Things need to change NOW!

[tortoise1956]

I would like to point out the hard truth, as I see it. This country is in a bad spot, and no one in charge seems to have the political will to change the core structure. We are in financial trouble because over the past 11 years both parties have gone hog-wild on spending and/or cutting, without regard to the future. Now the bill is coming due, and they're hollering bloody murder. Well, to hell with them!

If it was up to me, I would start a serious discussion on restructuring the big entitlements - Social Security, Medicare and Medicaid. The fact is that Social Security is NOT fully funded, as demonstrated in the past 2 weeks. If the government doesn't have the money to redeem the bonds in the trust fund, then the checks don't get mailed out. (I hope that those who kept insisting that Social Security is solvent are paying close attention...) I am 55 years old, and I don't know if these programs will be there for much longer. I would rather take a small hit now to strengthen these programs so that they are financially sound, than a huge hit in 20 years when I won't have the ability to protect myself fiscally.

The next area is Defense. A little background- I retired from the Navy Reserve in 2006 after 20 years, I work on the defense arena, and I have contact with many people who are involved in the wars (military and civilian). So, when I say that there is a hell of a lot of waste in the defense budget, I know whereof I speak. There are programs that Congress refuses to kill even though the Pentagon says they don't need them. There are billions wasted keeping bases in Europe 65 years after the end of WW2. The Navy is trying to build more aircraft carriers, which means more support ships, when the sad truth is that carriers are of little use in the modern combat arena. The AF is planning on building thousands of F-35s, at a cost of billions, and the program is suffering cost overruns and delays already. The head-to-tail ratio (front-line troops compared to support personnel) is around 1:8, meaning that for very soldier patrolling in Afghanistan, there are 8 non-combatants sitting somewhere else. That is obscene! Get out the red pencil, keep those programs that actually benefit the grunt in the field, and hack away at the rest.

Finally, we need a sane tax personal and corporate tax structure. How is it that GE can get away with paying less taxes in a year than I do? What is the use of having a 35% rate if big companies can beat it? I know that small companies who can't afford lawyers get stuck for most, if not all of that tax rate. Drop the rate to 25%, which will still keep it in line with most of the current rates in the EU, but get rid of the loopholes. The revenue will increase dramatically.

Do something similar to that with the personal tax rate. How does a hedge fund manager making billions pay a pittance in taxes? Because of arcane regulations that need to be killed off. So, let's do some research and find out what level of taxation will provide the required revenue, and use that from now on. Pick a cutoff point (2 times poverty line, 3 times the poverty line, you pick) and no one below that line has a tax burden. Any money earned above that line is taxed at a single rate (15% 25%, whatever). That will work IF we get rid of the tax loopholes built into the current tax code. We might keep those that encourage saving, or contribute to society (IRAs and mortgage deductions, for example), and drop the rest. That should increase revenue also, with the biggest amount coming from the highest earners. It will also make it easier for the average taxpayer to figure out what his tax bill will be.

I realize that there is a push to raise the top rate to 39.6%, but that won't change very much as long as the tax code resembles swiss cheese. I guarantee that the big boys won't pay that much more in taxes. Hell, I don't think they pay anywhere close to the top rate right now! The only way to change that is to simplify rates and close loopholes. A certain 15% of 1 million is better than the amount paid now. (I think it averages around 7-10% by the time the lawyers get through...)

Ok, I'm off my soapbox. Fire away!

[safeinOhio]

1. campaign finace reform

As long as big money can buy politicians, they can write the tax laws. Just like when the big pharmaceutical companies wrote the medicare prescription drug plan.

[shraby]

2. The only way campaing financing can ever be reformed is

if the limit contributions to the district/state that the candidate represents. No, zero, zilch, nada contributions from outside the area they are running to represent.

For a representative, the district; for a senator, the state; for the president in can be from anyplace in the country, but the contributions for the president has to be identified for every single dollar he/she takes in, and limited to a certain amount from each person/corporation.

[tortoise1956]

3. As usual, I have a plan...

I would change the contribution law thusly:

If you are not a living, breathing person, you CAN'T contribute to a candidate. That includes PACs, non-profits, business, labor, religion, whatever. No ifs, ands or buts. If a candidate can't tie a donation to a real person, he can't keep that money.

The next part - No limits on how much you can personally contribute. HOWEVER, no more anonymous contributions. In addition, the list of contributors must be made public within 1 week of accepting the donation. That way, everyone can see if someone tries to buy an election.

Finally, contributions are not tax deductible. If yo want to donate, good on you. You don't get to pay less taxes.

I see this as Win-Win. What do YOU think?

[safeinOhio]

4. I'd change one thing in your plan

Limit to $10 per person, per candidate.
Also add, one tv or radio commercial per day.

