A Tax Compromise

[bord-du-rasoir.livejournal.com]

American conservatives who complain that the bottom 50% of households don't pay enough of their fair share of taxes often also advocate for a flat tax. What advocates of a flat tax don't often address, consider, or even care about is— (1) the plight of low-income and impoverished households, (2) the fact that the 1.45% Medicare tax is flat, and (3) the fact that the 6.2% Social Security tax is regressive.

I would gladly forfeit the current flat Medicare tax, regressive Social Security tax, and progressive federal income tax structure for an all-three-in-one flat tax on discretionary income, defined as:

The amount of [a household's] income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of.

(Image links to source)

Despite the flat rate, the tax paid under a flat tax on discretionary income would be effectively similar to taxes paid under the current system for all current tax brackets— with the notable exception that the roughly third to half of American households without any discretionary income (i.e., impoverished and low-income households) would not be burdened with any federal taxes.

Also, if anyone has or can access better data on discretionary income in the U.S., I'm interested.

Comments

[bord-du-rasoir.livejournal.com]

Of course we could spend less, but that's a different topic. It'd be interesting (and depressing) to figure out the ratio of comments that tangentially relate to posts to comments that directly address them.

[htpcl.livejournal.com]

Friday lulz is coming up soon! ;)

[badlydrawnjeff.livejournal.com]

It's absolutely relevant. We don't have a revenue problem in this country, we have a spending one.

[badlydrawnjeff.livejournal.com]

So sorta like The Fair Tax (http://www.fairtax.org)? I'm game.

[bord-du-rasoir.livejournal.com]

"The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment."

1. Beginning federal taxes at poverty level would be significantly different than taxing only discretionary income. The federal poverty rate for 2009 was 14.3%, officially, though a new measure (the Supplemental Poverty Measure) places the poverty rate at 15.7%. Comparatively, 36.5% in 2006 and 47.9% in 2002 has no discretionary income.

2. I'm not sure how a progressive sales tax works.

3. I don't know what "dollar-for-dollar federal revenue neutrality" means.

[badlydrawnjeff.livejournal.com]

You should read further, then.

Tax policy

[russj.livejournal.com]

I agree that a "progressive" tax does help poor families.
And the progressivity of the federal income tax is often negated by state & local taxes--especially the sales tax, which is also a flat tax. I like the fact that in Minnesota, food and clothing are exempt from sales tax.

Strangely enough, many "liberals" favor sales taxes and their associated revenue bonds to finance many of their own pet projects. (Boulder county in Colorado has three or four separate "open space" sales taxes, despite 2/3 of the land there already being public-owned.)

What conservatives like me complain about is that everyone should pay _something_. The current system can allow a voting block who pay no federal taxes _at_ _all_ decide how much the burden is on the rest of the citizens. And recent trends show the federal government taking control over many local functions (think roads, schools, etc.) and setting funding levels for them.

Re: Tax policy

[sealwhiskers.livejournal.com]

Why don't you also tell a little more about how the roads and public services in Colorado Springs are? (libertarian paradise)

Re: Tax policy

[bord-du-rasoir.livejournal.com]

Ideally, I'd want everyone to pay something. But if people are unable to pay for their rent or mortgages, utilities, insurance, medical expenses, children's expenses, transportation, and food, I'm not sure how I personally justify taking money from them, because of some ideal.

[eracerhead.livejournal.com]

Under your proposal, we will still have a lot of happy horseshit in determining poverty levels. A flat poverty level will benefit less costly regions and perpetuate low wages within them, regional poverty levels will be complex and therefore subject to political pressures for gerrymandering.

Secondly, you are already making an exception to taxation which will set a precedent for further exceptions and we may eventually end up just where we are now.

Why not just have a gross receipts tax for both businesses and individuals? Perfectly flat, no exceptions. The poverty wage will escalate to compensate just like it does now for FICA.

