.
I like the flat tax idea with large individual deductions(otherwise, the fewer deductions the better) which will keep it progressive. In this case the individual deductions are $12,500 per family member and, in addition, mortgage interest, state and local taxes, and charitable contributions are also deducted. Your income minus all of those deductions is your taxable income. The tax rate is 20% of that taxable income.
Let me point out a few things about it that get lost in the propaganda from those who want to use the tax code to promote whatever it is that they want to promote.
The flat tax in general and this one in particular is not regressive. Consider a few examples for a family of 4 with this flat tax.
Family A makes 50,000 and pays no income taxes because their deductions are 4 x 12,500 = 50,000 leaving no taxable income.
They actually pay 0% of total income.
This applies to any family of 4 with income (after deductions) of less than 50,000.
Family B makes 70,000 and has a total St and local taxes, charitable contributions, and home mortgage interest of 10,000. They would have 60,000 in deductions and would pay 20% of the remaining 10,000 in taxable income which would be 0.2 x 10,000 = $2,000 in taxes.
They actually pay 2000/70,000 or 2.86% of total income.
Family C makes 150,000 and has a total of 20,000 in deductions. Their remaining taxable income is 80,000 (=150,000 - 50000 - 20,000) on which they too will pay 20% which is $16,000.
That is 16000 / 150000 and They actually pay 10.667% of their total income.
Richer family D makes 400,000 and has 40,000 in deductions. Taxable income is 310,000 (=400,000 - 50,000-40,000). (Notice that a much bigger share of their income is taxable.)
20% of that is .20 x 310,000 = 62,000.
That is 62,000 / 400,000 = .155 and they actually pay 15.5% of their total income.
Rich family E makes 1.5 million and has 70,000 in other deductions. Their total deductions are 120,000. Therefore their taxable income is 1,380,000. 20% of that is 276,000.
That is 276,000/1,500,000 = .184 and they actually pay 18.4% of their total income.
Notice that as income goes up so does the amount of taxes and the rate of taxation of total income. The more you make the higher your actual tax rate is with an upper limit of 20%.
.
Wednesday, October 26, 2011
Subscribe to:
Post Comments (Atom)
Yeah, I like a flat tax as well. I can’t say I am thrilled about keeping the old system and giving taxpayers a choice although the choice obviates many arguments against Rick’s proposal. I would prefer to simply switch.
ReplyDeleteAs Wayne points out the tax is indeed progressive. However, it is not as progressive as the current tax structure so it is also accurate to say that a move to THIS flat tax would be a regressive change. I fear that “the rich owe me” mentality has taken root, since I am hearing this sentiment even among my conservative friends. In short I think the flat tax can be successfully attacked as not being progressive enough.
Has anyone heard how revenue under Rick’s proposal compares to revenue under the current system?