The 15% Tax Rate
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So we get unfair situations, where a business founder is taxed once on his initial investment, again on his company's income tax, and finally on capital gains; whereas someone like Romney is taxed much less.
One obvious way to fix this is to protect investment accounts. You know how a traditional IRA is tax deductible when you invest, and taxed when you withdraw? Open up more tax-advantaged investment accounts like that[1]. Money isn't taxed until it's withdrawn, presumably to be spent. With such a system in place it will also become reasonable to tax the rich at a very high rate, without inefficiencies like over-taxing transient income or "destroying jobs".
The argument the author presents is strange to me. He says, essentially, that for economic reasons it's fine to tax capital gains at a lower rate. But then in the next paragraph he calls it "unfair". So... he proposes an unsustainably low flat tax rate, which he just implied would be bad, but feel fair... doesn't seem like sound economic thinking to me.
[1] Greg Mankiw mentions this idea in a NYT op-ed: https://www.nytimes.com/2012/01/22/business/four-keys-to-a-b... . I've seen a few other economists also toss around this idea also.
Huh?
You just wrote that money is taxed when withdrawn, then suggested taxing money when it's withdrawn.
Roth IRAs allow you to deduct tax free, because you pay tax on the money before you invest it, generally a good deal for most people, as you don't know what tax policy will be in effect when you come to withdraw it later, but you do know today's tax policies.
Is there really anything preventing them from changing the way Roth IRAs work, though?
Let me preface this by saying, I don't necessarily disagree with the ideas presented in this article, however that quoted bit is a very weak argument. Essentially the author is arguing that because the current system is regressive that justifies moving to a flat tax rate. However this does not actually provide an argument for why a flat tax rate is less regressive, rather he only asserts that the current system is not ideal.
If you're going to sell people on the idea, you've definitely got to come up with some strong arguments for your proposal and not just arguments against the current implementation. I think such arguments exist, but this isn't a great presentation of them.
Sorted.
Extra points if the government looks at everybody's W-2s & 1099s, decides how much it needs and calculates an X accordingly for that year. Then sends me a bill.
Why not just have a graduated tax system with a clean base? It's not the tax brackets that make it complicated, it's the byzantine process of calculating "taxable income."
The only thing that distinguishes them is the number of tax brackets. What's often presented as a "flat tax" actually has two brackets. The first, which starts at $0, has a 0% tax. The second, which starts at $X, has a Y% tax.
The "fair tax" is pitched on the basis of a sales tax. I don't see a reason why this couldn't be off income tax as well.
So if I have a flat tax that only affects incomes over a certain income level, and that income level is set high enough so that a reasonable person's food, shelter, and clothing needs are met, it's a lot harder to argue that the tax is unfairly regressive, especially when you consider the flat tax above a certain income level is actually the same progressive tax we have now but with a single rung on the ladder.
The flat tax proposals, being simple and loophole free, make it more difficult (and more financially burdensome) to game, whereas the current system seems to be designed to allow people to gain by paying accountants to find loopholes. The benefits of a simplified version of the current progressive tax we have seem self-evident.
The idea is to reduce or eliminate the incentive to cheat. Fairness really doesn't factor into it much, although it could be seen as a nice side benefit. End of argument.
Personally, I'd posit that the only truly fair tax is a fixed rate, like "everyone pays $2000 annually." Everyone is entitled to the same protection under the law, and therefore should owe the same amount. Laws which don't meet the criteria that they apply to all people equally should therefore be stricken.
The next closest "fair" thing to me is a retail sales tax, provided that everyone is provided a stipend to cover the tax paid on basic living expenses. That prevents the negative effects of the regressive nature of the tax.
Consider my own personal story. I come from an upper-middle class family. During high school I wasn't particularly motivated to excel academically and as a consequence didn't get particularly good grades in courses that I should have if I had invested the appropriate time and effort into studying. My parents response to this situation was to hire a tutor and force me to sit down with said tutor and study several hours a week. As a consequence I ended up getting better grades than I should have simply because my parents had the disposable income to spend on tutors. People from disadvantaged backgrounds do not get this same benefit. As a consequence I go on to university and end up getting a higher position on the totem pole because of my parents wealth. The kid who comes from a disadvantaged background and is in the same academic position as me does not get that kind of second chance.
