MY INFAMOUS FLAT TAX ESSAY CONTINUED - READ IT AND COMMENT AT THE BOTTOM!
THE FLAT TAX PART TWO - compiled by Michael Fisher
WHAT I DON’T LIKE ABOUT HOW CORPORATIONS PAY TAXES
First, corporations pay 35 percent on their gross profits. Then when net profits are distributed to shareholders, they are taxed again at rates as high as 39.6 percent. Thus, the total federaltax on corporate profits can be as high as 61 percent, and no other major country penalizes profits this way. This double taxation is both unfair and inefficient because the dividends of all shareholders, regardless of their income, are net of the same 35 percent income tax paid at the corporate level. Moreover, shares held by IRAs and 401(k) plans pay the corporate tax as well -- even though they are supposed to be tax-exempt. This double taxation raises the cost of capital -- resulting in reduced investment, less growth, fewer jobs and lower wages. It also encourages excessive borrowing, because interest -- in contrast to dividend payments -- is tax deductible.
It has been suggested that corporate managers are not unhappy with the present system because it encourages corporations to retain a larger share of earnings -- which can be used to build empires and expand power.
WHAT I LIKE ABOUT THE FLAT TAX CONCEPT
All taxable income is subject to one single, lowrate. By treating all citizens equally, a simple, low-rate flat tax restores fairness to the tax code. The personal and corporate income taxes are fully integrated, thus ensuring that all income is taxed, but only once. Furthermore, this reform ensures neutrality between saving and investment and consumption and promotes simplicity.
Compare the flat tax to our present system, which favors consumption over investment, short term over long term horizons, debt over equity, and service over manufacturing industry. Many in big business and the world of policy making say we should tax consumption more to level the playing field. The flat tax does the opposite. It says that we should tax everything, across the board, less.
The bill totally repeals today's complicated income tax system and replaces it with a low, simple flat tax. Under the bill, every dollar of income in the economy is taxed, with wage and pension income collected from individuals and all other income collectedfrom businesses. Individuals pay 17 percent of all wages, salaries, and pensions, after subtracting family allowances. When fully phased in 1998, the family allowances will be $11,350 for a single person, $22,700 for a married couple filing jointly, and $5,300 for each dependent. These allowances are indexed to inflation. The flat tax replaces the current income tax system, but not Social Security and Medicare payroll taxes. Social Security benefits would not be taxed. All business income, whatever the source (corporate, partnership, sole proprietor, professional, farm, and rental profits and royalties) is taxed at the one low rate. Businesses pay 17 percent of the difference, if positive, between revenues and expenses.
Expenses are defined as purchases of goods and services, capital equipment, structures, land, wages and contributions to employee retirement plans. No deductions are permitted for fringe benefits, interest, or payments to owners. Collecting business income earnedby individuals at its source -- the business -- allows for a simple, airtight system that ensures all income in the economy is taxed.
Again, I like the fact that all income is taxed. Surprisingly, the amount of revenue the federal government collects from the personal income tax is only 9.5 percent of total personal income. If corporate income is included, federal income taxes take only 11 percent of income. Thus, in principle, government would have just as much money if it levied an 11 percent, across-the-board tax on all personal and corporate income. Today's deductions, exemptions and loopholes result in more than half of all personal income not being taxed at all.
WHAT ABOUT SOME OF THE MORE "JUSTIFIABLE" DEDUCTIONS?
Mortgage Deductions - Only 27 million of the nation's 116 million taxpayers claimed a mortgage interest deduction in 1992, and some 40 percent of homeowners have no mortgage on theirhomes, and thus have no mortgage interest to deduct. Seventy-eight percent of families earning more than $100,000 took the deduction, but only 14 percent of those earning less than $50,000 took it.Charitable Deductions - The 1980s taught us that higher incomes are far more important than tax subsidies for charities. The top marginal tax rate dropped from 70 percent in 1980 to 28 percent in 1989 and charitable contributions grew from $49 billion in 1980 to $107 billion in 1989. WHY A TAX CUT WOULD MEAN ECONOMIC GROWTH (HISTORICALLY)
Tax rate reductions in the 1920s, 1960s and 1980s resulted in increases in government revenue, while taxes paid by the wealthy rose. Tax rate increases in the 1930s prolonged the Great Depression, and inflation-induced bracket creep in the 1970s and early 1980s hindered economic growth in the 1973-82 period.
In the first half of the Twenties, the top tax rate was slashedfrom 73 percent to 25 percent. Tax revenues surged from $719 million in 1921 to $1.16 billion by 1928. The share of the tax burden paid by the rich -- $50,000 and up in those days -- rose to 78 percent in 1928 from 44 percent in 1921.
Now consider what happened in the 1960s. The top tax rate was reduced from 91 percent in 1963 to 70 percent by 1965. Tax revenues climbed more than 16 percent between 1963 and 1966. Tax collections from those making more than $50,000 a year climbed 57 percent during that period, but grew just 11 percent for those making less. Those in the upper income brackets saw their portion of the income tax burden increase to 15 percent from 12 percent.
Then there were the 1980s. Between 1980 and 1988, the top tax rate was reduced from 70 percent to 28 percent. Revenue surged from 1983 to 1989, increasing by more than 54 percent (or an inflation-adjusted 28 percent). The top 1 percent of earners saw their share of the income tax bill rise from18 percent in 1981 to 28 percent by 1988.