It also keeps things simple. We are going to fight a war, to pay for it the national tax will go up (say) 2% during the period. The cost to the voter will be right there in red and black and the individual can decide whether the sacrifice is worth it.

"Why not just have a gross receipts tax ... Perfectly flat"

[bord-du-rasoir.livejournal.com]

Because if you take money from people who can't pay for the lowest measures of basic rent or mortgages, utilities, insurance, medical expenses, children's expenses, transportation, and food; you increase social problems.

"The poverty wage will escalate to compensate just like it does now for FICA."

And not everyone in the U.S. has the ability to work 40 hours to pull themselves out of poverty, not necessarily because of some physical or mental defect or lack of trying but because of the state of the economy. And we can't guarantee that minimum wage will increase. And I don't know what you mean by the poverty wage escalating "now for FICA."

"It also keeps things simple. We are going to fight a war, to pay for it the national tax will go up (say) 2% during the period. The cost to the voter will be right there in red and black and the individual can decide whether the sacrifice is worth it."

I'm not opposed to delineating additive expenditures like war or stimulus spending in the tax system. But I don't think such a practice is directly dependent on whether or not the tax code is flat.

Re: "Why not just have a gross receipts tax ... Perfectly flat"

[rasilio.livejournal.com]

"And we can't guarantee that minimum wage will increase. And I don't know what you mean by the poverty wage escalating "now for FICA."

Actually yes we can and what you don't understand is the mechanism by which it will occur.

When you inflate the cost of living through any means then in the long term wages must rise to compensate for it. If they do not then those at the bottom of the wage scale will no longer have ANY incentive to work, their option would be to not work and starve quickly, or to work and starve slowly,. So if the minimum wage is $5 an hour and the cost of living goes up by 20% because of a new tax then people will no longer be willing to work for that $5 wage, they will demand enough more so that they can eat.

Please define discretionary Income in the tax code...

[russj.livejournal.com]

The problem with a tax on "discretionary" income, is that it would require unending definitions, each one with a corresponding way to defeat the purpose.
I used to live in a $350K house until I lost my job, and moved into a $210K house. In a real sense, housing is also disgressionary. So if I reduce the price of "necessities", my tax burden goes up. I may choose to buy luxury food, designer clothes, and a bigger house and car.

Re: Please define discretionary Income in the tax code...

[bord-du-rasoir.livejournal.com]

"it would require unending definitions"

The current system contains a standard deduction of $11,400 for 2010 for married couples filing jointly, and $5,700 for 2010 for individuals. The 2010 HHS poverty guideline for a married couple is $14,570, and $10,830 for an individual.

There is no unending definition in either the standard deductions nor the poverty guidelines; likewise, there is no need for unending definitions for a standard deduction for discretionary income.

Standard deductions would apply for a small number of key basic expenses: rent or mortgages, utilities, insurance, medical expenses, children's expenses, transportation, and food. You wouldn't get to deduct your rent or mortgage but rather the median rent or mortgage in your county— likewise, the median utility costs, insurance costs, medical expenses, children's expenses, transportation, clothing, food, and basic hygiene (toilet paper, soap, cleaning products, etc) . Now, all of those measures would just be standard deductions factored at a county level, but in the cases of insurance costs or medical expenses, if the standard is exceeded, individuals would be able to keep receipts to increase the amount deducted. But for gas, rent, mortgages, utilities, children's expenses, vehicles, clothing, food, or hygiene, the county median standard would be sufficient.

[korean-guy-01.livejournal.com]

The most obvious point you are missing is that 2 & 3 are non-issues because the "mainstream Consevative flat tax argument" is based on income taxes. When the central tenant of the argument is based on that (income taxes), it's rather foolish to say that someone doesn't care about something outside of the scope of the presented argument. To be fair, you criticize the panookah about this but don't hold yourself to the same standard. Social Security & Medicare is a "different topic" in the same manner.


Here are some reasons why your proposal would be rejected by many.