>The next closest "fair" thing to me is a retail sales tax, provided that everyone is provided a stipend to cover the tax paid on basic living expenses.
Consumption taxes are regressive because they penalize the spenders. Bill Gates doesn't spend nearly as much money as he earns and as such pays a lower effective tax rate than someone who makes $30,000 a year and spends it all to support their family.
You are ignoring the part he put in about the stipend to cover tax on basic living expenses. With that included, the $30K spender will pay a much lower effective tax rate than Bill Gates.
Making a flat consumption tax progressive in practice is a very simple solved problem --- there might be other arguments against a flat consumption tax but it being regressive is not really one of them. A rebate or prebate that covers the tax up to a certain dollar amount per person solves it nicely.
A revenue-neutral flat tax system would ultimately require the majority of people to pay higher marginal tax rates than they do at present, and its inevitable negative effects on the quality of life of the middle classes (even if their basic needs were covered) wouldn't be balanced out by a positive impact on the quality of life of the smaller numbers of people wealthy enough to never consider budget constraints when making spending decisions.
Also, If everyone paid 15% (in total) I doubt it would appear fair. Wealthier people may benefit more from government policy, why should they pay the same amount?
A low flat tax rate isn't realistic. Maybe if it was higher it might have worked, but you'll have to have welfare spending to offset taxing people into poverty. Which practically the same as having a progressive tax rate in the end.
They wouldn't pay the same amount. They would pay the same proportion of their income.
The current tax system encourages speculative investment for capital gain and discourages investment for passive income due to lower tax rates on capital gain. Just look at the dismal amount of dividends paid out by companies in the US compared to Australia, where many companies pay out over 50% of their profits in dividends.
A person who earns a $10m a year but only spends $20,000 pays close to the same tax as a person who earns $10m and spends all $10m.
Both contributed lots to society to earn that $10m, but since the first person only spends $20,000 he only claims back a tiny amount from society resources due to him for his contribution. The second person claims back everything, equal in value to his contribution, resulting in no net gain to society. [correction: less net gain, because earning $10m would likely have provided several times that in benefits to society]
Replacing income taxes with only consumption taxes will further increase incentive for production, while discouraging unnecessary consumption. You'd get more people like the first person than the second person, and society will reap more of the rewards of more productive individuals, who use up less resources.
It'll be like society giving out pieces of paper that is put in a building called a bank in return for real goods and services, that are carefully allocated because no one wants to waste anything.
An example of a consumption tax is the VAT.
Only if you ignore sales tax and other taxes incurred when spending money (hotels, fuel).
Second, low income families spend all their money making ends meet, whereas high income families have a lot more latitude in adjusting their expenditure. Offsetting this with deductions will be a bureaucratic nightmare.
Second, you can implement a progressive consumption tax scheme. You can mirror with existing income tax system - first $10,000 spent each year is tax free, next $20,000 at 15% and so on. It could be hard to implement at this moment but with the advance of technology it would certainly become possible. An alternative would be to charge higher taxes for luxury goods like yachts and fast cars and lower taxes for basic goods like food and transportation.
The collected taxes can given back to the populace as social welfare. Most people would want to only limit welfare to low income individuals and families. I do not share the same opinion - there are many convoluted rules it is hard for people to see what the government is really incentivising you to do - in my country if you save more than $2,500 you lose your welfare payments until your bank account balance goes back below $2,500. Which I think is dumb.
e.g. When cash is replaced by only bank accounts, then every transaction becomes traceable.
As I said before though, you can as an alternative lower sales tax on basic goods and raise them on luxury ones.
Your receipt might look like:
1 coke $1
Consumption tax $0.15
-------------------------
total $1.15
While I don't disagree with your larger argument, producer captures only a fraction of the value they created. So earning $10M likely resulted in a huge net gain to society, regardless of their spending habits.
There are billionaires that live in modest homes and don't particularly act or spend like their rich, but they enjoy all of societies benefits that created an environment that enabled them to become rich. They should pay for it so that future billionaires and millionaires can be made.
15% tax rate applied at point of sale universally. Say $20K in spending per person is exempt. Each person receives rebate (or prebate) check for $3K.
You end up with a progressive consumption tax.
Mitt Romney and Fred Wilson are atypical cases.
