This just in from IRS

[Oh Shoot]

Always interesting take, Lester, and lots of brain work, not to mention math!

One thing, I blew it my post, I said this was tax rate on "adjusted gross income", meant to say simply "taxable income", edited post.

 

 

Note that ALL the fellas above, even the poor guy, have a MUCH higher tax rate than Mitt Romney's 14.1 percent.

 
Well, you have to be comparing tax % on total income (all bucks coming in) to % on final taxable income to make that statement, would you not? Meaning, didn't Romney actually pay the same % as anyone else in same bracket of final taxable income for a given year? Doesn't everyone?

- OS

Edited January 31, 2013 by Oh Shoot

[Guest Lester Weevils]

I am the middle guy at $90k and taking all into consideration including the tax breaks the rich get and the not taxable ways they distribute their money is my issue once you get it all figured out it comes out like your math I pay 35.8 and the Rich pay 14.1, makes me throw up alittle in my mouth, that and the dog behind me just farted!

 

Yep, in theory but my example was single self-employed, which might be the most defense-less against the tax man. In every one of the tax brackets, some get reamed and some make out like bandits, depending on each fella's situation in relationship with thousands of pages incomprehensible tax regulations. There are "goodies" handed out to all brackets, which favored groups can use to reduce the tax bill. If you happen to fall thru the cracks and they didn't write tax dodges for you, then it can get ugly. But I don't know any other way to TRY to compare total rates, rather than pick some "otherwise equal" type of taxpayer, so that the only variable is income. You could do the same comparison for married filing jointly with 5 kids, but it would be a lot more complicated, and also give a different spread.

Edited January 31, 2013 by Lester Weevils

[Rowdy]

Just looking at the rates, the tax rate is already surprisingly flat. If one ignores such confounding factors as capital gains tax. And if one doesn't try to figure out whether tax dodges of the rich'n'famous are more or less "deserved" than child care credits or earned income credits taken by po folks, or mortgage interest deductions taken by middle class folks and yuppies.
 
Here is a numeric example-- Postulate three single self-employed fellas who don't have much in the way of deductions. One fella makes $900,000, the second fella makes $90,000, and the third makes $9,000.
 
So the fella with $900,000 income pays $314,163 income tax. He pays 12.4 percent social security on the max ceiling of 113,700 = $14099, and he pays 2.9 percent medicare tax on $900,000 = $26,100. His total tax bill is therefore $354,362. Divide that by $900,000 to give a total tax rate of 39.4 percent.
 
Now the fella with $90,000 income pays $18,493 income tax plus $11,160 social security and $2610 medicare. Note that his social security bill is almost as much as the fella who made $900,000, but his income is a tenth as much. That is the trick part of the equation. The fella has a total tax bill of $32,263. Giving a total tax rate of 35.8 percent.
 
The self-employed fella with only $9000 income has $904 of income tax and $1377 of social security/medicare, totaling a tax bill of $2281 and a total tax rate of 25.3 percent.
 
So we see in this case there is only about a 15 percent spread between rich and poor, and the fella in the middle has about a 4 percent spread going up and 11 percent spread going down. Pretty dang flat.
 
There are other factors that tend to flatten it even more, sales tax ferinstance. The poor fella and the middle class fella both pay sales tax on just about every penny of their incomes, but the rich guy is probably spending a good bit of his money on things that are not sales-taxable, such as stocks and bonds. Which would tend to raise the total tax rate of the po and middle class more than it would the rich guy, and bring the actual rates even closer.
 
Note that ALL the fellas above, even the poor guy, have a MUCH higher tax rate than Mitt Romney's 14.1 percent.

Currently, the poor guy ($9,000 income) would have a tax rate of 0% because of the earned income tax credit. Not only that, the IRS refunds all his tax payments and sends him some more on top of that.

[Guest Lester Weevils]

Currently, the poor guy ($9,000 income) would have a tax rate of 0% because of the earned income tax credit. Not only that, the IRS refunds all his tax payments and sends him some more on top of that.

 

I could be mistaken, but don't think a single guy is gonna get much of an earned income credit. It was just comparison of one case. All the brackets have their dodges and gimme's, if the congresscritters think you belong to a big enough group to favor.

 

yet another edit: I'm not defending the EIC, but the basic theory of the EIC from its inception was to "reduce the SS tax burden" of the poorest citizens. Plenty of self-employed are po as church mice. In fact, lots of self-employed lose money hand over fist for years before pulling a profit.

