Monday, April 18, 2005

Flat Taxes for Flat Brains

I've been pondering a grand new post railing against the flat-tax for some time now, but that'll have to wait. But for now, I just wanted to add to what the ubiquitous Kevin Drum had to say over at Washington Monthly.

Like Drum, it bugs the hell out of me listening to flat-taxers, because they ALWAYS pretend like it's an all or nothing kind of thing. They rally against the inequities of the deductions system, but then insist on hoisting the stupid flat rate on us too, as if various tax rates are a problem. But the issues are separate. One determines how much income is taxed, and the other determines the rate at which that income is taxed. But the only arguments they can give are against deductions, and they never fully explain the advantage of the flat-rate. And all they really want is lower tax rates for themselves.

Tax Rates

I can tell you straight-up that as a CPA who does taxes, having various tax rates doesn't slow me down in the least. Hell, I don't even know what the tax rates are. Sometimes, clients ask me what rate they're taxed at, and I haven't a clue until I'm done with their return. And that's because I never look at tax rates. I have a general idea of what they are, but the computer takes care of all of that, and does it instantly. I plug in the numbers, and the tax software does the calculations...just as you'd expect. The secret of taxes is knowing how to treat income, what you can deduct, and where to enter everything. That's the hard stuff. But the tax rates aren't even an after-thought. I don't even consider them.

And why should I tell them what the tax rate is? That applies to their taxable income, not their gross income, and depending on their specific situation (kids, itemizing, etc), taxable income is all over the map compared to gross income. I could tell them what their the tax table rate is, but their effective tax rate (tax paid divided by gross income) is much more important. Your tax rate might be in the 30% range of taxable income, but still be less than 10% of gross income. And that's a much more relevant number. And that's an important issue, as most people are wrong about how much of their income they actually pay in taxes; as they use the tax table rate, and not the effective rate. It's a safe bet that most people believe they pay a higher rate than they really do.


Anyway, this isn't my big anti-flat tax post. I meant to do one on tax day, but I was much too busy and don't have the time for it now. But my main point is that, even if you don't like loopholes and deductions (many of which are seriously misunderstood) that's still no reason to switch to a flat rate. The primary benefit of the flat rate is to help rich people pay less, and I can't think of any other reasons beyond that. Especially as some of the biggest deductions don't even apply to the super-rich due to income phase-outs; and it's the super-rich who are the intended beneficiary of the flat-tax, despite the phony populist rhetoric.

So removal of deductions doesn't really hurt the super-rich, and the flat-rate will clearly benefit them greatly, easily reducing their effective tax rate in half. Based upon my rough estimates of a fair flat-tax system, the people who are likely to pay for that will be those in the $80k-$250k income level; with those below that level seeing little or no benefit, and those in the $500k+ range seeing great benefit. And I'm talking about annual income and not wealth, of course. So the typical American won't see a significant tax savings, those in the top 0.1% will have a significant tax savings, which those between the two will pay for. I'll explain my assumptions on that in another post.

That's all I have to say for now, but you can count on several more specific posts on why the flat-tax is a bad idea, especially as it's one of the only subjects that my expertise actually pertains to. And if you really have trouble figuring out your tax table rate, you have no business doing your own taxes. Hire professional help. Just not me. I'm too busy right now.

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