The bottom quintile pays 4.3% of income in tax, assuming they have any income. The middle quintile pays 14.2%, the nation as a whole pays 20.7%, and the top quintile pays 25.8%. The top 1% pays 31.2% [1].
The difference between the CBO and Fred Wilson's analysis is corporate income taxes.
Suppose Fred Wilson buys 1 share of twitter worth $100. Twitter then makes $10 of profits, which it does not distributed as dividends [2]. This is taxed at the rate of 15-35%, so twitters balance sheet expands by $8.5/share, i.e. Fred Wilson's 1 share is now worth $108.5. He then sells, and pays 15% cap gains, earning back $107.22. To me that looks like a 27.8% tax rate.
So yeah, go ahead and tax cap gains at individual income rates. But eliminate the corporate income tax while you are at it.
[1] http://www.cbo.gov/ftpdocs/100xx/doc10068/effective_tax_rate...
http://www.cbo.gov/publications/collections/tax/2010/graphic... (Graphs are for 2007 data, not 2006 data. Not much difference though.)
[2] Dividends are taxed at individual income tax rates, except sometimes.
Let me put it my way:
When a plumber puts his knowledge and tools to work, his revenue is taxed once, at personal level.
When a shareholder puts his knowledge and money to work (along with other shareholders, in form of a company), his revenue is taxed at both company level and again at private level.
Can you spot the double taxation now?
The philosophy here is that you shouldn't get taxed on dividends because you're an owner... the money was already yours. The plumber didn't have to pay tax again to take his money out of his plumbing business (maybe a limited-liability partnership) and buy DVDs, but the shareholder did.
So the issue here is that in the case of google or any major tech company investors + company only pay the 15% + marginal effective rate of 1 or 2% which is only 17%.
Yes, many companies use complex tax structures to avoid paying US corporate income taxes on non-US profits. So what? They don't consume any US government services either, and Fred Wilson paid appropriate taxes to whatever nation Twitter Europe lives in.
Similarly, my employees (all located here in India) don't pay any US income taxes. Is there some reason they should?
GE paid a negative percentage of taxes because they lost money in prior years and used a loss carryforward.
The loss carryforward is a necessary hack to the system to prevent taxation from penalizing businesses with volatile income streams. Consider two investments - one makes $10 with P=1. Another makes +$60 with P=0.5, $-40 with $P=0.5. Without the loss carryforward, the volatile company would pay an average tax rate of 45% (15% of $60 when they make money, 0% of -$40 when they lose money).
Google, and of course virtually every multi-national corporation based in the US, does make use of many US government capabilities. I don't think it makes any sense to say:
>They don't consume any US government services either
However, I do think the corporate income tax issue is a subtle one.
It'd be interesting to compare what Larry and Sergey will pay in taxes versus government outlays for the things that have made Google possible.
These sorts of arguments always bother me because they over simplify the complexities of how one benefits from a public good or service. One example would be that Google doesn't have to worry about their engineers getting into a car crash on the way to work because the governments (federal and state) collectively spend billions of dollars ensuring that our roadways are safe for vehicles.
Another example would be that google doesn't have to spend money hiring private militaries or police forces to enforce their contracts because we have a judicial system that is paid for by the tax payers. This particular example is where your "consumption" argument falls down rather directly. Although it's true that they hire their own counsel, they are not the ones paying the salaries of all the various court officials. They "consume" these resources but in many peoples minds, myself included, do not pay their fair share.
>Similarly, my employees (all located here in India) don't pay any US income taxes. Is there some reason they should?
Of course not. The company that you set up and domiciled in America pays income taxes on the profit that you generate. Profit is usually defined as revenue minus expenses. Taxes paid in other countries are considered expenses and as such are accounted for.
>The loss carryforward is a necessary hack to the system to prevent taxation from penalizing businesses with volatile income streams.
Although we can both agree that GE's tax situation is very complex the problems that I and others have is that they directly lobby the government to get these tax incentives. The example I am thinking of is their lobbying arm advocating for an increased depreciation schedule on some of their capital equipment. This isn't fair.
The summary of my problem with your argument is that you benefit from all the things that America provides (government services, easy access to higher education, educated working class, pro-business climate, etc) but don't think that you should have to pay for any of this because "you didn't consume it." Just by living in America and being able to take advantage of these things you have consumed these things and you should have to pay your fair share. Consumption doesn't necessarily mean somebody handing you a check or waiting in a welfare line.