[tortoise1956]

6. I understand your reasoning,

But I think it would withstand judicial scrutiny better if we had no limits. Otherwise both sides would claim we are infringing on their right to free speech. (Personally, I think the whole concept of contributions being a form of speech is BS, but no one listens to me...)

Besides, think of the angst it would cause politicians when they have to decide whether or not to accept a big check from some unsavory character, knowing that if they do, everyone will find out. they might actually decide to turn down contributions.

What a concept!

[checks-n-balances]

5. I agree, except the Citizens United would have to be overturned

Our Supreme Court needs to change the ruling somehow (a miracle, perhaps?)
I do agree with it, though.

[tortoise1956]

7. Absolutely!

That decision was based on a faulty precedent, as far as I'm concerned. But once again, no one at the court seems to listen to me...

[flowerbells]

18. So would I, but....

...but I don't change laws. One way to help push your idea along is for all - all of us - progressives to take their personal moneys out of big banks, and deposit the money into credit unions or local small banks. This would, over time, begin to weaken the hold of the big money banks.

Another way is to create a state bank in your state.

Another way is to pressure our state, city, county and various quasi governmental entities (such as water districts, bridge authorities, etc) to take THEIR moneys out of the big banks and invest them in smaller, local banks that will support the local economy. It is my understanding that NY state is currently working on this move.

[fasttense]

8. Social Security is fully funded.

If the federal government goes down in flame so will Social Security. But that's like saying if the insurance firm you bought your life insurance from goes bankrupt so will your life insurance pay out. But then if the federal government crashes so will our debt to China and Japan. So will all US treasury bond holders. Is our debt to these countries and bond holders fully funded? No more than Social Security.

Baby boomer's have paid for their parent's and their own Social Security. Social Security is in trouble now because the federal government is in trouble. We are in a fake crisis orchestrated by wanna-be feudal lords because they want every last penny they can squeeze out of the carcass that remains of our economy. And those last pennies are in the Social Security Trust Fund.

Don't let the banksters loot your retirement.

[golfguru]

13. Social Security is funded with US Bonds aka IOU's

If the Treasury has no money to redeem those bonds owned by
Social Security then benefit recipients are SOL.

[tortoise1956]

15. I respectfully disagree...

The Social Security has no assets other than special treasury bonds. Their worth is dependent upon the government redeeming them, as is the interest they accrue. The sad truth is that if Social Security was a private defined benefit plan, it would be in violation of IRS regulations pertaining to minimum funding liquidity.

And this is nothing new. I believe it was 1968 when Congress started raiding the trust fund. Ever since, they have treated it as a slush fund for them to use as they saw fit. Both parties approved this, and both parties have been feeding at the trough. The result is that now, when the number of retired people are increasing and on track to peak around 2022 or so, there is nothing in the till and we are borrowing money to help pay for it. These are bad economic practices.

I don't know about you, but I have little faith in the government continuing to make full payments on time. Sooner or later, they'll figure out a way to cut payments in order to fund something else that is "Absolutely CRITICAL!" to the country. I hope I'm a pessimist, because while I will have enough to retire without social security, it will definitely reduce our standard of living considerably. And that's assuming that my 401K doesn't take a dump, and my company pension fund doesn't get raided, and yada yada yada...

Anyway, thank you for offering your opinion. It may not sound like it, but I appreciate getting input from others who don't always agree with me. As mom always said,"If you constantly shout your opinions at the world without stopping to listen, you'll never learn anything."

[fasttense]

17. There was no trust fund until 1983 when Raygun started the double taxation of the middle class.

Yes, there was a small fund that was used to move Social Security payments in and out but it was hardly of a size worth raiding.

When in 1983 Raygun and Greespan started using the trust fund as a deposit location for the Baby Boomer's Social Security, is when the government started using the money to buy Treasurer bonds. Why would Social Security bonds be any less of value than the bonds held by W, China and the banks?

I do trust the government because the government is We The People. So, we millions can easily overtake the handful of uber rich who are trying to steal our retirement. They can only rule us if we let them.

I certainly trust our democracy more than I would trust a corporation or Wall Street.

[progree]

19. The Trust Fund bonds are assets to Social Security and liabilities to the federal government

Why would Social Security bonds be any less of value than the bonds held by W, China and the banks?

The Social Security Trust Fund (SSTF) securities are just as valuable (backed by the Full Faith and Credit of the U.S. Government) as the ones sold to W, China, and the banks. Well, almost -- see the Flemming v. Nestor part down near the bottom.

The SSTF securities are IOUs that say, "I the federal government, owe you, Social Security, ___ dollars". (I don't know what size these things are).

