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Comment by jmspring | Hacker News Reader

I'm not a Trump fan, and despite likely tax hits, his proposal of simplifying the tax code (as many have done before him), getting rid of the IRS (yes jobs lost, but really, I got a certified letter owing $0.51 and they were "too busy with this category to answer. click") would be a positive thing.

One short summary of his proposal -- http://www.thepoliticalinsider.com/donald-trump-unveils-his-...

I think a pure flat tax would actually be bad for the country implemented immediately, but maybe a gradual rescinding of tax breaks (mortgage, etc -- i use said benefit) might be worth considering.

Wall Street bankers running off pure capital gains is a big problem.

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The flat tax is an incredibly pointless solution.

The flat tax is opposed to a progressive tax, that says that instead of having a tax rate of 15% for 100% of your income, you have a tax rate of 0% for the first $10000 of your income, 10% of the next 20000, and so on. This is something that can be calculated mentally, looked up using IRS published tables, or calculated with no effort in a 10 line script or some of the simplest Excel sheets possible.

The progressive nature of income tax is absolutely not a problem and recognizes the marginal value of money.

The problem is exemptions, etc., which a flat tax as opposed to a progressive tax does nothing to resolve.

Sure the mortgage deduction exemption is horrendous, but I think income source discrimination is a bigger issue. We have different rates for wages, long-term capital gains, bonus income. Don't even get me started on carried interest.

I'd also like to see social security contributions get uncapped. After $118k in income, your average tax rate falls until $189k. Even then, your mean tax rate will still be lower than someone earning $118k until you earn in excess of $411k.

1) Wages and bonus income aren't taxed differently.

2A) When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think.

2B) Many economists argue that there should be no capital gains taxes at all as they create a distortion between consumption and saving behavior. https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is as good of a place to start as any on this discussion. I also like http://www.thebigquestions.com/2010/01/27/a-quick-economics-... if you prefer things in parable form.

3) With respect to carried interest I generally agree with you but this piece will make some people question their opinions on the matter:

http://www.nytimes.com/2012/03/04/business/capital-gains-vs-...

1) It looks like I'm mixing up the California withholding rate with the tax rate. Thanks.

2A) Granted. If I had a magical tax wand, I'd obliterate corporate taxation.

2B) It's an argument I've heard, but I'm more interested in avoiding arbitrage. My preferences might be mistaken. :)

3) If I hold the belief that we shouldn't tax income differently based on its source, Mankiw's argument doesn't have much force. His reasoning is sound, sure, but I'm not sold on the premise.

1) Yes. This is true and annoying especially if you care about short term cash flow. If you super care about this you can play games with your W4 to cut down your withholding and instead pay quarterly tax payments. Though if you screw up and underpay you'll owe penalties.

2A) Indeed I agree. Though personally I put the chance of this ever happening at precisely zero due to the political optics.

2B) The difficulty of determining what is a capital gain and what is income is, in fact, one of the biggest theoretical arguments against a zero cap gains rate.

Why remove corporate taxation?

From my perspective, corporations already pay a lower effective tax rate and have access to tax avoidance strategies that not available to the individual.

I've read the argument that eliminating the corporate tax would spur growth but that's like saying eliminating individual income tax would spur consumer spending.

Because all taxes are taxes on people. Corporate taxes are just a convoluted and bad way of doing so.

Are you proposing that eliminating corporate taxes would mean that somehow you would make more at the end of the day and be taxed less overall?

I'm not sure I see that happening.

If you eliminate corporate taxes then the shareholders of the corporation would make more money(1). You can then make up for the lost corporate tax revenue by taxing those shareholders more. It would be a simpler and more efficient system overall.

1. Probably also the employees would make more and the customers would pay less for products as well. This has to do with something called tax incidence.

Thanks. I'll have to read more about tax incidence.

But naively speaking, what's the incentive for a corporation to increase employee pay in this scenario rather than just maximize shareholder value?

The same incentive they have to pay you anything more than the minimum wage: the market. If there is more profit in the system how that profit gets allocated (higher wages, lower costs to customers, shareholder value) depends on the relative leverage of the various parties involved.

What Harry said.

At the end of the day money is going to land in someone's pocket. It'll be paid out as wages and dividends. A company will spend it on equipment, vendors and consumables. When money is retained, it'll get priced into shares and will get taxed (albeit indirectly) once a shareholder realizes a gain.

