The flat (income) tax is a regressive tax

myp · Dec 24, 2011

Just wanted to put that out there since it seems like a lot of people still don't seem to understand that. There are two simple explanations behind it:
1) Value is subjective. A dollar to a rich person is not worth the same as a dollar to a poor one.

2) The above can really be summed into this one if one wanted: the utility of money is marginal. As with everything else, money experiences diminishing returns.

DodgeFB · Dec 24, 2011

myp said:
Just wanted to put that out there since it seems like a lot of people still don't seem to understand that. There are two simple explanations behind it:
1) Value is subjective. A dollar to a rich person is not worth the same as a dollar to a poor one.

2) The above can really be summed into this one if one wanted: the utility of money is marginal. As with everything else, money experiences diminishing returns.

If given the choice, I want the money. I already tried the no money way and it sucks.

myp · Dec 24, 2011

DodgeFB said:
If given the choice, I want the money. I already tried the no money way and it sucks.

Huh? What do you mean by that?

DodgeFB · Dec 24, 2011

myp said:
Huh? What do you mean by that?

Nothing really. Just that money would be valuable to me.

But many people with money seem not to understand why I would feel that way.

myp · Dec 24, 2011

DodgeFB said:
Nothing really. Just that money would be valuable to me. But many people with money seem not to understand why I would feel that way.

It is still somewhat valuable to everyone, it is just that the value diminishes as you have more. That is why a rich person might spend a dollar on something random or even throw it away while a poor person would likely not. That stands for most things. If you are hungry, you value food more at that point then when you are full. It's the law of diminishing returns and it applies to monetary utility.

dave · Dec 30, 2011

myp said:
Just wanted to put that out there since it seems like a lot of people still don't seem to understand that. There are two simple explanations behind it:
1) Value is subjective. A dollar to a rich person is not worth the same as a dollar to a poor one.

2) The above can really be summed into this one if one wanted: the utility of money is marginal. As with everything else, money experiences diminishing returns.

A regressive tax is one in which the rate decreases as the income level increases. A flat tax has a constant tax rate.

But I see what you meant, a flat tax is "regressive" in terms of value. A flat tax has a bigger impact on a person who has just enough money to feed his family (paying a tax means less food) than it has on a person who has money to burn.

You can solve that problem by having a few tax rate tiers. I think that would be acceptable to most flat tax supporters although a tiered system is much easier to abuse than a single flat tax rate.

myp · Dec 30, 2011

dave said:
A regressive tax is one in which the rate decreases as the income level increases. A flat tax has a constant tax rate.

But I see what you meant, a flat tax is "regressive" in terms of value. A flat tax has a bigger impact on a person who has just enough money to feed his family (paying a tax means less food) than it has on a person who has money to burn.

You can solve that problem by having a few tax rate tiers. I think that would be acceptable to most flat tax supporters although a tiered system is much easier to abuse than a single flat tax rate.

A tiered system is what we have (not counting the silly loopholes, etc. which I do think should be cleaned up) - it is a progressive system. Since all income even for high earners is separately taxed in each bracket, there is no real way to abuse it since making more money never means you keep less.

Nice to see ya around again by the way.

myp · Dec 30, 2011

Sorry let me clarify that it is a progressive system in terms of nominal dollars. In terms of value such a system can try to achieve an equal tax in terms of value.

dave · Dec 30, 2011

myp said:
A tiered system is what we have (not counting the silly loopholes, etc. which I do think should be cleaned up) - it is a progressive system. Since all income even for high earners is separately taxed in each bracket, there is no real way to abuse it since making more money never means you keep less.

Nice to see ya around again by the way.

Thats not the way it works in reality. Even a simple system of 3 tiers (for example) and no deductions/exclusions/loopholes faces problems. There will be pressure to shift the tax burden to the rich just as we see it today. Its easy to argue that the poor can't afford the tax, while the rich owe society, dont "pay their fair share", etc. The thresholds will slide upwards, the rates will steadily increase, until only the very top earners are paying taxes.

The top tax rate used to be 91%, but nobody made enough to be in the top bracket. It wasn't worth it to work or invest and give it all away. To avoid the top tax bracket, people took their income in different forms that were not taxed - company provided vacations, company provided car and driver, house, college tuition for their kids, etc. People created and worked for their own charitable/non-profit foundations to avoid taxes. Tax shelters abounded and it was well worth spending a fortune on CPA's and tax experts to figure out loopholes, or to lobby politicians to grant special favors.

The rich with the money didn't invest it in new businesses or loans because the return wasn't worth the risk - if they made a 10% return, they would lose 91% to taxes leaving a real return of 0.9%.

And with inflation - even low inflation - there was no way for the rich people to keep from losing value. If inflation was 3%, the rich needed an extraordinary return of about 30% just to stay even with inflation. It was much smarter to move the money offshore into those infamous Swiss and Caymen Islands and Bahamian banks.

Thats partly why the economy expanded - and federal revenue increased - when the top rates were dropped by Coolidge, Kennedy, and Reagen. All the money that was squirreled away could be used in more productive ways. With a lower tax rate, there were better uses for the money than tax shelters.