Is the Guinness Brewing Company or Tata similarly obligated to do business in the US just so the US government can tax them? And on the flip side, is GM obligated to do business in India so that India can tax them?
Given the billions of dollars that is building up in parking spaces overseas for major tech companies such as Google indicates to me here that the motivation isn't to re-invest in business overseas but to wait patiently for a tax holiday and repatriate the capital at next to tax free. And this is what I disagree with.
We can come up with all sorts of points and counter points about why our particular positions are correct but my issue is as follows:
1. I suppose that Google has built all these complicated transfer pricing agreements so that they can accumulate capital with out being taxed and wait for a tax holiday to repatriate the capital at next to no cost.
If 1 is true then I believe that this is wrong and Google is not paying their fair share.
Which part of this do you disagree with?
I disagree - I believe taxes are payment for government services received. Google Ireland and the Guinness Brewing Company did not receive government services from the US, and hence their "fair share" (to the US) is precisely $0.
Incidentally, the shareholders of Google USA may not live in the US. And similarly, the shareholders of Guinness may be located in the US. If it turns out that some large fraction of Guinness shareholders live in the US, should Guinness start paying taxes in the US for it's Irish operations?
(Guinness does, of course, pay taxes in the US for profits made by it's US subsidiary.)
So it's not so much about forcing truly international companies to pay taxes in the US (though they should pay taxes if they are indeed subsidiaries making money from the work of a parent company when that parent company repatriates profits), it's more about exposing the legal-by-letter-but-not-by-spirit practices of companies that hide money generated in the US overseas.
See http://www.npr.org/2011/03/17/134619750/how-offshore-tax-hav...
Where do you think that "the governments" got that money?
This applies only to Google USA. Google USA pays US income tax. Google India does not pay US income tax and does not receive these benefits.
The summary of my problem with your argument is that you benefit from all the things that America provides (government services, easy access to higher education, educated working class, pro-business climate, etc) but don't think that you should have to pay for any of this because "you didn't consume it."
My employees were educated mostly here: http://www.nifdpune.co.in/ and here http://www.softpune.com/index.shtml. I didn't ask where my devs went to school, but it was probably an IIT. Explain again how I'm consuming US government services?
We might get enough offsets in jobs, payroll taxes, etc to offset the corp taxes lost.
And better yet it does skew certain manufacturing concerns to not out-source but in-source..
Or switch to an integrated tax system like Canada has, where you get dividend tax credits (approximately) equal to the taxes the corporation paid on the revenues which resulted in those dividends.
The bottom quintile pays over 20% if they have a job. Medicare alone is 15.3%.
Also, corporate income taxes only apply to US investments, which is rarely 100% of any sane persons investments. To top that off if you actually buy stock from a large company their tax rate is often below 5%.
Well, defenders of the current SS and Medicare system keep insisting that they're not really taxes, they're "contributions" for "insurance" that everybody pays into for the purpose of receiving benefits later. I'm all for abolishing those taxes and funding means-testing benefits out of general revenues, but the left hates that idea because they don't want SS and Medicare to be thought of as welfare.
The bottom quintile pays over 20% if they have a job. Medicare alone is 15.3%.
That's Social Security, Medicare is only a few percent. But the rate is correct; "your employer pays half" is a legal fiction.
Note that the benefits payouts are incredibly progressive. Folks who don't put much money into SS get a much better return on their money than folks who "contribute" the max each year.
"better benefits" depends on their income distribution. There are folks who don't marry because that would result in smaller social security benefits.
AKA the only time where X and Y getting married lowers their combined benefits if X or Y was married to someone else z before this and where receiving marriage benefits from this.
We both have decent incomes, so there's no "he'd have benefited from the low-income subsidy".
So, let's say you decide to retire at 62 and not wait till 68. You have 2 choices you can take your normal befit and gain nothing, or you can take your 50% your spouses benefit at 62 wait until 68 take your benefit calculated as if you had revived zero benefits. Net result your ahead.
PS: Feel free to use there calculators to check this out: http://www.ssa.gov/planners/benefitcalculators.htm
The bottom quintile also receives things like EITC, which dramatically reduce their taxes.
It's true that US corporate income taxes apply to US investments. Similarly, Irish income tax applies to Irish investments, Japanese income tax to Japanese investments, etc. So what?