Corporations are really good at playing a tax minimization shell game. Big corporations are especially good. This leads to all sorts of nonsense like laundering profits through Bermuda and parking capital outside of the US. In the end all we end up doing is compounding the advantages of size to the disadvantage of smaller corporations. Meanwhile there's the added inefficiency of churning money into tax lawyers.

My expectation is that revenues would increase if we set the corporate tax rate to zero and reallocated the burden to personal taxes.

> When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think.

This doesn't make any sense. All of these things (with the exception of corporate taxes, which shouldn't exist) are priced into the return of the investment[1] and have nothing to do with taxation.

Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate?

[1] More precisely, investments with a lower return are less desirable and their price tends to drop until the return (including risk, inflation, etc) is.

> Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate?

There's actually some bizarreness in the English tax code around this. Most taxpayers are subject to a 28% levy on investment returns. Gamblers themselves aren't taxed on winnings while the house pays 15% on their profits. (The treatment of professional gamblers is a conversation for your accountant.)

If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes.

> If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes.

The same is true of getting a raise and paying higher taxes on a "fake gain" (i.e., your effective tax rate slowly rises as each boundary shifts lower in real terms). That being said, I guess my main complaint wasn't with the inflation claim but rather with the idea that the risk/return line is somehow relevant to taxation.

What you are describing is different from what I'm talking about. You are talking about how tax rates can go up over time if the brackets are not adjusted for inflation.

What I'm talking about is the fact that you can have a nominal gain that you pay taxes on that is not a real (inflation adjusted) gain at all.

These are two different problems. The first we handle by adjusting the tax brackets every year. The second we do not handle. I suppose we could, but it would be a lot more complicated.

I really liked the discussion of the Chamley-Judd model, especially in parable form.

Question though: I worry that some individuals have the ability to recharacterize their earnings as either income or gains by shifting their contracts and methods of compensation.[0] If so, then you end up with odd results. Scenario 2 (a 50% tax on wages) turns into Scenario 1 (no taxes) for that subset of the population.

Looks like a well studied topic, so I'm sure someone tackles this?

[0] Say I build machines that make widgets, and your new widget factory wants such a machine. You could hire me as an machine-building employee, I could own my own business and you could buy the machine from me, or you could give me shares of ownership in your factory. Each of these could result in the same actions and changes in wealth for all parties, but would be taxed under completely different systems. CEO compensation packages are the most transparent real world example of compensation structuring I can think of. On the other hand, Jon Ronson interviewed a woman making 1.5-3 million per year who claimed she paid 35%, that she wasn't rich enough to restructure to avoid income taxes. This was in a piece on income inequality, maybe for GQ. So maybe this is non-trivial until you start getting near the top...

Indeed if you look at the Wikipedia link I posted you'll find a section on "Avoidance of tax arbitrage between capital and labor incomes" which is exactly the problem you describe.

Incidentally, when people talk about "tax shelters" and "complicated schemes the rich use to avoid paying taxes"(1) they're mostly talking about this. Though often they don't make that as clear as they should.

1. http://www.nytimes.com/2015/12/30/business/economy/for-the-w...

Yup, right there citing Reis (2007). Good stuff, thanks.

It's not a terrible solution. Ideally a flat tax (which pretty much always means a lower rate than high earners pay) simplifies the tax system, and makes high earners less likely to evade taxes. However it doesn't change the fact that really high earners get a lot of their wealth from investments, so in the end they'll still pay a lower total 'rate'. The highest tax burden will still be paid by upper middle-class professionals who have a high salary but few investments.

If governments really want to collect taxes from the ultra-rich, a wealth tax is what is necessary. However that alone poses problems because 'wealth' is not always liquid - do you tax the old lady whose house has appreciated significantly but who doesn't have an income? Do you tax an entrepreneur whose firm is worth several million but hasn't actually realized any significant income?

Anyhow, just a few musings, but the summary is that taxes are hard. Too high and people evade them, too low and the government has a shortfall...

> It's not a terrible solution.

It's precisely a terrible solution. Yes, taxes are hard, but a solution that punishes the poor (or the not rich) by not recognizing the marginal utility of money is terrible in any form.

> punishes the poor by not recognizing the marginal utility of money

What does this have to do with the poor? Are you under the impression your federal tax dollars get redistributed to the poor? Government contractors aren't poor.