And thats where the Laffer curve comes in. As the tax rates go up, people do more to avoid the tax. At some rate, the tax becomes counterproductive. 91% is certainly counterproductive, 70% is probably counterproductive as well.

There is also an emotional aspect. People resent paying "too much" in taxes. "Too much" varies with each individual, but when its reached, people will be willing to lose some money to avoid taxes. It becomes personal.

The conclusion is that even a simple system of multiple tiers can lead to an unstable system. With a single tax rate (a true flat tax), everyone has a stake in the system and it is much harder to raise the tax rate.

And thanks. There seems to be more activity here than there used to be.

myp · Dec 30, 2011

I think I should've been more clear in that I do not think the income tax in general comes without its flaws or that I necessarily think it is the best way to tax at all. My point was that a flat income tax is regressive and less preferable to a progressive income tax- that does not mean either is the best option. I think we need to look at comprehensive reform that includes considering loopholes and other tax categories like capital gains and corporate (perhaps even abolishing some or all of them for other forms).

dave said:
There will be pressure to shift the tax burden to the rich just as we see it today. Its easy to argue that the poor can't afford the tax, while the rich owe society, dont "pay their fair share", etc. The thresholds will slide upwards, the rates will steadily increase, until only the very top earners are paying taxes.

Where the brackets should be will always be subjective. Historically, never has it shifted so much that only the very top pays (depending on how you define the very top of course). Either way, if it does shift too much to one side, it is a political problem, not an economic one. The possibility for it to shift too much to one side is far from reason not to have a progressive tax. In the same way, a flat tax can be set at the wrong rate too. Either way, should the goal be to have equality or fairness in process, then a regressive tax makes no sense. Nominal value does not matter- real value does. Just like nominal prices don't matter as much as real prices.

dave said:
The top tax rate used to be 91%, but nobody made enough to be in the top bracket. It wasn't worth it to work or invest and give it all away. To avoid the top tax bracket, people took their income in different forms that were not taxed - company provided vacations, company provided car and driver, house, college tuition for their kids, etc. People created and worked for their own charitable/non-profit foundations to avoid taxes. Tax shelters abounded and it was well worth spending a fortune on CPA's and tax experts to figure out loopholes, or to lobby politicians to grant special favors.

You are using a lot of correlation to make your points, but I understand the worry, although I do not feel they are justified. Loopholes need to be closed as best as possible, that is my point. You have loopholes in a flat tax system as well. Those that don't want to pay will try not to. What you state is not inherent to a progressive tax system- it can all and likely would all still happen. Things like charities, putting money in capital gains, etc. are all loopholes (but whether they are loopholes we want as a country is another discussion).

dave said:
The rich with the money didn't invest it in new businesses or loans because the return wasn't worth the risk - if they made a 10% return, they would lose 91% to taxes leaving a real return of 0.9%.

At some point individuals are no longer trying to make money to increase wealth, but more likely for other purposes whether it be the feeling of the dopamine rush of making money or to show the world they did it. The value of money like everything is marginal. Even in a flat tax system, this is true. The 91% rate should it exist should be set only at the extremely high end and note that on an investment with a 10% return it would leave a net return of .9% only if the gains of that investment were made AFTER the person already made enough income to be outside all of the other lower brackets. And that is all assuming that this investment didn't fall into capital gains which is taxed differently and not as income (which is why Buffett pays a lower rate than his secretary).

dave said:
And with inflation - even low inflation - there was no way for the rich people to keep from losing value. If inflation was 3%, the rich needed an extraordinary return of about 30% just to stay even with inflation. It was much smarter to move the money offshore into those infamous Swiss and Caymen Islands and Bahamian banks.

Inflation effects everyone, so that is really a mute argument here. I'd argue it affects the rich in this scenario even less, again because of the marginal value of money. As for offshore, that is a loophole, not something I'm for. Oh and this problem still stands with a flat tax too.

dave said:
Thats partly why the economy expanded - and federal revenue increased - when the top rates were dropped by Coolidge, Kennedy, and Reagen. All the money that was squirreled away could be used in more productive ways. With a lower tax rate, there were better uses for the money than tax shelters.

Highly correlationary, but a theory nonetheless I suppose.

dave said:
And thats where the Laffer curve comes in. As the tax rates go up, people do more to avoid the tax. At some rate, the tax becomes counterproductive. 91% is certainly counterproductive, 70% is probably counterproductive as well.

The problem with the Laffer curve is that it changes depending on time and market. I see the optimal spot of tax revenue on the Laffer curve somewhat like predicting where a particular electron is in an atom- by the time you figure it out, it has moved. That aside, the Laffer curve still exists with a flat tax.

dave said:
There is also an emotional aspect. People resent paying "too much" in taxes. "Too much" varies with each individual, but when its reached, people will be willing to lose some money to avoid taxes. It becomes personal.

Also happens with a flat tax.

dave · Dec 31, 2011

myp said:
I think I should've been more clear in that I do not think the income tax in general comes without its flaws or that I necessarily think it is the best way to tax at all. My point was that a flat income tax is regressive and less preferable to a progressive income tax- that does not mean either is the best option. I think we need to look at comprehensive reform that includes considering loopholes and other tax categories like capital gains and corporate (perhaps even abolishing some or all of them for other forms).