When Social Security reached the point recently where Social Security taxes collected are insufficient to pay all the benefits, then Social Security must redeem enough SSTF securities to make up the shortfall. So SS presents a SSTF bond to the federal government, and says, I want to exchange it for cash (redeem it). That means the federal government must come up with the money to give to SS in exchange for the bond.

What people are saying when they say Social Security is not fully funded is really that the U.S. government doesn't have money or other assets set aside to redeem the Social Security securities. The securities must be redeemed from general tax revenues.

A couple of other things --

The SSTF securities are non-marketable "special issues" of the Treasury. Such securities are available only to the trust funds..

So its not something the RepubliCONS or anyone else can grab and invest in Wall Street. That has always been complete rhetorical nonsense.

Another point is that in the 1960 Supreme Court Case Flemming v. Nestor, the Supreme Court ruled that nobody has a contractual right to some amount of Social Security benefits. No matter how long they have worked and paid FICA taxes. Congress can increase or reduce benefits or make any other changes as they deem fit (of course some kinds of changes would mean political suicide). So its possible that there could be a stack of SSTF securities miles and miles high, and yet Congress chooses to cut benefits such that some or all of the securities are never redeemed (because SS payroll taxes are sufficient to fund the (reduced) benefits. In that sense, the SSTF securities are less valuable to Social Security than regular marketable bonds are to the Chinese and the banks.

Google:   "non-marketable" site:ssa.gov

=========================================
http://www.ssa.gov/oact/progdata/fundFAQ.html
All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.
=========================================
http://www.ssa.gov/oact/trsum/index.html
The Department of the Treasury currently invests all program revenues in special non-marketable securities of the U.S. Government
==========================================
Flemming v. Nestor - Social Security Online History Pages
http://www.ssa.gov/history/nestor.html
==========================================
Flemming v. Nestor - Wikipedia
www.ssa.gov/history/nestor.html
==========================================

[progree]

9. CONservatives love the flat tax

We're agreed that spending is out of control. And that defense spending is a real mess.

On Social Security -- projections are that even ignoring the trust fund (which as you indicate is what the U.S. government owe to Social Security), the 6.2% Social Security tax on employer and employee (12.4% combined rate) will, though below promised benefits, actually provide for higher benefits in real (i.e. inflation-adjusted) per beneficiary in the future than seniors get currently (this based on Social Security's Intermediate Projection economic assumptions that the historic 30-year growth in real per capita wage income will continue into the future...). See Dean Baker at CEPR.net (Center for Economic and Policy Research) for more on this.

However, projections for Medicare and Medicaid are very scary, making the overall entitlement benefits picture scary. So I certainly agree with your larger point on entitlements.

The idea of a flat tax (even with a large exclusion) alarms me -- every such scheme (including "fair tax") that I've seen is far less progressive than what we have now (even with all the loopholes).

(Also, without the Earned Income Tax Credit, many low-income working families would be in poverty -- the earned income tax is quite frankly a negative income tax, and was actually favored by old-fashioned righties like Milton Friedman and Ronald Reagan as a fiscally smart incentive to help move people from welfare to work. To this old-fashioned leftie, its about fairness and compassion).

I believe the flat tax thing is definitely Koch Bros. / Norquist CONservative noise meant to con the CONNEDservatives, and unfortunately too many Dems too.

And having a flat marginal rate structure only saves a few moments in figuring out taxes -- 99.999% of the work in doing taxes is figuring out one's taxable income. Once one figures out one's taxable income, it takes only about a minute to look up one's tax in the tax table (for anyone who still fills out their own forms manually.).

But I agree that a lot of the tax code can and should be simplified.

On average federal tax rates (individual income tax plus social insurance tax plus corporate income tax plus excise tax), CBO data shows the average federal tax rate increasing as income increases -- all the way through the top 1%. Average tax rate is total tax dollars divided by total income dollars (so for example if you earn $100,000 and pay $20,000 in taxes, your average tax rate is 20%).
http://www.cbo.gov/publications/collections/collections.cfm?collect=13

So the progressivity (higher incomes pay higher rates) of the federal tax code is still there, at least through the top 1%. (Who know what happens when you get into the top 0.1% and the top 0.01% and so on -- from other sources that's when things get really whacky and where a majority of income is taxed at the 15% capital gains rate, like the hedge fund managers).

The most progressive part of the federal tax code is the individual income tax. Flattening that would turn total federal taxes into a regressive tax system.

There is a lot of CONservative noise (Koch Brothers, Druggie Limpaugh, Sean Inanity) about how the wealthy are the job creators and should pay less taxes (or none at all, or get a handout from a grateful government and us non-wealthy-class type goobers) so they can use the money to create jobs for us CONNEDservative and DemTard goobers. Meanwhile they use their money to invest and create jobs overseas, puff up asset bubbles everywhere, buy the Treasury bonds needed to finance their tax cuts, and fund a right-wing noise machine, lobbyists, and campaign finance system to keep us lower-class types fooled and in economic servitude.