Do you have any idea what percentage of government proceeds are redistributed to the poor? Do not include social security. That money was taken from them to begin with.

> What does this have to do with the poor?

Look up what regressive means and what marginal utility means; nothing I'm saying has anything to do with how taxes are redistributed. Flat taxes are inherently unfair, they ignore the marginal utility of money; they are regressive.

About 20% goes to 'income support'. There's a slightly partisan-but-fair breakdown here: http://www.heritage.org/research/reports/2014/12/federal-spe...

There's pretty much always a minimum amount you need to make to pay taxes, most flat tax schemes are still progressive on the low end. Very few 'flat tax' proponents want to tax the poor (not much money in it anyway).

The idea with a flat tax isn't to punish the poor, but to reduce tax evasion on the higher end, and to reduce to burden on the middle class.

Taxes should be progressive at all levels, setting a floor to exclude the poor from the unfairness doesn't make it more fair for the guy in the middle income ranges. All flat tax solutions are bad as they are all inherently unfair.

Depends what your definition of 'fair' is. Conservatives think it's 'fair' that everyone pays the same rate. Progressives think it's 'fair' that everyone pays what they can afford.

'Fair' depends strongly upon one's beliefs, and can't be objectively defined.

> Conservatives think it's 'fair' that everyone pays the same rate.

Which is a position completely ignorant of the marginal utility of money. No, it isn't fair that for one guy 10% could be the difference between getting by and not getting by while for the other guy 10% means no change to his lifestyle all.

No, progressives think it's fair that the burden is felt equally and that requires understanding how money works.

> 'Fair' depends strongly upon one's beliefs, and can't be objectively defined.

Fair does depend on beliefs, but some people's beliefs are objectively stupid. Anyone who denies the marginal utility of money and insists a flat percentage is fair, doesn't understand money and doesn't belong in the conversation just as anyone who believes vaccines cause autism is objective stupid and doesn't belong in that conversation. Everyone has opinions, that doesn't make them equal.

Some people also thought "From each according to his ability, to each according to his needs" was fair. Most seemingly disagreed, given how history has unfolded.

For the record, I agree with Piketty, Marx, and others of that particular persuasion. I'm all for progressive taxation, wealth and inheritance tax, all of it. But I'm also not ignorant of history...

Nor am I, and implying progressives are communists is quite intellectually dishonest.

Nor are you what? I said I agree with Piketty and Marx.

Anyhow, the example was just rhetoric. The point is that communism started because people thought it was unfair that there was a rentier class who essentially monopolized wealth because they had inherited wealth. And communism fell because people thought it was unfair that people who were lazy made the same as people who worked hard.

Studies have shown that most people in western societies prefer inequality as long as someone has less than them. They think inequality is 'fair'. Why do you think people value celebrities and rich people? People are happy with our 'lottery' system, where anyone can become rich, even if the majority don't, and even if the average struggles...

And we're back to communism again. This thread has nothing to do with communism. That you keep going there shows you can't have a serious conversation; goodbye.

Socialism, the labour movement, and communism all come from the same place.

It's funny, you're arguing for progressive taxation, but you don't understand the history behind labour movements, equal rights, welfare, socialism, etc... Or why communism is relevant in a discussion about rational choice, inequality and perceived fairness.

I do get it though - Americans have been taught to hate communism, and thus have purged an entire century of socialist philosophy from their collective thoughts.

While it's true that fair is hard to define objectively progressive tax rates are easy to support from quite a few underlying premises:

1) utility maximization 2) Rawlsian justice 3) fee for service model based on benefits received from government

It's actually pretty hard to justify a flat tax from most underlying axioms. I think you'd actually have an easier time justifying a flat fee where everyone pays the same $ value regardless of income.

I also contest your assertion that "Conservatives think it's 'fair' that everyone pays the same rate." While that might be true for some conservatives, political support for progressive tax rates go much beyond Democrats.

In theory, the AMT exists to prevent the affluent from using too many deductions

> taxes should be progressive at all levels

Are you proposing replacing the tax bracket system with an algebraic equation?

I wonder if that would be more or less confusing. I guess if you just showed people "this is what the tax curve looks like", it would be obvious that:

1) They need to use a calculator or look up in the tax table.

2) You don't actually lose money when your income goes from $37,449 to $37,451.

Regressive taxes are inherently economically destructive.