 

It was considered poor form to tax a man who doesn't have enough money to put food on the table. Just sayin, for a po fella who is an employee, he might get back all his SS taxes (thousands of dollars) if he happens to fit the regulations in the proper fashion, but the government doesn't "give back" the other half that was paid by the employer. So even if a po turnip picker doesn't pay a lick of SS tax, his employer is paying a minimum of 7.65 percent tax rate in his name, that the feds would not receive if the fella didn't have that suck turnip-picking job.

 

But a self-employed fella, even if he gets the EIC, can't escape at least the same 7.65 percent that he owes as the employer of himself. :)

Edited January 31, 2013 by Lester Weevils

[Guest Lester Weevils]

Always interesting take, Lester, and lots of brain work, not to mention math!

One thing, I blew it my post, I said this was tax rate on "adjusted gross income", meant to say simply "taxable income", edited post.

 

 

 
Well, you have to be comparing tax % on total income (all bucks coming in) to % on final taxable income to make that statement, would you not? Meaning, didn't Romney actually pay the same % as anyone else in same bracket of final taxable income for a given year? Doesn't everyone?

- OS

 

Thanks OS

 

I wasn't trying to "sell a bill of goods" just analyzing one situation. Other situations would give other answers.

 

Maybe some taxpayers have an interesting page 2 of form 1040, but all the action on mine are on the schedule C's. Once a number shows up at the top of form 1040 page 2, its all over but the crying. Not much on page 2 is very useful reducing the tax burden.

 

Haven't studied Mitt's return and maybe it is unwise to even hazard a guess, but since his final tax rate is slightly lower than the capital gains rate, a near-100-percent capital gains income, combined with large donations to the Church of Latter Day Saints and various expert accounting dodges ought to give a number in that ballpark?

 

Had earlier posted an idea that long-term capital gains ought to be calculated according to inflation, because it is a travesty to owe tax on "slight absolute profits" if in reality you lost your butt to inflation on the deal. OTOH, I can't see any justification for a capital gains lower rate (as long as inflation is taken into consideration). If one man makes his money buying and selling stocks, bonds or real estate. Another man makes his money buying and selling groceries, hammers, or widgets. Why does the widget-trader deserve to pay double the tax rate of the stock-trader?

Edited January 31, 2013 by Lester Weevils

[Oh Shoot]

...a near-100-percent capital gains income, combined with large donations to the Church of Latter Day Saints and various expert accounting dodges ought to give a number in that ballpark?

 

Yep, that's pretty much it AFAIK.

 

But my point is, that figure you mention on page two, taxable income, gets the same rate as anyone else in a tax bracket. So Mitt's was 30 something % same as anybody else who topped out.

 

Sure, he's paying a lot lower rate on overall income than someone who only made that $400K or more from wages but that seems to be the way the figure is painted for public figures.

 

Hell, even those in the lowest tax bracket are paying a lower overall % than if if they had no deductions, even if they only have the standard one and nothing else.

 

- OS

Edited January 31, 2013 by Oh Shoot

[Guest CigarGuy]

Couple thoughts.........

Most of Mitt's income was cap gains, which was capped at 15%.  Don't forget..... this is after tax money that he already paid

regular tax on. 

And, please, don't think it's a bad thing IF you don't have the mortgage interest expense deduction!

[Oh Shoot]

Most of Mitt's income was cap gains, which was capped at 15%.  ...

 

Yeah, that was sorta parta of my poorly made point. No cheating involved.

 

If I had been smart enough to gamble a quarter or more my income through the years and come out way ahead, I could have paid a helluva lot less in taxes while making a helluva lot more money, too. Albeit on an, umm, slightly less grandiose scale. ;)

 

Begrudging someone who makes out like a bandit by obeying the law is un-American. Hell, it's worse than that, it's Democratic!

 

- OS

Edited January 31, 2013 by Oh Shoot

[frankmako]

if you are a normal hard working tax paying person and you fall under this, good for you.  if you are a low information voter and/or a dead beat and you collect this, you are a leach.  you take out more than you put in.  that is the problem now.  we have more that take and don't put back.  they are raised to be dead beats.  the mean old hard working person has been mean to them and we owe them.   fair tax is the only way we can support these social programs.  with the fair tax everybody has skin in the game and pays a federal tax on goods bought.