Page 2, Social Insurance Taxes is ~8% on that graph.
Also, the bottom quartile includes people that don't work. I specifically said those in the bottom quartile who do.
As to non US companies paying non US taxes, there is no universal corporate tax rate. You can't assume that non US companies are going to be paying US style income taxes.
As to promoting investment. Getting a Masters is a huge investment in time and money but I don't get to tax my extra earnings at 15% or use pretax money to pay for it etc.
PS: Not that corporate income tax really falls on the owners of a company. You could just as easily say it's the workers that end up paying corporate income tax as it reduces the value of their output work which reduces their income.
You can't assume that non US companies are going to be paying US style income taxes.
True. For example, a company based in Gurgaon pays fairly little in taxes. On the other hand, they need to provide their own roads, water and police services. (This is partly why Gurgaon is thriving - corporations seem to do a much better job of this than the Indian government.)
You might be right that some nations provide a better benefit/tax ratio. But the solution is not for the US to tax their corporations, the solution is for the US to provide more cost effective government services.
I agree that we should equalize taxes across income sources. My simple proposal? We should eliminate all corporate income taxes, dividend taxes, cap gains, etc, and put all income into the same bucket. But this is unpopular since it makes it more difficult to raise taxes - individuals immediately see higher taxes and blame politicians, rather than merely seeing their jobs go overseas and blame investors, or seeing prices rise and blaming walmart.
If you make over six digits I don't care what the source is, no-one should get a special rate. Because once you hit that level, there is no way you could convince anyone you are "suffering" even if you decided to work 12 hours a day. At that level work is a choice, where the millions making 4 or 5 digits have no choice.
A regular income-earning individual cannot take more than a fixed amount of deductions (in the sense his tax rate is fixed). However, a small business owner or self-employed invididual can deduct business expenses from his income. And there in lies the problem. How do you classify expenses? This creates an incentive to find creative ways of deducting your taxable income, so much that there is an entire industry formed around it.
So change the current system to prevent wealthy people from paying lower rates, don't just move the goalposts and call it a goal.
The fact that more money often means you can pay lower tax rates doesn't mean those people shouldn't be paying higher tax rates, just that the current laws aren't doing a good enough job at getting them to pay higher rates.
Also, it could have an unintentionally bad effect on our (now very consumer-driven) economy. You don't want to discourage people from spending money.
As for your second objection, I don't see the issue. If they don't want to be taxed, they can forego buying something.
That's parent's point: if I one buys less because of the tax, that's means someone or some company has lost a sale, which means they'll need to cut back on spending, etc. In a consumption based economy, you want money to be constantly re-injected into the economy to prevent stagnation.
We already have too much crap.
It's also hardly clear that the tax burden is even felt by the rich. Consider an investor with millions in investments who only consumes $50k/year. He would like to invest in his new venture, a medical search engine. But because of the taxation, he has less money for this investment. Think: who is forced to consume less as a result of taxation? The rich man continues to consume $50k/year. Instead, goods and services have been redistributed from the medical search engine to government uses.
The real question about taxing investors: do we believe the government will spend the money better than Fred Wilson would?
See also: http://www.thebigquestions.com/2011/04/18/the-man-who-cant-b...
Your link is really unhelpful to the idea of consumption taxes and I'm actually surprised to see you post a line of reasoning that suggests allocation of fiat money is zero sum in the medium term, especially in response to someone making a point about the economy being driven by consumption.
The $84 million belonging to Mr Kendrick might have been invested in US businesses providing valuable services (although if his private wealth managers are competent, he'd have been better off investing in foreign companies or shorting the housing market in the last few years. Earlier on, maybe, or maybe he'd have done fine placing speculative bets on asset bubbles that create nothing except liquidity for malinvestment and problems afterwards). But given the existence of fiat money created by the fractional reserve system, taxing Mr Kendrick's wealth shouldn't result in a reduction in the supply of bank loans unless the banks are running low on reserves. The government has a whole host of non-fiscal policy instruments to encourage more loans if that's the problem.