1) Some states allow a deduction for Social Security & Medicare taxes (itemized deduction).
2) Your system offers no safeguard that future Liberal majorities will just revert back to the old tax system.


In my opinion, one of the big issues with income taxation is that the IRS serves as a yearly ATM for a lot of households. Personally, you should either have a 0 or positive tax liability, and not make money.

[bord-du-rasoir.livejournal.com]

"The most obvious point you are missing is that 2 & 3 are non-issues because the "mainstream Consevative flat tax argument" is based on income taxes."

I wrote,

"What advocates of a flat tax don't often address, consider, or even care about is"

I'm not sure how directly addressing is the equivalent of missing. Furthermore, the Fair Tax site badlydrawnjeff links to is based on payroll as well as income taxes. Are you asserting that badlydrawnjeff and/or the site he links to are not "mainstream" or not "Conservative"?

[rasilio.livejournal.com]

No the Fair Tax is not terribly mainstream or Conservative, it us more closely associated with Fringe libertarians. Steve Forbes Flat Tax would be by far the more mainstream conservative tax plan.

[rasilio.livejournal.com]

It sounds all nice and everything, but how do you calculate how much a person should spend for food, clothing, and shelter? Alternatively you can change it to taxing them on how much they DO spend on things other than food, clothing, and Shelter but then you get into the very tricky power game of what constitutes food clothing and shelter.

For example a person could be perfectly healthy eating a diet of Red Beans and Rice supplimented by the occasional fresh fruit and vegetable, so is prime rib really a necessity, what about twinkies? How about dining out, obviously the person had to eat a meal and it may be for perfectly legitimate reasons that they didn't have time to prepare one for themselves so is the meal fully, partially, or not at all deductibile?

On the flip side if you try to tax based on what the person actually spends then can you imagine the headache of filing your taxes? You would need to keep EVERY SINGLE RECIEPT from any purchase you made during the year to be able to justify whether it was a valid food, clothing, or shelter expense or not.

[bord-du-rasoir.livejournal.com]

Standard deductions would apply for a small number of key basic expenses: rent or mortgages, utilities, insurance, medical expenses, children's expenses, transportation, and food. You wouldn't get to deduct your rent or mortgage but rather the median rent or mortgage in your county— likewise, the median utility costs, insurance costs, medical expenses, children's expenses, transportation, clothing, food, and basic hygiene (toilet paper, soap, cleaning products, etc) . Now, all of those measures would just be standard deductions factored at a county level, but in the cases of insurance costs or medical expenses, if the standard is exceeded, individuals would be able to keep receipts to increase the amount deducted. But for gas, rent, mortgages, utilities, children's expenses, vehicles, clothing, food, or hygiene, the county median standard would be sufficient.

For counties without calculated median standards, state or federal standards would apply.

[rasilio.livejournal.com]

So in otherwords no change from what we have today with the exception of the standard deduction being county specific and maybe a little higher.

[meus-ovatio.livejournal.com]

I laughed the first time I heard people campaigning for tax-cuts decide to call it something else, as if they could fool me so easily.

[nevermind6794.livejournal.com]

Your post reminds me of this. (http://en.wikipedia.org/wiki/Guaranteed_minimum_income) It strikes me as a generally good idea, but the devil is obviously in the details. It would be a great way to reduce government bureaucracy (and thus spending and time-until-food-stamps), but I can't decide whether breaking up government purchasing power for food, shelter, health care, etc. into such small units (since the "minimum income" would likely be pretty low) is such a good idea.

[bord-du-rasoir.livejournal.com]

since the "minimum income" would likely be pretty low

Minimum income would not necessarily be low. In the comments above, I suggest that we allow for deductions of basic expenses based on the median cost of living at the county level. This would entail that some government entity (county-level, state, or federal) define the median cost of rent/mortgages, utilities, health care, childcare, transportation, hygiene, clothing and food. Then, based on the total, one standard deduction would be computed for everyone in a given county. In the case of health care, receipts could be kept to deduct expenses exceeding the median cost for the county.