[Oh Shoot]

... fair tax is the only way we can support these social programs.  with the fair tax everybody has skin in the game and pays a federal tax on goods bought.

 

The reason it hasn't happened and won't happen is that the pols lose control. It's an anonymous tax -- they couldn't stroke targeted groups to enhance contributions and votes.

 

- OS

[Rowdy]

I could be mistaken, but don't think a single guy is gonna get much of an earned income credit. It was just comparison of one case. All the brackets have their dodges and gimme's, if the congresscritters think you belong to a big enough group to favor.
 
yet another edit: I'm not defending the EIC, but the basic theory of the EIC from its inception was to "reduce the SS tax burden" of the poorest citizens. Plenty of self-employed are po as church mice. In fact, lots of self-employed lose money hand over fist for years before pulling a profit.
 
It was considered poor form to tax a man who doesn't have enough money to put food on the table. Just sayin, for a po fella who is an employee, he might get back all his SS taxes (thousands of dollars) if he happens to fit the regulations in the proper fashion, but the government doesn't "give back" the other half that was paid by the employer. So even if a po turnip picker doesn't pay a lick of SS tax, his employer is paying a minimum of 7.65 percent tax rate in his name, that the feds would not receive if the fella didn't have that suck turnip-picking job.
 
But a self-employed fella, even if he gets the EIC, can't escape at least the same 7.65 percent that he owes as the employer of himself. :)

I agree with your point. The truly poor shouldn't have to pay the taxes. Many of the flat tax proposals I've seen have a point at which they begin. In other words, everybody's first $50,000, for example would be exempt.

[Rowdy]

Yeah, that was sorta parta of my poorly made point. No cheating involved.
 
Begrudging someone who makes out like a bandit by obeying the law is un-American. Hell, it's worse than that, it's Democratic!
 
- OS

I heard it was so cold in Washington the other day that the Democrats had their hands in their own pockets! :)

[Oh Shoot]

I agree with your point. The truly poor shouldn't have to pay the taxes. Many of the flat tax proposals I've seen have a point at which they begin. In other words, everybody's first $50,000, for example would be exempt.

 

Then you just right back into exemptions, deductions, whatever. Would inevitably just be tweaked constantly, like now. Because it's not anonymous, the pols couldn't resist manipulating it, just like now.

 

- OS

[LagerHead]

I don't understand why a flat tax is such a bad idea, I see no issues with anyone with a job paying the same amount. I read an article that I can't find to link here last year, the article had several calculations that showed a flat tax from 10-20% and the funny thing was at 10% there was almost the exact same amount of tax revenue as the year it was written. I realize if everyone paid 15% it would make it extremely easy and the number of audits would drop exponentially for a few years, and all those fighting against the tax hikes for the top 10% would be out more money, but why is that bad? I am expected to pay twice the percentage as the top earners seems like I'm being punished for not running a fortune 500. I love the argument that the top earners already pay a large portion of tax revenue, but to me that shouldn't matter, why should it be ok to pay in a third of what I earn when I am outside working hard all day and they pay in 10% or less sitting in an office 3 days a week. I guess I'm just not that smart seems it would even the field a little to me and isn't that what Washington wants for us?

 

The thing you're missing is that they already were taxed on that money. Here's a simplified version of what is going on:

 

A guy, let's call him Mitt, makes millions over his lifetime running businesses. That money is taxed at a rate of over 39%. After years of running businesses he decides to retire with whatever is left over in his bank accounts. For the sake of easy math let's assume he made $10 million. $3.9 million of that went to Uncle Sam leaving him with $6.1 million. He then invests that money in stocks, etc. That money then begins to make a profit. That profit is taxed at the lower capital gains rate of 15%. 

 

The thing that you're missing is that the situation is the same for you. If you also invest in the stock market, etc. your dividends will be taxed at the exact same rate. Another thing you seem to be missing is that both rates - the taxes on earned income and the capital gains rate tax - are too high. This is not the government's money to begin with. This is money that is taken from someone who earned it honestly under the threat of violence. The unfair part is not that you pay less than anyone else, the unfair part is how much we ALL pay.

 

 
You pay significantly less percentage that the top on taxable income:
 
Tax brackets for 2013:

 
If you want to discuss the tax rates on certain investment income, that's a totally different argument. But you'd not pay higher rate on that than the big rich either.
 