By the way, I'm well into the 25% marginal federal income tax bracket, paying $14,000/year in federal and state INCOME taxes, way above the median as far as tax rate (mostly because I'm single and without dependents). And plenty more in payroll, sales, and property taxes. I would therefore likely benefit in most flat tax schemes; but I think its just flat out unfair for me to advocate shifting some of my tax burden downward onto people who were born into lesser circumstances and with lesser abilities. It will only increase inequality - something we already have way too much of.

[tortoise1956]

10. Very good post...

While I don't agree with all of your post, your arguments are well reasoned and easy to follow.

BTW, good point on EIC. I have no problem with maintaining the EIC. As far as I'm concerned, there is a compact between society and the individual. For example, I expect society to take care of those who truly can't do it themselves. The individual, on the other hand, has an obligation to abide by the rules that are set by society.

The trouble comes when the rules are perverted by segments of society. (Can anybody say politicians?) I am appalled at the behavior of both parties on a regular basis - at least, when I'm not shaking my head in disbelief. I believe that the answer to this whole mess has to start with a way to cut down on the amount of money borrowed every year. That will take both increasing revenue and cutting spending. I know that this is not a popular answer, but I think it's the only rational and feasible solution.

One last time, back to the flat tax. I have found a link to an accounting of how much the percentage of income tax paid is for different percentiles. I can't vouch for the accuracy, but it is a starting point. By these numbers, a 25% flat tax would increase the revenue well beyond what is currently collected.

http://www.ehow.com/info_7746582_percentage-taxes-paid-vs-income.html

If nothing else, it would build stability into the tax code, making it less susceptible to being gamed by the uber-rich and their attack-dog attorneys.

Once again, thanks for the reply. It's nice to have a debate instead of an argument...

Edited for capitalization and grammar. My mom the teacher would not be happy!

[progree]

11. Likewise, thanks. But the flat tax is ouch!

While I don't agree with all of your post, your arguments are well reasoned and easy to follow. Once again, .... thanks for the reply. It's nice to have a debate instead of an argument...

Thanks much. Much appreciated.

I agree completely we have to borrow less .... and that will take both increasing tax revenue and cutting spending. We're (federal government) currently borrowing 40% of what we spend. Annual federal borrowing is running about 10% of GDP.

One last time, back to the flat tax. I have found a link to an accounting of how much the percentage of income tax paid is for different percentiles. I can't vouch for the accuracy, but it is a starting point. By these numbers, a 25% flat tax would increase the revenue well beyond what is currently collected.

http://www.ehow.com/info_7746582_percentage-taxes-paid-vs-income.html

I looked at the link and here is what I saw:

Average Federal INCOME tax rates, 2008

Avg Income
Tax Rate    Income Group
=========   ===============
 2.6%       Bottom 50%    

12.2%       The overall average

18.7%       Top 10%
20.7%       Top 5%
23.3%       Top 1%

The above indicates a very progressive income tax system - a progressive tax system means that higher incomes pay higher tax rates. The bottom half pays a miniscule 2.6%. The "average" earner pays 12.2%. The top 10% average an 18.7% rate. Given the gross and ever-growing inequality, a highly progressive income tax system is both fitting and proper. Especially considering that all other taxes are regressive.

Unfortunately, a 25% flat income tax rate would hammer the unwealthy. If there is a large exemption, and an Earned Income Credit as you suggest, a 25% tax rate will spare the lower class but hit the middle class very hard. That's why all progressives that I know of hate the flat tax -- the income tax is the only progressive part of the tax code, and to flatten it will make the overall tax system highly regressive (higher incomes pay lower tax rates).

If nothing else, it would build stability into the tax code, making it less susceptible to being gamed by the uber-rich and their attack-dog attorneys.

I'm very much for tax simplification. But a flat tax simplifies the system only a miniscule bit, and at a devastating cost to progressivity and fairness. The flat tax is a right-wing trick to plant the idea that a flat tax is the same as a simple tax.


Flat Tax and Simple Tax are virtually separate issues - It takes me literally days to do the work to figure out my taxable income (I use a tax preparer too). Once I have figured out my taxable income, it only takes about a minute to look up my tax in the tax table (assuming that Turbo Tax went on the fritz). A flat tax would save me a fraction of a minute in figuring my tax (again assuming my computer was down).

What the righties really are trying to do with a flat tax is shift a lot of the tax burden from the upper classes to the lower and middle classes.

To better illustrate the current income tax code's progressivity, here are the numbers from 2007 (the last pre-crash year) that I got from the Congressional Budget Office.