It's not a straight opportunity cost decision since the government isn't consuming the money out of existence, even if their spending is utterly devoid of foresight. Welfare check recipients and pointless bureaucrats consume much greater proportions of their income, which ultimately returns via a flows back into the hands of private investors via the mechanism of people actually buying products. Investors, especially passive ones apparently indifferent to returns, don't create profit; consumers buying things do. Shifting the burden from income to consumption taxes discourages that spending, especially if the government has to recoup the revenues Mr Kendrick's $84 million from people that actually get put off by higher prices. If consumers buy less, even Fred Wilson isn't going to get good returns from his investments.
The "ability to choose when to work and on what terms" is nothing but the ability to purchase goods.
The issue is not allocation of green pieces of paper at all. Moving numbers around in computers somewhere at the Fed or BankAm's data center doesn't affect the world at all.
The issue is spending. Real resources are allocated based on where the money is spent. If Fred Wilson spends the money, then real resources will be allocated towards a social network/gaming platform for people trying to get in shape. If the government spends the money, those resources will instead be devoted to making bling bling for welfare recipients.
If you want to argue that the latter case is a good thing, then go ahead and argue it. But the issue is whether the money should be spent on Fred Wilson's venture rather than Obama's venture, not whether to increase or decrease Fred Wilson's consumption.
Incidentally, if you are concerned by investors putting money into foreign companies (note: I'm not), why are you not concerned by welfare recipients consuming goods that are made in China?
And the ability to be able to enjoy more of that wonderful tax-free benefit: leisure. A person living a life of leisure off the proceeds of their lottery win benefits more from society than a person who works 4000 hours a year to fund exactly the same consumption habits. That advantage accrues to the lottery winner from the day they receive the income.
The issue is not allocation of green pieces of paper at all. Moving numbers around in computers somewhere at the Fed or BankAm's data center doesn't affect the world at all.
On the contrary, numbers moving around in computers makes a huge difference. I don't think we disagree with the basic intuition that taxing the supply of cash going into Fred's fund will reduce the real resources allocated by his fund. But the dynamics of the economy overall are a little more complicated, especially when instead of the investor actively allocating to new ventures a la Fred Wilson, investments are fed into the world of finance where the inherited real resources of Schlage Lock Company have the same purchasing power as newly-created credit to most market participants.
As several of the comments in your linked article pointed out, it's not a true representation of reality to suggest that taking $84 million out of the bank will result in the cancellation of $84 million in business loans, unless the US were to switch to a 100% reserve system. Instead, banks have a large degree of choice in the quantity of money they loan out, which is ultimately based on whether they anticipate earning enough real interest to repay the loans: they've already allocated a multiple of Mr Kendrick's money to real resources and if the government wants to start consuming it that's fine and dandy until the reserves look a little low. If the recent upswing in the bling market is looking sustainable, and the demand for yachts remains resilient they may even decide to extend more credit than they were previously so more people can get to work creating resources.
Sure, the government isn't omnipotent and clumsy fiscal stimuli might boost little more than inflation and do more damage to the economy than good. But moving numbers around and multiplying them does a lot more for the economy, especially when it's not doing too well. And Mr Kendrick would doubtless greatly appreciate being taxed less even if his bank manager notices the difference less than him.
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Most of the profit in selling Chinese-made goods is made by US companies (or multinationals employing sizeable US workforces). Selling and distributing foreign-made goods to US consumers is always going to generate incomes in the US, even if its creatively destroying domestic manufacturing industries at the same time. On the other hand, US investors can invest the untaxed portion of their income anywhere in the world with a few strokes of a keyboard. In the event of the US government offering the investment stimulus of income tax cuts but balancing them with domestic-demand-depressing consumption taxes, it's a fair bet a sizeable portion of that investment stimulus might find its way to London, Frankfurt or Tokyo.
Again, the issue is spending, not loans. Consider two possible uses for the money:
a) You can hire a programmer to do maintenance on the welfare administration system.
b) You can hire a programmer to build Fred Wilson's new venture.
By taxing the money, you devote it to welfare admin apps. By leaving it untaxed, you devote that programmer's labor to Fred Wilson's venture.
The relevant question: is purpose a) or b) a more valuable use of that programmer's labor?
Because of the amount of credit in the system, that $84 million can be simultaneously spent by many people anyway; the government joining the spending party might crowd out rather less or rather more private sector investment expenditure than they collect through tax revenues.
The only certain loser is the rich person.
But shouldn't be. Especially mortgage interest; it should be painfully clear by now that blindly encouraging people to buy houses is not a good plan.