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The problem with the Laffer curve is that it changes depending on time and market. I see the optimal spot of tax revenue on the Laffer curve somewhat like predicting where a particular electron is in an atom- by the time you figure it out, it has moved. That aside, the Laffer curve still exists with a flat tax.

Also happens with a flat tax.

What I am writing is accurate and well documented. There is plenty of non-political economic material on the web (plus books) if you want to research it.

Taxation is a complicated subject but it is not a mystery. The Laffer curve is real even though the specific numerics of it are somewhat variable, but we do have experience with a wide range of tax rates. Its safe to say the optimal spot is <50%. The Laffer curve was known long before Laffer and Reagen made it famous, and its basic psychology - rewarded behaviour is encouraged, punished behavior is discouraged. All economists from Keynes to Hayek to Krugman understand it and discussed its application in their books.

Also lookup Hausers Law, which is not really a law just an observation of federal revenue vs top tax rate.

Tax rates (flat or otherwise) and the distribution of the tax burden can be an economic problem. Wealth has always been concentrated at the top, thats typical of almost all societies. Severe tax burden on the "rich" depresses the economy because they have the wealth - punishment depresses economic activity. Concentration of wealth at the top is not bad unless the movement of people between the wealth levels has stopped.

Go to irs.gov, download the tax data base into excel, and look at the numbers. If you take every single penny the top 10% earn, you might balance the 2011 federal annual budget. Your idea of a high tax bracket only for extremely high income levels will not work because there just isn't that much income at those levels. To solve the national fiscal problem through taxation alone requires a greatly expanded tax base (everyone pays) and increased rates. The tax burden on the economy will be too great and will depress economic activity.

Liberals typically mention a wealth tax to avoid the limitation of an income tax. That wont work either. A high enough wealth tax will amplify all the problems of a very high income tax. Income is renewable because the underlying wealth is not destroyed (unless the income tax is too high), that is why an income tax is better than a wealth tax. Once you take wealth, its gone. Wealth is also generally not liquid like income. Bill Gates doesn't have billions in cash, its in his home and stocks and loans and property.

Personally, I support a flat tax, or even a 3 tiered system. No deductions, credits, loopholes, tax exempt organizations, boxtops, coupons, favours, nothing. That removes the artificial pressure of the government on the economy - no more social engineering through the tax code. Everyone should have to pay taxes, then everyone has a stake in what the government does. A flat tax also removes the tremendous tax comliance burden on businesses. It tkaes a lot of people to track costs, material, depreciation, generate compliance reports, support audits. Ben Rich ran the Lockheed Skunk Works and wrote a book (Skunk Works), in the appendix he discusseed the impact of federal regulations (DoD, IRS, etc) on the cost of government contracts. He estimated it increased his costs 30%. Imagine if all those resources were free to be applied to productive activity.
　

myp · Dec 31, 2011

I am not making a case out of politics, but looking to the economic research myself as well.

dave said:
Taxation is a complicated subject but it is not a mystery. The Laffer curve is real even though the specific numerics of it are somewhat variable, but we do have experience with a wide range of tax rates. Its safe to say the optimal spot is <50%. The Laffer curve was known long before Laffer and Reagen made it famous, and its basic psychology - rewarded behaviour is encouraged, punished behavior is discouraged. All economists from Keynes to Hayek to Krugman understand it and discussed its application in their books.

While the Laffer curve is still accepted (I said above that I too believe it is real), it has largely lost its potency (for lack of a better word) in economic circles because of the very questions I bring up (we can't figure out where the optimal is). The optimal point varies by market and no two markets are ever the same. You cannot safely say it is below 50% and either way it undeniably varies by which bracket we are talking about due to the marginal value of money (if there was a > 50% income tax on the lowest bracket we would most definitely still see a lot of people working [not assuming welfare moral hazards]).

I am not really a supporter of Krugman's ideas, but since you mentioned him here's an article where he suggests a 70% tax on upper brackets would still be okay: http://krugman.blogs.nytimes.com/2010/08/10/the-laffer-test-somewhat-wonkish/

All that aside, you can run into the same problems with a flat tax. A flat tax would likely be a higher rate for lower income earners in today's market. Since that higher rate might be over their Laffer optimal, especially since a higher rate affects them more (and they pay more in value) than it does the rich.

dave said:
Also lookup Hausers Law, which is not really a law just an observation of federal revenue vs top tax rate.

I am not denying the Laffer curve, so no point discussing this, but his work had some questionable methodology in coming up with the conclusion he does.

dave said:
Tax rates (flat or otherwise) and the distribution of the tax burden can be an economic problem. Wealth has always been concentrated at the top, thats typical of almost all societies. Severe tax burden on the "rich" depresses the economy because they have the wealth - punishment depresses economic activity. Concentration of wealth at the top is not bad unless the movement of people between the wealth levels has stopped.

