeed paying less of a percentage of his income than his secretary, then how do the arguments of a flat tax being hardest on the poor pan out?

[Martinus]

What others said. And a flat tax with a tax free amount is not really a flat tax anymore.

[crazy canuck]

What others said. And a flat tax with a tax free amount is not really a flat tax anymore.

I think you misunderstand the mischief a flat tax is designed to address.

[Habbaku]

A pure, flat tax would be horrible.  A flat tax with basic exemptions is the height of sanity compared to the current slapdash system in the USA.

[Iormlund]

I think the part that I'm confused on is that if Warren Buffet is correct and he is indeed paying less of a percentage of his income than his secretary, then how do the arguments of a flat tax being hardest on the poor pan out?

The Buffet thing is another issue: capital is taxed less than labour or (at least over here) there are a lot of loopholes available.

The regressiveness of a flat tax lies in the amount left after taxes and the essential products and services everyone needs. If you take a big percentage of what Buffet makes he'll still be able to live like a king. If you take the same percentage from his cleaning lady she won't be able to afford rent, healthcare or a decent school for her kids.

[crazy canuck]

I think the part that I'm confused on is that if Warren Buffet is correct and he is indeed paying less of a percentage of his income than his secretary, then how do the arguments of a flat tax being hardest on the poor pan out?

The Buffet thing is another issue: capital is taxed less than labour or (at least over here) there are a lot of loopholes available.

The regressiveness of a flat tax lies in the amount left after taxes and the essential products and services everyone needs. If you take a big percentage of what Buffet makes he'll still be able to live like a king. If you take the same percentage from his cleaning lady she won't be able to afford rent, healthcare or a decent school for her kids.

That is why all realistic flat tax proposals exempt a significant base amount from low tax earners.  The aim of the flat tax is not to prevent people from living like "a king".  That is socialism.  The goal of the flat tax is to remove needless disortions and complexity from the tax systems so that the rich end up paying less than their cleaning lady.

[Berkut]

I think the part that I'm confused on is that if Warren Buffet is correct and he is indeed paying less of a percentage of his income than his secretary, then how do the arguments of a flat tax being hardest on the poor pan out?

Because Warren Buffet's "income" is pretty minimal. He makes his money off of capital gains, which is not "income" per se.

A flat tax would make this problem worse. A lot worse. Much, much, much, MUCH worse. Unless you build in exemptions for lower incomes, in which case it is no longer all that flat anymore, by definition.

I am all for simplofying the tax code, but a flat tax would just be a reset of the problem, not a solution. It would become complex again quickly because nobody is really willing to create such a regressive tax that a true flat, simple tax would represent, nor should they.

[DGuller]

I think the part that I'm confused on is that if Warren Buffet is correct and he is indeed paying less of a percentage of his income than his secretary, then how do the arguments of a flat tax being hardest on the poor pan out?

Buffet is talking about the totality of taxes, which are indeed regressive, which is worse than flat.  The flat tax advocates talk about just income taxes, which is the only progressive tax out of all the taxes people pay.  Therefore, flat income tax, if enacted, would make the totality of taxes even more regressive than they are now.

[Berkut]

I think the part that I'm confused on is that if Warren Buffet is correct and he is indeed paying less of a percentage of his income than his secretary, then how do the arguments of a flat tax being hardest on the poor pan out?

Buffet is talking about the totality of taxes, which are indeed regressive, which is worse than flat.  The flat tax advocates talk about just income taxes, which is the only progressive tax out of all the taxes people pay.  Therefore, flat income tax, if enacted, would make the totality of taxes even more regressive than they are now.

[Martinus]

I think the part that I'm confused on is that if Warren Buffet is correct and he is indeed paying less of a percentage of his income than his secretary, then how do the arguments of a flat tax being hardest on the poor pan out?

The Buffet thing is another issue: capital is taxed less than labour or (at least over here) there are a lot of loopholes available.

The regressiveness of a flat tax lies in the amount left after taxes and the essential products and services everyone needs. If you take a big percentage of what Buffet makes he'll still be able to live like a king. If you take the same percentage from his cleaning lady she won't be able to afford rent, healthcare or a decent school for her kids.

That is why all realistic flat tax proposals exempt a significant base amount from low tax earners.  The aim of the flat tax is not to prevent people from living like "a king".  That is socialism.  The goal of the flat tax is to remove needless disortions and complexity from the tax systems so that the rich end up paying less than their cleaning lady.

As I said, if you exempt a base amount from the flat tax, you no longer have a flat tax - you have a progressive tax scale, with two thresholds - 0% and X%. So you may just as well go whole hog and have more than one threshold.

In short, if you recognize the need to have a base amount that is exempt from tax, there is really no good argument why you can't have a progressive tax scale. (Or rather, all arguments against the progressive tax scale apply equally to the tax exempt amount).