The craze for flat taxes: Republican candidates are competing to race to the lowest point

The craze for flat taxes
Republican candidates are competing to race to the lowest point
Oct 29th 2011 | WASHINGTON, DC | from the Economist print edition

“ZERO-zero-zero is better than nine-nine-nine,” claims Rick Santorum, a Republican presidential candidate, trying to outbid the tax plan of his rival Herman Cain. Mr Santorum’s is not the only effort at one-upmanship: “I’ll bump plans with you, brother,” Rick Perry, another contender, told Mr Cain before unveiling a proposal for a flat tax this week (see above). Yet another of the candidates, Newt Gingrich, does not want to be left out. “Bump plans w/ me,” he implored Mr Perry by tweet.

It has been more or less compulsory for Republican presidential candidates to promise a tax cut of some sort—or at least indefatigable opposition to tax increases—ever since Ronald Reagan pledged a 10% reduction in marginal rates every year for three years during the campaign of 1980. Over time, the proposals have been getting bolder. Mike Huckabee, the runner-up for the nomination last time around, suggested replacing the entire federal tax code with a 30% federal sales tax, deftly if misleadingly branded as the “fair tax”. John McCain, the nominee, advocated a two-tier system. Taxpayers could either stick with the present code or switch to a massively simplified alternative, with much lower rates but few exemptions or deductions.

This time around the smorgasbord of tax plans on offer is even more radical. Most undertake not just to lower bills, but to dispense with whole tomes of the 3.4m-word code. Mr Santorum, for example, wants manufacturing firms to pay no corporate tax at all (one of his three zeroes). Ron Paul, a libertarian candidate, wants to do away with federal income tax altogether. Mr Cain denounces the current tax code as “the twenty-first-century version of slavery”. There is a consensus among all the candidates that the federal corporate tax rate of 35%, the highest in the rich world, must be slashed. Most candidates would like to put an end to taxes on capital gains and dividends as well.

Meanwhile, negotiations over a “grand bargain” to eliminate America’s gaping deficits seem to hinge on sweeping tax reform. What with Occupy Wall Street’s protesters railing against the power of America’s plutocrats, and Barack Obama’s insistence that the wealthy must pay more, a row about tax seems likely to dominate the campaign.

Messrs Cain, Gingrich and Perry are all hawking flat taxes, whereby individuals would all pay the same rate, with few exemptions and deductions. The idea is not new: Steve Forbes, a publishing magnate, made a flat tax the centrepiece of two presidential bids, in 1996 and 2000—both resounding flops. But Mr Cain has garnered lots of attention, and a lead in some polls, with his relentless refrain of 9-9-9. He wants to cut personal and corporate income taxes to 9%, abolish most other federal taxes, and make up for the lost revenue with a 10% sales tax (billed as 9% thanks to a mathematical sleight of hand). “If 10% is good enough for God”, he quips, “then 9% should be just fine for the federal government.”

That, by all reckonings but Mr Cain’s, would provide the rich with a whopping tax break (chiefly because tax on capital gains and dividends would be eliminated), paid for by higher taxes on everyone else. It was concerns about how regressive the switch to a flat tax would be that caused Mr Forbes’s campaigns to founder. At the time, a certain Mitt Romney called it “a tax cut for fat cats”.

This time around, however, raising taxes on the poor seems to be a point of pride among Republican candidates, although Mr Cain has modified his original plan slightly to make it less regressive. In launching his campaign, Mr Perry expressed dismay at “the injustice” that 47% of Americans do not pay any federal income taxes. Most of the people Mr Perry is referring to live below the poverty line, and still pay payroll taxes on what little they earn. Yet an indignant campaign called “We are the 53%” has sprung up online, to complain about the loafing remainder. Most of the Republican candidates, including Mr Romney, the erstwhile scourge of the fat cats, argue that more of the poor should pay at least some income tax. Mr Gingrich goes even further, accusing both Mr Perry and Mr Romney of “class warfare” for putting upper limits on certain tax breaks in their plans.