I am not making an argument against income inequality. I am making an argument against a flat tax which is unfair to the poor because they have to pay a larger percentage (in value) of income in tax.

dave said:
Go to irs.gov, download the tax data base into excel, and look at the numbers. If you take every single penny the top 10% earn, you might balance the 2011 federal annual budget. Your idea of a high tax bracket only for extremely high income levels will not work because there just isn't that much income at those levels. To solve the national fiscal problem through taxation alone requires a greatly expanded tax base (everyone pays) and increased rates. The tax burden on the economy will be too great and will depress economic activity.

I am also not trying to solve the budget issue here. I am merely saying the flat tax is regressive

dave said:
Liberals typically mention a wealth tax to avoid the limitation of an income tax. That wont work either. A high enough wealth tax will amplify all the problems of a very high income tax. Income is renewable because the underlying wealth is not destroyed (unless the income tax is too high), that is why an income tax is better than a wealth tax. Once you take wealth, its gone. Wealth is also generally not liquid like income. Bill Gates doesn't have billions in cash, its in his home and stocks and loans and property.

Not arguing for that either...

dave said:
Personally, I support a flat tax, or even a 3 tiered system. No deductions, credits, loopholes, tax exempt organizations, boxtops, coupons, favours, nothing. That removes the artificial pressure of the government on the economy - no more social engineering through the tax code. Everyone should have to pay taxes, then everyone has a stake in what the government does. A flat tax also removes the tremendous tax comliance burden on businesses. It tkaes a lot of people to track costs, material, depreciation, generate compliance reports, support audits. Ben Rich ran the Lockheed Skunk Works and wrote a book (Skunk Works), in the appendix he discusseed the impact of federal regulations (DoD, IRS, etc) on the cost of government contracts. He estimated it increased his costs 30%. Imagine if all those resources were free to be applied to productive activity.
　

If you want fairness in process, which I feel you do, then a flat (in terms of nominal dollars) tax makes no sense because it does not even attempt to tax value evenly (and at the end of the day the value of money is what matters, not the nominal number printed on it). I am actually pretty pro-markets myself and I guess you can consider me a libertarian on these issues as I want equality in process as opposed to ends. I think libertarians are often wrong in not recognizing a flat tax is a regressive tax though. Just as a progressive tax in value isn't fair, a regressive tax in value is not either. To have an actual equal tax, an actual flat tax in value, a progressive tax in nominal dollars is needed.

dave · Jan 2, 2012

myp said:
I am not making an argument against income inequality. I am making an argument against a flat tax which is unfair to the poor because they have to pay a larger percentage (in value) of income in tax.

I am also not trying to solve the budget issue here. I am merely saying the flat tax is regressive

Not arguing for that either...

If you want fairness in process, which I feel you do, then a flat (in terms of nominal dollars) tax makes no sense because it does not even attempt to tax value evenly (and at the end of the day the value of money is what matters, not the nominal number printed on it). I am actually pretty pro-markets myself and I guess you can consider me a libertarian on these issues as I want equality in process as opposed to ends. I think libertarians are often wrong in not recognizing a flat tax is a regressive tax though. Just as a progressive tax in value isn't fair, a regressive tax in value is not either. To have an actual equal tax, an actual flat tax in value, a progressive tax in nominal dollars is needed.

We probably have different definitions of "fair". You use "fair" and "value" in a purely subjective sense. You cannot have equality in process when the metrics are so dependent upon the person making the judgement. A flat tax is regressive only if those subjective criteria are applied.

How would you define qualitatively "fair" and "value"?

Are the definitions based strictly on current income and/or current wealth? What about the person that invested everything into a new company, made it a success, and is now rich? That persons income is the return on the years of risk, stress, hard work, lost wages, and his and his families sacrifice.

Does the definition change based upon what a person does with his money? Is the rich person that donates half his income to charity treated differently than someone that sqaunders his wealth on frivolous things?

How about the size of a persons family? Is a person that chooses not to have children treated differently than a person who chooses to have 4 children?

How will you treat someone that is in a difficult situation due to their own voluntary actions? They have less money and the "value" of that money increases, but do you reward them for their failures by lowering their taxes?

What about age, illness, accident, acts of God.......before you know it, you will have a tax system as convoluted as the current one.

I would treat the tax system as a straightforward purchase of goods. We hire the govt to provide certain services, we pay for those services with taxes. Everyone benefits, everyone should pay the tax. When you go to WalMart, the cost of an item is not based upon your financial condition, its based upon the expenses required to produce and transport that item to you. A single tax rate is the easiest system, least intrusive, least prone to abuse by taxpayers and tax collectors.

myp · Jan 2, 2012

dave said:
How will you treat someone that is in a difficult situation due to their own voluntary actions? They have less money and the "value" of that money increases, but do you reward them for their failures by lowering their taxes?

Lowering their taxes? I am talking about equal taxes. You are the one that wants to have lower taxes for the rich compared to the poor. Nominal income means nothing- it is just that- nominal. It inherently reflects real value about as much as it inherently reflects real income.

dave said:
I would treat the tax system as a straightforward purchase of goods. We hire the govt to provide certain services, we pay for those services with taxes. Everyone benefits, everyone should pay the tax. When you go to WalMart, the cost of an item is not based upon your financial condition, its based upon the expenses required to produce and transport that item to you. A single tax rate is the easiest system, least intrusive, least prone to abuse by taxpayers and tax collectors.