I'm sorry but its just a terrible idea.

You can get a 0 deductions system with a progressive tax system too, it isn't some magical property of a flat tax.

> Regressive taxes are inherently economically destructive.

The current system, in practice, is progressive up to the upper middle class, and regressive after that.

Flat tax rates aren't about taxing the poor (you can still build in income exemptions and most flat tax schemes do), but reducing tax evasion by the rich...

In theory, the AMT exists to prevent that

1) That isn't how regressive taxes work. Stating its regressive on rich ppl is simply a failure to understand what the word means in context of taxation.

2) The proponents of flat tax schemes frequently set the exemptions low enough to raise the tax burden on the poor.

The problem with the flat tax is it doesn't address the problem. What makes the tax code complicated is determining exactly what constitutes taxable income. Dealing with different tax brackets is simply a matter of looking a number up in a table.

I know this is about US taxes only, ( And i am not from US ). But shouldn't mortgage reduction only be acceptable if you have one property only? If you have multiple property, then you are basically accumulating asset over a long period of time.

Apparently, one or two homes, and there are limitations on the deduction for your second home.

https://www.irs.gov/publications/p936/ar02.html

The biggest difference moving to a flat tax system can make is that you can shift income tax collection from the payee to the payer.

Under a progressive system, Company A paying you $10,000 and Company B paying you $10,000 results in a different tax rate so neither company knows how much tax you owe. Under flat tax, Company A can just take $1500 out of your earnings before it gets to you, regardless of any arrangements you have with other payers. Since there are far fewer companies than employees, this makes tax enforcement significantly easier and evasion much less likely. Ordinary citizens now no longer have to deal with the IRS and tax is handled transparently.

Every flat tax proposal also tends to come with a negative income tax component to make up for the regressivity. The NIT essentially becomes a basic income like social safety net to make up for the loss of progressivity. And since it involves the govt giving you money rather than you giving the govt money, compliance will naturally be much higher.

The challenge of a "flat tax" is defining "income". It's not as easy as you think, and basic intuitive "fairness" will result in a lot of income being excluded. Given that today's graduated tax system results in top-earners paying lower percentages, a "flat" tax will surely be worse.

As for getting rid of the IRS, who will collect, administer, and audit the flat tax?

That's why "fair tax" advocates flat sales tax. It still leads to questions, but sales taxes are usually simpler than income and capital taxes.

This is my favorite proposal to date. Sales tax applies equally to a pencil and a yacht. It also encourages savings at lower income levels.

That's the problem, too -- it applies equally to necessities and luxuries. Sales taxes are regressive because there is a certain amount of non-discretionary spending everyone has to make, regardless of income, just to live.

Most sales tax proposals include a "universal rebate", which is a fixed monthly amount given to everyone that's intended to cover the tax on necessities.

Certainly there are ways to mitigate the effect, I was just pointing out that the universality of a sales tax isn't all positive.

We tried a luxury tax in the 90s.

Yachts were more expensive and due to highly elastic demand, the industry plummeted. Companies went under or laid off thousands.

But don't worry. Guess who works at yacht manufacturing plants? Not rich people. They weren't hurt, and they were fine with taking their money elsewhere.

Nice straw man. I didn't even mention luxury tax, let alone promote it.

You implied that it would be better if luxury items were taxed at a different (higher) rate than other items. They is a luxury tax.

However, if I misunderstood and you advocate having the same tax rate on luxury goods as other goods, then we are in agreement on this point.

It doesn't necessarily need to. We could have a `digit-sales tax', i.e. count the number of digits in the item cost and add a tax at that percent. Something less than $10 only has a 1% tax, while something costing $10,000 has a 5% tax.

Clearly the numbers should be adjusted if someone wants to turn this into a serious tax proposal, but it seems possible to design a progressive sales tax.

It's not quite so simple. Many non-essential things are cheap (e.g. iOS games), and many essential things are expensive (e.g. housing, transport). The line between essential and luxury is also subjective. So you have to start categorising, and things get messy.

Costco would be a bad place to shop.

No, yachts get a break on sales tax.[1] Really.

[1] http://www.pressofatlanticcity.com/business/new-jersey-cuts-...

It's a terrible idea, a sales tax taxes spending instead of earning which automatically is a huge tax cut to the wealthy who by definition spend a far smaller percentage of their income than the middle classes who basically spend it all. Taxes belong on income, not on spending; sales taxes are incredibly regressive.