Mr Cain’s rivals do worry, though, that his scheme will introduce a new federal revenue stream, in the form of a sales tax. That would come on top of the already hefty sales taxes levied by many cities and states, they point out, and would inevitably rise over time, much as income tax did until Presidents Kennedy and Johnson in the 1960s cut the top rate by 21 percentage points. Doing without a sales tax obliges Messrs Gingrich and Perry to propose higher flat taxes, of 15% and 20% respectively. Moreover, both would make their plans optional, like Mr McCain’s, and retain a few cherished tax breaks, on mortgage interest and donations to charity, presumably in an effort to placate suspicious primary voters.

Judging by the polls, such efforts are likely to fall flat. Only 3% of participants in the latest Economist/YouGov sounding said they would leave the tax code as it is, whereas 62% agreed that a big overhaul is needed. But there was no consensus as to what shape reforms should take. Flat taxes, including the 9-9-9 plan, seem to put off far more voters than they attract. Even Mr Romney’s much more modest call to cut the corporate tax rate and extend income-tax cuts dating from George Bush junior’s presidency generates more dismay than enthusiasm among voters.

In fact, the only tax scheme that wins approval from most Americans is the one pushed by Mr Obama and other Democrats, to raise rates for the rich. In support of the idea, Democrats point to studies such as one out this week from the Congressional Budget Office, which found that the share of national income accruing to the richest 1% of Americans has doubled over the past 30 years, to over 20%.

A clear majority supports higher taxes on those earning more than $1m a year to pay for job-creation schemes; a narrower one supports tax increases for those earning more than $200,000. Mr Obama won the presidency while campaigning on a similar proposal, but did not get it enacted when Congress was under Democratic control, and now faces implacable opposition to the idea from Republicans, who dismiss it, as usual, as class warfare. The received wisdom in Washington is that the two parties are so divided on tax that only an election can resolve the impasse. At any rate, Mr Obama says his desire to raise taxes on the rich will be a prominent part of his campaign for re-election.

Yet both parties profess to believe that the tax code should be simplified and the base broadened, chiefly by eliminating most loopholes. This holds out the prospect both of lowering rates, a notion dear to Republicans, and raising revenue, which pleases Democrats.

The idea appeals to populists on the left and the right, as a blow to special interests and corporate welfare. It is the crux of all deficit-reduction schemes that enjoy bipartisan support, and is thought to feature prominently in the discussions of the “super-committee” charged by Congress with deflating the deficit. It was also the basis of the last big overhaul of the tax code, under Reagan. Catchy campaign slogans, in other words, can sometimes evolve into sensible policy.

from the print edition | United States

In launching his campaign, Mr Perry expressed dismay at “the injustice” that 47% of Americans do not pay any federal income taxes. Most of the people Mr Perry is referring to live below the poverty line, and still pay payroll taxes on what little they earn.

This is a flat out lie, big time. That 47% are normal everyday folks who make in excess of $50,000 a year or more. A majority of this 47% pay no taxes because the gov't has made it that way. They can take deductions galore, relieving them of any tax burden. Again, my uncle makes $400,000 a year or so in his business and pays no taxes because he has so many deductions that his liability is zero. He gets money back in excess of $10,000. This is a fact and is indisputable.

I stopped reading after this bit.

Do you have any evidence that supports this fact?

The author lied about the Fair Tax rate very early in the article, that makes this author either a shill for higher taxes or just too stupid to do proper research.

It's sad really, the Economist used to be a reputable and balanced publication.

That's clearly out the window now.

A nationwide, standardized 'flat tax' could work well IF we could get the economy upright again first. As it stands right now, we have a very precarious situation with borderline income levels that a flat tax... if implemented all at once, would almost certainly devastate.

Once we're rolling again, this could work pretty well because the economy would be strong enough to adjust those lower income levels to meet the increase in taxes. The only way around this to make it work in the here and now would be to redefine the base poverty level and a starting point.

Just a few thoughts...

BubbleBliss wrote:
Do you have any evidence that supports this fact?

Go look it up on www.irs.gov, search for it and do the math yourself. I get tired of having to do the work for you.

Arx Ferrum wrote:A nationwide, standardized 'flat tax' could work well IF we could get the economy upright again first. As it stands right now, we have a very precarious situation with borderline income levels that a flat tax... if implemented all at once, would almost certainly devastate.