This is perhaps another reason there is such opposition to removing tax deductions and simplifying the code. There are tonnes of people who need a complex tax code to make their current jobs relevant. So much inertia holds us back from getting to a better place.
That's not a flat tax. It is a progressive tax with two brackets. People who reach the second bracket pay a variable overall percentage that rises the more they make. I have never heard anyone make a convincing argument that this is better that a progressive tax with multiple brackets.
In fact, a progressive rate with multiple brackets is what you get if you apply a two bracket "flat" tax serially. What I mean by that is suppose that for each major department or function of the government you had a separate tax specifically to fund that department or function, with a two bracket structure. You get a separate tax bill for each of these in some specified order, with the taxes on each being deductible when computing the taxes for the ones that follow.
If you take this to a limit, imagining a separate small two bracket tax for every single thing the government does that needs money, and then replace the thousands of very small brackets with a smooth marginal tax rate curve, you'd get a monotonically increasing curve.
If the author really thinks his 28% tax rate is very unfair in light of his two brothers paying 40-50% taxes, he could donate the difference between 28% and 40-50% for himself to the Treasury each year, and effectively be paying a 40-50% rate.
That said, while I benefit personally from the low long term capital gains tax, carried interest is ridiculous.
In fact, I don't know anyone from any income group willing to donate money to the government.
What is fundamentally unfair is that the government is terrible at 99% of things it tries to do. This affects everyone regardless of their tax rate.
Whenever someone argues this point (not fw, in this case) and alludes to being double-taxed, I like to remind them that only the gain (minus any loss) is taxed...so there is no double-tax. ...and why someone would invest in stocks or startups vs bonds is that the rate of return is potentially much greater. I don't think there needs to be an extra incentive (in the form of lower tax rates) for investors. ... That argument seems to be a smokescreen.
On another note: I'd love to see a tax rate (or fair analysis) based on discretionary income.
A progressive tax system addresses this a bit...and, in my opinion, this is why moving to a flat tax would benefit the rich and hurt the poor.
Amongst other things, it would give a better picture of political candidates' motivations as they propose various tax "reforms".
We've had all sorts of politicians make all kinds of great speeches about various policies to implement with the tax code.
All that got us was a complex mess. Inside that mess was a lot of corruption paid for by lobbiests. You can hide a lot of cronyism in a tax code. I think no matter what you want the tax system to do, as technologists we can ask you to make it do that in a very simple, understandable way. So I support a flat tax, but not because it's "fair." I care about structure, I don't care about fair. Make it understandable, and then we can all decide whether it's fair or not. We'll vote people in and out of office depending on whether it's fair or not. Make it complex and we're stuck just voting on tax code depending on how emotionally somebody's speech appeals to us. We've found that while this will work for a few decades, it's not scalable over longer periods of time.
1. For a given taxable income, what is the tax?
2. What is taxable income?
To make a flat tax you fiddle with item #1. This involves changing a page of the tax code.
To make a less complicated tax, you fiddle with item #2. This involves changing the other 71000 pages of the code.
http://www.slideshare.net/rahamin/estonian-taxes-and-tax-str...
It seems to me that if the benchmark tax rate is 40% (AVC says his brothers pay 40-50% on their salaries), and the 15% rate is raised, it would be beneficial for the investors to simply take a salary and bonus instead?
In particular: corporation taxes (effectively paid by shareholders) and sales taxes should be added to the mix when talking about tax rates.
A progressive tax system seems more fair to me (though not perfect) because there is some link to discretionary income.
1. You ignored inflation. Your argument gives a justification for taxing the real gain, but current CGT taxes the nominal gain, which is generally greater. So the difference between the two is taxed twice.
2. Let's do some math. For simplicity let's consider a world with no CGT at all, only income tax.
Say I earn $10k income and pay 40% income tax, leaving me with $6k. Then I invest it and gain 400% on my investment, so I have $30k.
If I had not been subject to income tax, I would have taken home the entire $10k I earned; I would have invested it and gained 400%, leaving me with $50k.
But in fact I only have $30k. Since, out of my total (admittedly hypothetical) tax-free profit of $50k, I have lost $20k owing to the imposition of a 40% income tax, how can you say my capital gains have not already been taxed?
As with everything, it comes down to an argument about what's "fair".