My bad. At the time of posting I thought that FairTax was fairly well known.

https://en.wikipedia.org/wiki/FairTax#Monthly_tax_rebate

And as with all things government, it's the opposite of what it's named. The fair tax is anything but fair. If you only tax spending, then the rich, who spend far less than their income, can effectively avoid taxation of most of their earnings by simply living below their means, which they do anyway because that's what being rich is. If I make a million a year but consume like someone making 100k a year, I only pay taxes on 1/10 of my income; hardly fair since the guy actually making 100k is paying taxes on 100% of his income.

A sales tax is the ultimate regressive tax. At the low end, you don't have much to save anyways (you need to eat!), so you are spending your income and getting taxed. At the high end, you can save a lot more since you make more. And you can always fly off to Hong Kong for a weekend to buy things (that is what happens today in China which has a high VAT/import tax).

No, I think you mean a true flat tax, e.g. a poll tax, is the ultimate regressive tax.

I have come to find that "regressive" moves the goalposts. It sounds as if the rich pay less. They don't pay less; they pay more. They just don't pay more when dividing taxes by their total income. I've never heard a convincing argument for why that formula is the ultimate benchmark.

And anyway, virtually all sales tax proposals have some per capita rebate/basic income, and that can be tweaked to make it as progressive as your heart desires.

Who administers, audits, and collects the flat sales tax? And who decides what counts as "sales" on which to collect this super-simple tax? I assume we would tax the sale of pencils and computers. What about houses? Stock? Haircuts? Babysitting? Will companies be asked to pay taxes on their cost-of-goods-sold (currently deductible from corporate income taxes)? Or their employee's salaries?

At the federal level, there's an organization called IRS.

Yes.

I'm not sure if you're aware, but sales tax is already ubiquitous in the US.

The taxable entities are far fewer than income tax, making for less administrative overhead. Tax evasion rates also lower.

Of course there are tricky questions, but they're already being answered, IMO better than the personal income quagmire.

Having both today is a complicated tax structure (corporate taxes and sales taxes). Between the two, sales tax is the simplest choice.

What makes defining "income" in a flat tax scheme more challenging (or more important) than defining it for a progressive tax scheme?

I don't think the GP was claiming it was more challenging. The point is making the tax flat doesn't help solve this key problem, so all you get is a less progressive system overall.

Obama also wanted to reduce income tax filing to a single-page affair. Almost all such proposals along these lines founder on the rocks of legislative buy-in. Given Trump's penchant for denouncing other people as idiots and worse, even if he were to be elected I'm skeptical about his ability to get anything substantial done. Sure, some in congress would be intimidated or enthused into working with him, but others would conclude that he would be in place for 8 years at most, whereas government projects and finances typically involve much longer time horizons. I seriously doubt anyone trusts Trump to supervise a rewrite of the Constitution.

I thought tax simplification was opposed by the tax-preparation industry: http://techcrunch.com/2013/03/27/turbotax-maker-funnels-mill...

> I think a pure flat tax would actually be bad for the country implemented immediately

It would be bad in any form, it's regressive; marginal utility and all that, taxes should be progressive or they're not a fair burden.

I have a problem when people call tax burdens fair. There are so many ways to define fair its rediculous and has no solid meaning.

Also, on that note, its not logically possible to tax a business alone. Any tax a business pays must by necessity be passed on to consumers, else the company goes out of business. You can get around it by only taxing profits, but then you open the giant loophole of all value that's not profits, like capital, income, tax free expenses, etc. There is no "fair" way to do that makes everyone happier.

> I have a problem when people call tax burdens fair.

Well I have a problem with people who think fair doesn't matter.

> There are so many ways to define fair its rediculous and has no solid meaning.

Fair is like porn, it's hard to define, but everyone knows when they see it. It's genetic, even monkeys have a sense of fairness and refuse to cooperate when they're being treated unfairly. If that's not enough meaning for you, look harder.

> There is no "fair" way to do that makes everyone happier.

Sure there, look up the veil of ignorance; people think more fairly when they don't know which side of the equation they'll come out on.

A flat tax is a bad idea. A progressive tax without deductions might work, but a flat tax would just be a huge tax increase overnight for 90% of Americans.

Just copy whatever Hong Kong or Singapore or Estonia are doing taxwise.

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