( downloaded as http://www.cbo.gov/publications/collections/tax/2010/all_tables.pdf from http://www.cbo.gov/publications/collections/collections.cfm?collect=13

Individual Federal Income Tax Rates, %
   Q1   Q2    Q3    Q4    Q5    T10   T5    T1  
 ====  ====   ===   ===  ====   ====  ====  ====
 -6.8  -0.4   3.3   6.2  14.4   16.2  17.6  19.0 Indiv Income Tax Rate

Note that Q1 (the bottom quintile, i.e. the bottom 20%) "pays" a NEGATIVE 6.8% income tax rate. Even the 2nd quintile (the second fifth) "pays" a negative 0.4% rate. The 3rd quintile, i.e. those earning in the middle -- between the 40 percentile and the 60 percentile -- pay only 6.2%.

The top 20% pays 14.4%, the top 10% pays 16.2%, the top 5% pays 17.6% and so on.

From the same source, here is the total federal tax burden -- income tax + social insurance taxes (Social Security plus the payroll portion of Medicare) + excise taxes + corporate taxes (Corporate income taxes are attributed to households according to their share of capital income)

Total Federal Tax Rate, %
   Q1   Q2    Q3    Q4    Q5    T10   T5    T1  
 ====  ====   ===   ===  ====   ====  ====  ====
  4.0  10.6  14.3  17.4  25.1   26.7  27.9  29.5 Total Federal Tax Rate

Its still quite a progressive system, but much less so than the income tax portion. In particular, note that all quintiles, even the first quintile, are on net paying federal taxes.

The above is all federal taxes. Now here's the state and local tax burden. This is from the 4th graph on the below page:

http://jessescrossroadscafe.blogspot.com/2011/07/us-is-not-high-tax-corporate-country.html

and is titled: "Upside-Down Tax System: The More You Make, The Less You Pay (% of income spent on state and local taxes - by income bracket)." (all numbers are from my crudely reading the graph -- I didn't bother looking for the source)

State and Local Taxes, %
Q1: 11%, Q2: 10%  Q3: 8%, Q4: 6%,  Next 15%: 7.5%  Next 4%: 6.7%, Top 1%: 5.2% 

Source: Who Pays? A Distributional Analysis of Tax System in All 50 States. Third Edition. Institute on Taxation and Economic Policy, November 2009 (all data from 2007).

I converted the above to quintiles and top 10%, top 5%, and top 1%, with the following results:

State and Local Taxes, %
   Q1   Q2    Q3    Q4    Q5    T10   T5    T1  
 ====  ====   ===   ===  ====   ====  ====  ====
  11    10     8     6     7     ??    6     5  State and local tax rate

Now I combine the federal and state and local tax rates from the above, with the following result:

Federal, State, and Local Taxes, %
   Q1   Q2    Q3    Q4    Q5    T10   T5    T1  
 ====  ====   ===   ===  ====   ====  ====  ====
  4.0  10.6  14.3  17.4  25.1   26.7  27.9  29.5 Total Federal Tax Rate
 11    10     8     6     7            6     5   Total state and local tax rate
 ----  ----  ----  ----  ----   ----  ----  ----
 15    21    22    23    32           34    34   Total tax rate

In the above, the total tax rate is the sum of total federal tax rate and total state and local tax rate, and then rounded (since I'm only using "nearest whole number" accuracy on the state and local. I'm also probably wrong simply adding the two, since for those who itemize their deductions, state taxes are deducted from federal income. So the above is indicative only

Anyway, its still a progressive tax system, but not by very much. The bottom 20% get stuck with a 15% tax rate. The very broad middle (between about the 20 percentile and the 80th percentile) pay about the same 21% to 23% rate. The top 1% pay a rate only 12 percentage points higher than the broad middle. I'd hate to see this weak progressivity reversed with a flat income tax.

[tortoise1956]

12. Once again, provocative reading

 I've been sorting through your data for a while, and it seems
pretty sound. I would submit, though, that a flat tax would
still bring in more money from the top earners. As for the
middle class being hurt, I guess it depends where you draw the
line. Some figures for comparison, using federal taxes only. I
calculated the current rates from the IRS website, using 2010
tables. I used Married (best rates) and Single (worst rates)
to provide a comparison. All future proposals based on a
$50,000 exemption:

 Taxable   Married    Single  Proposed    Proposed  
                                 (25%)       (35%)
  50,000     6,666     8,688         0           0
  75,000    11,119    14,938     6,250       8,750
 100,000    17,356    21,702    12,500      17,500
 150,000    30,243    35,709    25,000      35,000
 250,000    60,281    67,617    50,000      70,000
 500,000   145,308   152,644   112,500     157,500   

 BTW, I found a calculator to calculate a percentile for a
given income. It appears to be using calendar year 2009 data
collected during the last census. According to this
calculator, if you earn $50,000 a year (total income), you are
in the 77th percentile. I only took a quick look at the census
table they based the data on, but it looks kosher.

http://politicalcalculations.blogspot.com/2010/12/whats-your-us-income-ranking.html

 So, based on my table, the middle class looks pretty good on
a 25% flat tax. the main problem lies at the upper end of the
spectrum (above $100,000). You can see the tax burden dropping
off. By increasing that to a 35% flat tax, the point at which
revenue starts increasing is at approximately $100,000 of
taxable income.