A single tax rate means a lower tax in value on the rich. I cannot support that. And I never said poorer earners should not pay taxes (although I am not sure they should either as I am still undecided on whether or not I would support a negative income tax as per Milton Friedman's definition/proposals).

A tax system isn't supposed to be about being "easy". It is about paying the governments bills and getting the money in a fair way that does not stiffle growth. Either way, a simple tiered system is pretty damn easy. That aside, even your "easy" tax system is very much subjective (as is mine) because any tax system is subjective.

I don't even think income is the best thing to necessarily tax. I have no problem with a progressive system though, it is not inherently convoluted. Check out this interesting post from Scott Sumner on why he'd get rid of the income tax and some of the topics we've touched on here: http://www.themoneyillusion.com/?p=7091

dave · Jan 2, 2012

myp said:
Lowering their taxes? I am talking about equal taxes. You are the one that wants to have lower taxes for the rich compared to the poor. Nominal income means nothing- it is just that- nominal. It inherently reflects real value about as much as it inherently reflects real income.

A single tax rate means a lower tax in value on the rich. I cannot support that. And I never said poorer earners should not pay taxes (although I am not sure they should either as I am still undecided on whether or not I would support a negative income tax as per Milton Friedman's definition/proposals).

A tax system isn't supposed to be about being "easy". It is about paying the governments bills and getting the money in a fair way that does not stiffle growth. Either way, a simple tiered system is pretty damn easy. That aside, even your "easy" tax system is very much subjective (as is mine) because any tax system is subjective.

I don't even think income is the best thing to necessarily tax. I have no problem with a progressive system though, it is not inherently convoluted. Check out this interesting post from Scott Sumner on why he'd get rid of the income tax and some of the topics we've touched on here: http://www.themoneyillusion.com/?p=7091

I think you should reread what I wrote.

"Easy" is only one aspect, but the simpler a system is the less prone to abuse and manipualtion. One of the best things this country could do would be to have a flat tax, or at most a 3 tier tax rate. And setting the tax is not subjective at all, its basic accounting and budgeting. The govt creates a budget, and sets the rates to provide that revenue.

The article has "I don’t buy the "I worked hard for it, it’s my money" argument, for two reasons:" and he lists 2 reasons.

The first, "Most of your income comes from luck". That is total bullshit and an idea only held by people who have never signed the front of a paycheck. The author of the article is an academic who has never been outside of academia (at least from his bio). He has no idea what it takes to start a company, make it successful, and run it.

In the same section, he claims that "luck" is being born in the US. That might hold some weight if we are talking about a global tax, but we are not and he is not. We are talking about a national tax. Everyone subject to the tax was either born here or immigrated here, and we all "hit the jackpot".

His second reason is that we live in a civilized society. Again, that is a common advantage to everyone in the US. Its not a reason to treat people differently.

His article is all over the political map, I would almost say he was a socialist

myp · Jan 2, 2012

dave said:
"Easy" is only one aspect, but the simpler a system is the less prone to abuse and manipualtion.

And the lack of a tax system is least prone to abuse and manipulation. It doesn't mean no tax system is the best. Also, I do not see how a regressive tax is inherently less prone to abuse than a nominally progressive system- incentives need to be considered and loopholes closed as best as possible in both. Also, a 3 tier rate is nominally progressive if the tiers mean you pay more as you go along

A simpler system is also not inherently less prone to abuse. Let's say there was a x% tax on cash gifts. There would be tons of people that would probably just not report cash gifting- maybe no one would (theoretically possible since how would the government know). That is very prone to abuse. Something like income in the current system with its employer links and audits is less prone to abuse even though it is tremendously more complex.

dave said:
And setting the tax is not subjective at all, its basic accounting and budgeting. The govt creates a budget, and sets the rates to provide that revenue.

That is not how it works. We deficit spend. And even if it were, then they could do that for a progressive tax too.

dave said:
The first, "Most of your income comes from luck". That is total bullshit and an idea only held by people who have never signed the front of a paycheck. The author of the article is an academic who has never been outside of academia (at least from his bio). He has no idea what it takes to start a company, make it successful, and run it.

It is absolutely true to an extent. There are plenty of people that have said it. Let me ask you: does someone born in the US not have a tremendously higher shot at great success than someone born in an African village? Does someone who is the son of the President not have a greater shot than the son of an immigrant farmer? A lot of things are about position, who one knows, and mere chance. Yes, hard work plays a role and increases those chances, but at the end of the day, chance is a huge factor. There are a lot of studies on cognitive biases surrounding this topic and how people judge their successes and failures and the reasons for them differently than they judge other people's successes/failures. Also, Sumner is far from the only person to have suggested this. Tim Harford has written an extensive amount on the topic (he just came to mind because I am reading his book right now but there are even more notable people who suggest this out there). No one is saying all of success is luck, but it is undeniable that there is a substantial luck (or as I prefer to phrase it: chance) aspect to it.