Once we're rolling again, this could work pretty well because the economy would be strong enough to adjust those lower income levels to meet the increase in taxes. The only way around this to make it work in the here and now would be to redefine the base poverty level and a starting point.

Just a few thoughts...

I submit that Cain's 999 plan (as imperfect as it is compared to the Fair Tax) would, in fact, be the best approach in a down economy. To slash the corporate and personal (for S-corp, etc. owners) income tax rates would be a tremendous boon to small and large businesses alike and would spark a near immediate resurgence in the economy - if 999 were made permanent or at least long term (10 years or longer).

We will never get the economy stronger by staying our current course. What is needed is bold action by someone who can inspire and insure that the private sector will no longer be treated like the enemy.

TexasBlue wrote:

BubbleBliss wrote:
Do you have any evidence that supports this fact?

Go look it up on www.irs.gov, search for it and do the math yourself. I get tired of having to do the work for you.

The fact is that with deductions and exemptions, low earners even out the taxes they pay.

http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3057

53.5% of people who don't pay income taxes are in the lowest quintile. So turns out, the author was right.

Nearly half of U.S. households escape federal income tax

Stephen Ohlemacher
Associated Press
April 8, 2010

WASHINGTON — Tax Day is a dreaded deadline for millions of Americans, but for nearly half of U.S. households, it's simply somebody else's problem.

About 47% will pay no federal income taxes for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.

The vast majority of people who escape federal income taxes do pay other taxes, including federal payroll taxes for Social Security and Medicare, and excise taxes on gasoline, aviation, alcohol and cigarettes. Many also pay state or local sales, income and property taxes.

Most people still are required to file federal income tax returns by the April 15 deadline. The penalty for not filing is limited to the amount of taxes owed, but it's still almost always better to file: That's the only way to get a refund of income taxes withheld by employers.

In recent years, credits for low and middle income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the U.S. from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10% of earners — households making an average of $366,400 in 2006 — paid about 73% of the income taxes collected by the federal government.

The bottom 40%, on average, make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.

The federal income tax is the government's largest source of revenue, raising more than $900 billion — a little less than half of government receipts — in the budget year that ended last Sept. 30.

In 2007, about 38% of households paid no federal income tax, a figure that jumped to 49% in 2008, according to estimates by the Tax Policy Center.

Middle income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17.

The bottom 40%, on average, make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes.


Your article is refuting what you previously claimed...

BubbleBliss wrote:
Middle income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17.

The bottom 40%, on average, make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes.


Your article is refuting what you previously claimed...

How so?

This was your original post... I bolded the key part of the sentence....

TexasBlue wrote:

In launching his campaign, Mr Perry expressed dismay at “the injustice” that 47% of Americans do not pay any federal income taxes. Most of the people Mr Perry is referring to live below the poverty line, and still pay payroll taxes on what little they earn.

This is a flat out lie, big time. That 47% are normal everyday folks who make in excess of $50,000 a year or more.
I stopped reading after this bit.

BubbleBliss wrote:
This was your original post... I bolded the key part of the sentence....

TexasBlue wrote:

In launching his campaign, Mr Perry expressed dismay at “the injustice” that 47% of Americans do not pay any federal income taxes. Most of the people Mr Perry is referring to live below the poverty line, and still pay payroll taxes on what little they earn.

This is a flat out lie, big time. That 47% are normal everyday folks who make in excess of $50,000 a year or more.
I stopped reading after this bit.

This is also a fact. A family of 4 (two of those are kids) can make in excess of that and still not pay a dime.

I really wish I could get my uncle to post in here but he's typing challenged. I've brought him up numerous times. He (along with his business) makes well over $400,000 a year and pays NOTHING in taxes. He actually gets money back. It's all in the deductions, man. But a guy like me had to pay in the last 2 years while unemployed. Go figure.

The article above states, that people making UP TO, not IN EXCESS of $50,000 don't pay taxes. That includes the lower class, which is what the author of the original article way claiming.

And your uncle may be a good example, but the stats are right there. Even in the article you posted!
Your uncle may qualify for certain deductions that not all businesses that make $400,000 a year qualify for...
No matter, I believe that it is not fair for somebody making that much money to pay less taxes than somebody that makes as much as you.