 According to the calculator, $100,000 of TOTAL income puts a
person in the 94th percentile. In reality, 100,000 of total
income will probably equate to around $90,000 of taxable
income, which would give you a tax burden of $14,000 at 35%.
Under current tables, it would be $14,856 for single and
18,902 for married. Thus, instituting a 35% flat tax above
$50,000 will have a positive effect for more than 90% of all
taxpayers.

 As long as we get rid of the major loopholes that lower the
tax burden dramatically on upper earners, a 35% flat tax will
definitely raise more revenue. And the best part is, there's a
much better chance of getting a flat tax passed in the current
political climate than a change on the marginal rate for top
earners.

 Let me know what you think. Tell me that you at least looked
at my work - I just about went nuts figuring the current tax
rates for incomes above $100,000. PLEASE don't make me do that
ever again!

 As for the social insurance taxes, the reason why it flattens
out above $106,800 is that that is the maximum income taxed
for SSI. However, when benefits are calculated, there is also
a maximum benefit. Thus, whether whether you benefits are
bases on an average of $107,000 or $107,000,000, you will
receive the same benefit.

 Raising the maximum taxable income limit for SSI will
increase that revenue stream. However, unless you also raise
the maximum benefit amount, it won't get passed, and that will
pretty much negate the additional revenue. Besides, I really
don't want to generate more money for Congress to trade in for
Federal IOUs every year...they already have put themselves in
the position of having to borrow money to make minimum
payments on the current debt, which is a financial no-no for
me. (My ex-wife tried to do that, which is why she is an
ex...)

 State and local taxes are probably the most unfair taxes of
all. In many cases, these are going to fund politicians pet
causes and/or favored contributors. An example of this is
California (my former home state - I am a fourth generation
Californian). Over the years, the state legislature has tried
to fund everything that the people desired, without
considering how to pay for it. Unfortunately, if you gouge the
taxpayers too much, they will find a more favorable climate.
That is probably one of the main reasons why the state
population growth in 2009 was less than 1%, and more people
are moving out of state than are moving in. Add to that an
insane state budget deficit and tons of regulations and hoops
to jump through, and you'll find that businesses will not move
into the state (unless they get a sweetheart deal on taxes by
paying off the right politicians...) 

 I would like to hear your thoughts on this post, if you feel
up to it. That goes for anyone else who would like to debate
this subject, or point out any discrepancies in my reasoning
or data. Fire away!

Edited: Damn, my tables got screwed up when I posted them.
Finally got them straightened out...

[progree]

16. Flat tax - Thanks for the interesting tables and links

I suspect a 35% flat tax beginning at $50,000 taxable income (and with loopholes closed) will raise much less revenue than the current progressive tax rate schedules (AND also with loopholes closed).

(A) The current tax system and no loopholes
vs.
(B) A 35% flat tax and no loopholes with taxable incomes below $50,000 exempted

In 2010, a $50,000 taxable income corresponds to at least a $59,350 Adjusted Gross Income (AGI) (approximately what we think of as income for most people) for a childless single and a $68,700 AGI for a childless married couple (details follow):

In 2010, for a single with no children, the Standard Deduction is $5,700, and the Exemption is $3,650, so that Adjusted Gross Income (or what is close to what we think of as Income for most people) is $5,700 + $3,650 = $9,350 more than Taxable Income. So a $50,000 taxable income for a childless single corresponds to $50,000 + 9,350 = $59,350 AGI (or more if the single itemizes deductions; and even more if there are children).

For a Married Filing Jointly couple with no children, the Standard Deduction is $11,400 and 2 exemptions = 2*3650= $7,300, so that Adjusted Gross Income is $11,400 + $7,300 = $18,700 more than taxable income. Thus a $50,000 taxable income for a childless married couple corresponds to a $50,000 + $18,700 = $68,700 AGI (or more if the couple itemizes deductions; and even more if there are children).