Also, we are talking about income here and I am sure Sumner earns himself a decent income. Not sure why you are using a potential lack of business experience as a measure of critic here. Either way, the reason I posted that link was to suggest that the income tax might not be a good way to tax and that there are better alternatives.

dave said:
In the same section, he claims that "luck" is being born in the US. That might hold some weight if we are talking about a global tax, but we are not and he is not. We are talking about a national tax. Everyone subject to the tax was either born here or immigrated here, and we all "hit the jackpot".

Immigrating here and being born here are not equal. That aside, that is not his point. It is an example. Let me give you another one which is more applicable here: the kid born in a rich neighborhood in Fairfax (one of the richest counties in the US) vs. the kid born in the "slums" (for lack of a better word) of DC. They are born close geographically but in tremendously different situations with tremendously different opportunities.

dave said:
His second reason is that we live in a civilized society. Again, that is a common advantage to everyone in the US. Its not a reason to treat people differently.

Wait, hold on. He is not treating people differently. He wants to tax equally (at least I think so. I definitely do though). You are the one that wants to tax differently with a regressive tax on value.

dave said:
His article is all over the political map, I would almost say he was a socialist

I am guessing you are not familiar with Sumner? Not near a "socialist".

dave · Jan 3, 2012

myp said:
And the lack of a tax system is least prone to abuse and manipulation. It doesn't mean no tax system is the best. Also, I do not see how a regressive tax is inherently less prone to abuse than a nominally progressive system- incentives need to be considered and loopholes closed as best as possible in both. Also, a 3 tier rate is nominally progressive if the tiers mean you pay more as you go along

A simpler system is also not inherently less prone to abuse. Let's say there was a x% tax on cash gifts. There would be tons of people that would probably just not report cash gifting- maybe no one would (theoretically possible since how would the government know). That is very prone to abuse. Something like income in the current system with its employer links and audits is less prone to abuse even though it is tremendously more complex.

I would go with a 3 tier system only because it may be a needed compromise to replace the current tax system. I would prefer a straight flat tax.

The easiest system is no system at all, but then that doesn't meet the objective of paying for the government. Simpler means less prone to abuse, not immune to abuse.

Think of an income tax of 10%. You earn a dollar, 10 cents goes to the govt. Period. No deductions. The employer deducts 10% of your paycheck and sends it to the government. Simple, with built in checks, minimal record keeping, and difficult (not impossible) to abuse.

myp said:
That is not how it works. We deficit spend. And even if it were, then they could do that for a progressive tax too.

That is not how it works, but that is how it should work. What we have now is simply poor and abusive accounting. If a company practices the accounting that DC practices, people would go to jail for fraud.

Many states have balanced budget requirments and they meet them. Businesses have to maintain accurate budgets. Its not hard. The federal govt can estimate expenses for the next year, add a small resserve, compute the tax rate. Not difficult at all.

myp said:
It is absolutely true to an extent. There are plenty of people that have said it.
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Also, we are talking about income here and I am sure Sumner earns himself a decent income. Not sure why you are using a potential lack of business experience as a measure of critic here. Either way, the reason I posted that link was to suggest that the income tax might not be a good way to tax and that there are better alternatives.

Immigrating here and being born here are not equal. That aside, that is not his point. It is an example. Let me give you another one which is more applicable here: the kid born in a rich neighborhood in Fairfax (one of the richest counties in the US) vs. the kid born in the "slums" (for lack of a better word) of DC. They are born close geographically but in tremendously different situations with tremendously different opportunities.

We - and Sumner - are not talking about a tax system that encompasses the USA and Africa. If we were, than his arguement has merit. We are talking about a tax system for the USA, and the conditions in Africa are irrelevent.

Luck, birth, act of God, genetics, ... many things impact success and failure. But look at the people around you, they probably have common backgrounds and opportunity. Are they all equally successful? I doubt it. What do the over-achievers have in common? Hard work, focus and dedication. Who is more likely to succeed, the guy leaning on the broom and goofing off at the water cooler, or the guy at his desk working hard? Success is not luck. A person may luck into an opportunity, but he has to pursue the opportunity and that takes work.

I understand the reason you posted the link, but Sumners position that income comes from luck is due to ignorance. I have a lot of experience in business, I started more than one company including a very successful engineering corporation. I know the pain and pleasure involved, and success is highly dependent upon the individual starting the company. Simply leaving a secure position to enter the unknown world of a business start-up takes a certain type of character. Its tough, it takes a lot of work, and many owners invest their entire financial life into their company - if they fail, they lose a lifetime's worth of wealth. Some lose their home. Not everyone can do it. The people that take the risk and make it work deserve every penny they get.

Every person I have encountered that believes as Sumner does also have no experience in starting or running a business. Sumner is talking in ignorance and it brings his entire position into question.

Also, people that believe as Sumner does are more prone to forcefull taking of property. They reason the state has more right to take private property because I benefited from the public infrastructure, public education, tax rules, the highly functional society, and I simply won the lottery. Its the same as saying that my company would be a success if I were replaced with any other person, I just happened to luck out and be in the right place at the right time. Its an arguement designed to deligitimize private property and my claim to my money. See the papers and speeches by Elizabeth Warren currently running against Scott Brown for the Massachussets senate seat

myp said:
Wait, hold on. He is not treating people differently. He wants to tax equally (at least I think so. I definitely do though). You are the one that wants to tax differently with a regressive tax on value.