During the current decade, we haven’t made radical changes, but taxes were increased in 1990 and 1993. The result was that taxes paid by those earning above $200,000 fell 6.1 percent in 1991, while taxes paid by those with lower earnings rose 1 percent. Between 1992 and 1993, taxable income among those with earnings of less than $200,000 climbed 3.3 percent, while it declined 2.3 percent for those making more.
THE ONLY POLL WHERE EVERYONE AGREED
A recent poll was taken asking people how much people should have to really pay in total taxes, and the results were unparalleled in polling history. What was so astonishing to the pollsters and the poll sponsors was the degree of unanimity among all groups. Women agreed with men. Blacks agreed with whites. Low earners agreed with high earners. The young agreed with the old. Those with limited education agreed with the more highly educated. Even Republicans, Democratsand Independents agreed that 25 percent of whatever income was the maximum any family should have to pay in total taxes.
OTHER THINGS TO CONSIDER ABOUT THE FLAT TAX
A flat tax would broaden the tax base by eliminating the multitude of special deductions and exemptions that can be used only by a select few. A broader tax base would accomplish both a fairer distribution of the tax burden and a lower tax rate that creates the least distortions in the economy.A flat tax would eliminate estate ("death") and gift taxation that represents punitive double taxation and unfairly transfers income from families to the government. The steep 55% top estate tax rate can force many families to liquidate or sell their businesses or farms just to pay the tax collector rather than being able to pass those belongings onto their next generation -- wiping a lifetimeof hard work. The flat tax would also bring equity and efficiency to the tax system by levying the same tax rate on everyone and dramatically simplifying the code.A flat tax would establish fairness in the tax system. What could be more fair than having two people with the same income pay the same tax? The flat tax would explicitly treat all individuals equally under the law and everyone would face the same single tax rate. Can we say the tax system was fairer when the top rate was 28, 50, 70 or even 94 percent? (It was 94 percent for some during World War II!)A flat tax will help our economy simply by lowering the tax rate and allowing investment to flow to its most constructive endeavors rather than into unproductive tax shelters. If tax reform fosters just a 0.5% increase in GDP growth, the typical American family after five years would have incomes ofmore than $3,000 higher then they would under current tax law.A flat tax would allow interest rates to decline. Since individual interest income is not taxed under the flat tax, interest rates would drop to reflect the tax-free status of interest (similar to current municipal bonds that pay a much lower interest rate because they are tax free.) Consumers would benefit from lower interest costs on home mortgages, credit cards, auto loans, and other consumer credit.A flat tax would no longer punish married couples filing a joint return with higher tax burdens. A single flat tax rate means a spouse's additional income could no longer push a family into a higher tax bracket and force them to pay the tax code's "marriage penalty."A flat tax would greatly minimize the tax loopholes that unfairly allowonly select individuals or interest groups to reduce their tax liability at the expense of others. Under the current code, for example, donating an art work can virtually wipe out the tax liability of a millionaire. Loopholes narrow the tax base and cause incentive-destroying tax rates to soar.A flat tax would reverse the income tax rate hikes of the Omnibus Budget Reconciliation Act of 1993 (OBRA'93) that was signed into law by President Clinton. OBRA hiked the top marginal tax rates on corporations from 34% to 35% and boosted the top individual tax rate from 31% to 39.6%.A flat tax would allow taxpayers to file a postcard-size tax return (10 lines!) by streamlining and simplifying the tax code. Taxpayers would no longer have to wade through 1,378 pages of tax code and 6,439 pages of federal regulations. Analysis by the Tax Foundation estimates that a flattax could reduce current income tax compliance costs from $140 billion to $8.4 billion.A flat tax would reduce the tax evasion by the so-called underground economy. The current high marginal tax rates increase the value of cheating or not reporting income vs. the cost and risk of detection. If the flat tax reduced the top rate from 39.6% to 19%, it would cut in half the reward for cheating. A flat tax would help put an end to the current class warfare mind set that ends up hurting all income groups with higher tax rates and slower economic growth. "Soak-the-rich" tax policy may score political points, but it's bad economics. Increasing tax rates more often results in lower federal revenues because people work less and invest in unproductive tax shelters to avoid the higher rates. Conversely, a single low tax rate would enhance equity and boost work incentives.A FEW STATS I FOUND AND WANTED TO THROW IN
In January 1993 (when President Bush left office), the Prime Rate was 6%. It is now 8.75%. When Bush left, America was importing $56.2 billion of goods into this country per month at the tune of a $4 billion trade deficit. In May 1996 (the most recent month available), we imported $80.6 billion and suffered a $10.9 billion trade deficit.Under Reagan, the United States began cutting back defense jobs in 1985, dropping thetotal from 1,450,000 to about 1,150,000. Bush entered office and initialized a phase-down rate that Clinton has continued, but there were still 842,000 defense jobs as of July 1996.Under Reagan, our defense spending peaked at $331.8 billion in 1981. Currently, we are spending $285.6 billion. We actually spent less than that in 1987 (again, under Reagan).SELECT YOUR NEXT STOP:
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Changes last made on: Sat Sep 21 12:31:43 1996