When comparing to your table of what percentage of the population earns $X or more, AGI is the more comparable entry. Exempting (at least) $59,350 for singles and (at least) $68,700 for married filing joint couples from any income taxes is going to cost a lot of revenue, and that lost revenue is not going to be made up at the high end because the 35% flat tax rate matches the 35% upper bracket in the current progressive system. Taxable incomes higher than the top of the tax table ($373,650) will pay only $12,192 more on Married and $4,856 on Single. No matter how high their incomes are.

It will take a lot of data gathering and spreadsheet work to determine the tax differences and the number of taxpayers affected (and thus the effect on revenues) in various income increments in order to determine if the massive tax losses for those below about $110,000 or $120,000 AGI (approximately the breakeven point from your table ... $100,000 taxable income) can be made up from the higher taxes from the relatively few who make incomes above that level, and the relatively small tax increase on them (relative to the current system with high income loopholes closed).

We'd also have to do something about them married people -- jointly a couple can be making $100,000 (and thus pay a certain amount of taxes, easily determined assuming our simple tax model), but such a couple can be any combination of earners (e.g. a $20,000 earner and an $80,000 earner; or a $50,000 and a $50,000 earner). Which makes finding where married couples fit on the income scale that looks at individual earners difficult. Though now that I think about it, there are IRS tables of statistics that, for example, say how many tax returns are between $X and $Y taxable income (or AGI or both), for all the various kinds of filers (single, head of households, married filing jointly, married filing separately, and what else).

Head of Household is another large category.

Child tax credits add to the spread between AGI and Taxable Income.

A lot of work. I doubt that I'm up to it.

I just know mathematically that a tax system that looks like this:

Flat Tax System, Marginal Rates
Taxable
Income     Rate, %
=======    =======
0 to T1     0%
T1 to Inf.  R1  (Inf = Infinity)

is a degenerate special case of the current progressive tax system which looks like:

Current Progressive Tax System, Marginal Rates
Taxable   Rate, %     Actual Current 
Income    (Symbolic)  Rate, %
=======   ==========  =======
0 to T1     0%         0%     (T1 is $0)
T1 to T2    R1        10%
T2 to T3    R2        15% 
T3 to T4    R3        25%
T4 to T5    R4        28%
T5 to T6    R5        33% 
T6 to Inf.  R6        35%  (Inf = infinity)

e.g. if I make R1=R2=R3=R4=R5=R6 in the Current Progressive Tax System, I then have the Flat Tax System.

With the Current Progressive Tax System, I have many more knobs to twiddle to fit about anyone's criteria for relative fairness between income groups while still raising whatever revenue we target (within reason). (Probably too many knobs -- I'd maybe get rid of two of the brackets, leaving four brackets. As we don't really need both a 25% and a 28% bracket. And we don't need both a 33% and a 35% bracket.).

Now if you are arguing that (B1) is more progressive than (A1) while raising at least as much revenue, I might agree:

(A1) The current tax system exactly as it is, loopholes and all
vs.
(B1) A 35% flat tax and no loopholes with taxable incomes below $50,000 exempted (same as B way above)

Though I'm still skeptical about how much the high-end loopholes in the personal income tax amount to -- I doubt they are enough to afford to take more than 80% of the population off the income tax roles completely and lower the taxes for another 10% or so. (Corporate tax loopholes might be a different matter -- I'm sure there's a lot there).

And I'd hold out for at least 2 brackets -- just to maintain the principal of progressivity in marginal rates.

there's a much better chance of getting a flat tax passed in the current political climate than a change on the marginal rate for top earners.

I dunno. As much as the righties love the flat tax concept, they aren't going to be happy seeing 80% or more of the population off the income tax roles. They already whine about how 47% (or somesuch) of adults pay no income taxes (or a negative income tax thanks to the EIC and child tax credit among other mechanisms), which creates a huge constituency of parasites (in their minds) that don't mind (or favor) an income tax increase since it doesn't hurt them at all (and funds their benefits).

As for the social insurance taxes, the reason why it flattens out above $106,800 is that that is the maximum income taxed for SSI. However, when benefits are calculated, there is also a maximum benefit. Thus, whether you benefits are bases on an average of $107,000 or $107,000,000, you will receive the same benefit.

Raising the maximum taxable income limit for SSI will increase that revenue stream. However, unless you also raise the maximum benefit amount, it won't get passed, and that will pretty much negate the additional revenue. Besides, I really don't want to generate more money for Congress to trade in for Federal IOUs every year ..they already have put themselves in the position of having to borrow money to make minimum payments on the current debt, which is a financial no-no for me. (My ex-wife tried to do that, which is why she is an ex...)