I am guessing you are not familiar with Sumner? Not near a "socialist".

If you want to use subjective terms like "fair" and "value", you can make any system sound like whatever you want.

I don't know if Sumner is a socialist. In his paper, Sumner does not hesitate to suggest the use of the govt force to impose upon people. Also, see my above comment.

myp · Jan 3, 2012

dave said:
I would go with a 3 tier system only because it may be a needed compromise to replace the current tax system. I would prefer a straight flat tax.

The easiest system is no system at all, but then that doesn't meet the objective of paying for the government. Simpler means less prone to abuse, not immune to abuse.

Think of an income tax of 10%. You earn a dollar, 10 cents goes to the govt. Period. No deductions. The employer deducts 10% of your paycheck and sends it to the government. Simple, with built in checks, minimal record keeping, and difficult (not impossible) to abuse.

And if there was a nominally progressive system, you might pay 10% on the first $10000, 15% on the next $20000, and 20% beyond that (the numbers are completely made up for the example not actual tiers or percentages I necessarily support). Also simple with minimal record keeping and difficult to abuse (relative to your flat 10%)

dave said:
That is not how it works, but that is how it should work.

And all people should not find tax loopholes when they can afford to pay taxes. Hate to break it to ya, but what you think should be how things work does not matter unless you can find a way to actually get it to work like that.

dave said:
What we have now is simply poor and abusive accounting. If a company practices the accounting that DC practices, people would go to jail for fraud.

Many states have balanced budget requirments and they meet them. Businesses have to maintain accurate budgets. Its not hard. The federal govt can estimate expenses for the next year, add a small resserve, compute the tax rate. Not difficult at all.

The federal government does not use capital budgeting so a balanced budget amendment would not work. Before any talks of balanced budget amendments even start, there needs to be discussion of whether or not to implement capital budgeting. The lack of a capital budget is the first reason why you can't straight up compare states or companies to the Federal government.

The second reason you can't compare the two is because the Federal government can influence monetary policy.

dave said:
We - and Sumner - are not talking about a tax system that encompasses the USA and Africa. If we were, than his arguement has merit. We are talking about a tax system for the USA, and the conditions in Africa are irrelevent.

It was an EXAMPLE. The point is that there are differences in situations and some of it most certainly has to do with chance. I gave you a more specific example within the US with the DC babies vs. Fairfax babies.

dave said:
Luck, birth, act of God, genetics, ... many things impact success and failure. But look at the people around you, they probably have common backgrounds and opportunity. Are they all equally successful? I doubt it. What do the over-achievers have in common? Hard work, focus and dedication. Who is more likely to succeed, the guy leaning on the broom and goofing off at the water cooler, or the guy at his desk working hard? Success is not luck. A person may luck into an opportunity, but he has to pursue the opportunity and that takes work.

To suggest that everyone has the same opportunity or very similar opportunity is intellectually dishonest. It is absolutely absurd. Yes people can work hard and move up, but for some people it is far easier to achieve success- especially when it comes to something like income just because of their situation or chance that ends up with them in a good spot. Want another example? How hard did the Kardashian sisters or Paris Hilton have to work to earn millions? Not much. They were raised in families with a lot of money and had nationally famous fathers. Everyone does not start with that.

This isn't to say that there is nothing wrong with it but to suggest they didn't have a better chance at income success is ridiculous.

dave said:
I understand the reason you posted the link, but Sumners position that income comes from luck is due to ignorance. I have a lot of experience in business, I started more than one company including a very successful engineering corporation. I know the pain and pleasure involved, and success is highly dependent upon the individual starting the company. Simply leaving a secure position to enter the unknown world of a business start-up takes a certain type of character. Its tough, it takes a lot of work, and many owners invest their entire financial life into their company - if they fail, they lose a lifetime's worth of wealth. Some lose their home. Not everyone can do it. The people that take the risk and make it work deserve every penny they get.

I don't know why you keep talking about starting companies when this discussion is clearly about income and you do not have to start a company to have high income. Even in business though, luck is most definitely part of the factor. I know you as a successful person might not want to admit it- but it is. And there are plenty of big business people who have admitted it. It doesn't say anything less about what you have accomplished because you probably did still work your ass off to increase your chances.

dave said:
If you want to use subjective terms like "fair" and "value", you can make any system sound like whatever you want.

Fairness is subjective.

The FACT that the utility of money (and the value too) is marginal is not. The value on an individual basis is subjective, but also marginal- that too is FACT. Your flat tax idea wants to tax people equally in nominal money, but not in actual value. In actual value you are supporting a regressive tax. That too, is fact.

dave said:
I don't know if Sumner is a socialist. In his paper, Sumner does not hesitate to suggest the use of the govt force to impose upon people. Also, see my above comment.

Do you support legal currency? The military? If so, you too support government force to impose upon the people. I hate how many libertarian-leaning people use this weak argument as it is completely hypocritical (unless they are anarchists), especially when you are using it against people who also consider themselves to be libertarian-leaning like Sumner and myself.

dave · Jan 3, 2012

myp said:
The federal government does not use capital budgeting so a balanced budget amendment would not work. Before any talks of balanced budget amendments even start, there needs to be discussion of whether or not to implement capital budgeting. The lack of a capital budget is the first reason why you can't straight up compare states or companies to the Federal government.

The second reason you can't compare the two is because the Federal government can influence monetary policy.

Accrual accounting is what is normally used for large corporations and many governments (the US actually uses a modified form of accrual but it seems to be designed to obfuscate, although the GAO publishes a straight accrual budget). Future obligations are taken into account in accrual and there is no reason the US govt cannot use it other than they don't want to make the budget process clear. The reason governments use nonstandard accounting practices is to hide or manipulate the data. There are plenty of papers on this issue.

myp said:
It was an EXAMPLE. The point is that there are differences in situations and some of it most certainly has to do with chance. I gave you a more specific example within the US with the DC babies vs. Fairfax babies.

To suggest that everyone has the same opportunity or very similar opportunity is intellectually dishonest. It is absolutely absurd. Yes people can work hard and move up, but for some people it is far easier to achieve success- especially when it comes to something like income just because of their situation or chance that ends up with them in a good spot. Want another example? How hard did the Kardashian sisters or Paris Hilton have to work to earn millions? Not much. They were raised in families with a lot of money and had nationally famous fathers. Everyone does not start with that.

This isn't to say that there is nothing wrong with it but to suggest they didn't have a better chance at income success is ridiculous.

That is not what I wrote. All things being equal, hard work is far more important than luck. Two members of the Bush family, one works hard, the other watches tv all day. The hard worker will go farther. Two sharecroppers, one works hard, the other is lazy, the hard worker will be more successful, but he will probably never rise to the level of either of the Bush members. There are exceptions, Clarence Thomas rose from dirt poor to Supreme Court, Obama went from listless drug using college student to President.

myp said:
I don't know why you keep talking about starting companies when this discussion is clearly about income and you do not have to start a company to have high income. Even in business though, luck is most definitely part of the factor. I know you as a successful person might not want to admit it- but it is. And there are plenty of big business people who have admitted it. It doesn't say anything less about what you have accomplished because you probably did still work your ass off to increase your chances.

The side issue of business came up due to the Sumner article. Its a side issue and not related to income taxes.

To frame success in business in terms of luck and chance is wrong. Luck can play a part in it, but a business isn't successful because of luck. Every successful company is successful because of hard work. There is no successful company run by a lazy lucky person. Maybe a person wins a contract or two because they are in the right place at the right time, but they win lots of contracts because they are good and work hard.

And there is a difference between me and many other people. I have actually done it, and I know others that have actually done it. When I started my corporation, in the early years I worked around 3700 hours a year, much of it unpaid (in 1996, my income was under $7,000, everything went into paying employees and financing the company). People that haven't done it don't have any idea what it takes, and those are typically the people that argue for luck. But no matter who claims that luck is critical or even significant in a business, I don't believe it. Its not delusional, its having the real experience.

myp said:
Do you support legal currency? The military? If so, you too support government force to impose upon the people. I hate how many libertarian-leaning people use this weak argument as it is completely hypocritical (unless they are anarchists), especially when you are using it against people who also consider themselves to be libertarian-leaning like Sumner and myself.

The issue is the role and scope of government. The government has limited powers to impose the will of the people on the consent of the governed, it should not have the power to impose its own agenda on the population. In this country, we have private property rights which Sumner doesn't seem to have a problem trodding on.

myp · Jan 3, 2012

Intellectually, it is absurd to say your position and chance did not play a role in what you became. You undoubtedly had a lot of help along the way. As I said hard work plays a major role too, but both are tremendously important. There are others who have worked just as hard and maybe even harder, possibly even harder and smarter and might not have made it as far as you because they just did not have luck on their side. Maybe the guy who sold his business too early- right before it really took off- might be a good example. I have a feeling you won't agree with me on this point though, but I just ask that you at least consider that it is potentially true as I take yours to be potentially true. Because either way neither you or I have empirical proof.

dave said:
The issue is the role and scope of government. The government has limited powers to impose the will of the people on the consent of the governed, it should not have the power to impose its own agenda on the population. In this country, we have private property rights which Sumner doesn't seem to have a problem trodding on.

What property rights is Sumner trodding on? Seriously, he just views the limit different than you do not even necessarily further against private property rights than you do. Again this is your opinion and that is his. As for the government's agenda, anything it does (or does not do for that matter) can be described as it's "agenda" if one so tries.

Virtually everything I responded to above and you posted in response is opinion though and not anything real. Now trying to get back on topic, what is your response to my claim that a progressive income tax system is about just as abuse-prone and easy to calculate inherently as a flat tax system is? You did not respond to that part of my post.

Also, do you think value is what matters in taxation or nominal dollars? And if it is the latter, you are okay with the rich paying less value (to them) in taxes?

The flat (income) tax is a regressive tax

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