On Social Security taxes, I generally agree with what you say. I realize that looking at the SS taxes alone (without considering that the benefits also accrue disproportionately to the lower incomes etc.) makes it unfairly look really really regressive. I included SS taxes as part of total federal taxes in post # 11 just to be complete and to show that even with this SS tax regressivity, overall federal taxes are still fairly progressive (thanks to the very high progressivity of the income tax code). Even with state and local taxes, we have a progressive tax code (at least up through the top 1%).

A more accurate view would include the SS benefits (as well as taxation of Social Security benefits), and then we'd find that benefit-adjusted SS taxes would be progressive. Making for two progressive elements to taxation: income taxes and benefit-adjusted SS taxes.

Though to a younger-than-62 working person, especially a lower-income person, the flat 6.2% SS tax (plus the 1.45% Medicare tax for a total of 7.65%) sure bites hard. (Flat up to $106,800 that is). And the 7.65% that his/her employer pays certainly doesn't help job creation or his wages.

One quibble - raising both the maximum taxable income limit and the maximum benefit a corresponding amount will increase the SS system's fiscal health -- that's because the SS benefit formulas provide a lower "rate of return" as incomes go up (here I'm talking about earners who earn below the maximum income cap). I don't know how much the difference is, I read somewhere that someone earning at the maximum income cap would get about half as much (per $ paid in) than would a very low earning person. Somewhere else I read that its considerably more than a 2:1 slope.

As for not being able to get an increased income cap passed (without a corresponding increased benefit) passed -- well, that was done with Medicare some time ago. (I know its not going to happen with this Congress, except maybe as part of a deal where the non-wealthy give up their wives and the lifetime labor of their first born in exchange).

While that will make SS more healthy, I agree with your point about how it makes the federal government correspondingly less healthy. Its a shell game where SS revenues are borrowed by the federal government and spent, leaving nothing but non-marketable interagency IOUs in a Social Security Trust Us fund that in effect says: I, the federal government, owe Social Security $X. (Its a SS website that uses the term non-marketable).

On the other hand, now that Social Security is in a deficit operating situation, a reduction in SS's operating deficit will result in less drain on federal government general revenues (general revenues are used to redeem the SS Trust Fund bonds that are redeemed to make up the SS operating deficit).

they already have put themselves in the position of having to borrow money to make minimum payments on the current debt,

This part I don't follow. Even though the deficit is an amazingly huge 40% of what we spend, the federal government takes in enough revenues to make the interest payments. Assuming that making the interest payments is given the first priority and not the last priority. Interest payments are about 15% or so of the federal budget, IIRC.

I just about went nuts figuring the current tax rates for incomes above $100,000. PLEASE don't make me do that ever again!

From the Alternatives To Marriage Project (unmarried.org), there is an introduction to a spreadsheet for figuring taxes at
    http://www.green5.org/mr-index.html
which links to an Excel spreadsheet at:
    http://www.green5.org/MarriageTaxPenalty.xls

California (my former home state - I am a fourth generation Californian).

Me too. Possibly fifth generation Californian. I've been living in Minnesota (Minneapolis) for more than 30 years because, well, that's where the dream job was, and then after that went sour, I stayed. I inherited the family farm (an 18 acre vineyard) near Fresno. (Kerman), which I manage long distance.

I only read about California's budget / deficit problems. Their deficit is about the same as Minnesota's on a per-capita basis. Taxes are quite similar too (my impression is that our income taxes are about the same, our sales tax is maybe 1.5 percentage points lower, our property taxes are way higher -- lower than most states but a lot higher than California's, thanks to California's Proposition 13 or whatever it was). We in Minnesota used to be smug about how California was ungovernable. Then we had our 11 day government shutdown which just ended a few days ago. (We also had a few days shutdown in 2005).

Edited: Damn, my tables got screwed up when I posted them. Finally got them straightened out...

Yes, that happened to me too -- where 2 or more spaces in a row get compressed into one space, thus screwing up the alignment of tables. And apparently you know that you can check the "Message Format ... Check here if you want to format your message in plain text. Use for posting code snippets." checkbox when you post. The only drawback is that the entire message is plain text (no way to mix plain text and HTML-formatted text in the same message by going this route).

For anyone who is interested, here's a way to have a normal post with HTML formatting, and yet have a table where the spaces are kept intact -- by wrapping it in the {pre class="dcplain"} ... {/pre} wrapper except replace the curly braces with square brackets.. For example:

{pre class="dcplain"}
Avg Tax
Rate      Income Group
=======   ===============
 2.6%     Bottom 50%    
18.7%     Top 10%
{/pre}

Anyway, thanks again for the interesting discussion and info.

[Warpy]

14. Raise the damned earnings cap

In fact, remove it until the "crisis" is over, give the super wealthy that flat tax with no deductions they've always claimed to want, let them test drive it for a decade or so.

That's what is supposed to be done when Social Security experiences a shortfall in bad economic times.