Methinks you have been convinced otherwise by the Dems?
 
- OS

 

I know it's been said a thousand times but it bears repeating: "If you control the language you control the argument." 

 

I am the middle guy at $90k and taking all into consideration including the tax breaks the rich get and the not taxable ways they distribute their money is my issue once you get it all figured out it comes out like your math I pay 35.8 and the Rich pay 14.1, makes me throw up alittle in my mouth, that and the dog behind me just farted!

 

Again, you're not comparing apples to apples. You're comparing apples to Volkswagens. You don't pay more than a millionaire on earned income unless you're a mutl-millionaire. And even then your taxable RATE is the same. 

[Guest Lester Weevils]

Yep, that's pretty much it AFAIK.

 

But my point is, that figure you mention on page two, taxable income, gets the same rate as anyone else in a tax bracket. So Mitt's was 30 something % same as anybody else who topped out.

 

Sure, he's paying a lot lower rate on overall income than someone who only made that $400K or more from wages but that seems to be the way the figure is painted for public figures.

 

Hell, even those in the lowest tax bracket are paying a lower overall % than if if they had no deductions, even if they only have the standard one and nothing else.

 

- OS

 

Yep, tax law is so complicated it is difficult to discuss what would be "typical" cases. I was just showing example figures, demonstrating at least in some cases the current system is surprisingly flat in practice. And at least in Mitt's case, for that year, it is in fact "reverse progressive tax" with him paying a total rate lower than a low-income self-employed lawn guy or roadside fruit stand operator.

 

I suspect if other situations were analyzed, married filing jointly with X children, etc, it would still be flatter than one would expect just looking at the tax tables, but I could be wrong and am too lazy to try to figure it.

 

Couple thoughts.........

Most of Mitt's income was cap gains, which was capped at 15%.  Don't forget..... this is after tax money that he already paid

regular tax on. 

And, please, don't think it's a bad thing IF you don't have the mortgage interest expense deduction!

Yeah, that was sorta parta of my poorly made point. No cheating involved.

 

If I had been smart enough to gamble a quarter or more my income through the years and come out way ahead, I could have paid a helluva lot less in taxes while making a helluva lot more money, too. Albeit on an, umm, slightly less grandiose scale. ;)

 

Begrudging someone who makes out like a bandit by obeying the law is un-American. Hell, it's worse than that, it's Democratic!

 

- OS

 

I did not imply that Mitt broke the law and I have no evidence or reason to believe that Mitt broke the law. Just that the current system isn't all that progressive in practice. Which would "disappoint" both liberals and conservatives. Liberals thinking that a drastically progressive tax system is a "good thing" and dismayed to find that it ain't that progressive. And conservatives thinking that the rich pay all the taxes and disappointed to find that the little people suffer much the same burden as the "important producers" and bigwigs.

 

I have thought about capital gains tax over the years and conclude it doesn't make sense to have a lower cap gains rate, except for a bass-ackwards imprecise way to keep some cap gains taxpayers from being reamed by an illusion of profit, owing tax on inflation-induced "paper profit" which in many cases might be a loss. But it would be better to include inflation in the calculation and charge the ordinary rate, IMO. For instance if a fella owns property for some years and he sells it for double what he paid-- If the fella paid $100,000 and sells for $200,000, but inflation over that period makes both figures the same value-- The guy didn't make any profit at all but he owes 15 percent tax on $100,000 "paper profit". Which is obviously grossly unfair that he owes a dime. But if he sells for $400,000, he "doubled his money" inflation adjusted. Sold for $400,000 on an inflation-adjusted investment of $200,000, "ideally" owing tax on $200,000 profit. But under the current setup, he owes 15% of a "paper profit" of $300,000. That just ain't precise and reams too many while simultaneously giving others "too much of a break".

 

I don't see how capital gains tax is "just" because it avoids double-taxation. If a fella paid tax on his $100,000 initial investment, then when the fella sells, he doesn't pay tax again on that $100,000 seed money. He owes tax on the profit on his seed money, which hasn't been taxed yet. It ain't double-taxation at all.

 

For instance, one fella scrimps and saves for years, takes his after-tax money and opens a widget business. Another fella scrimps and saves for years and buys a capital investment. Both guys are in exactly the same situation, so why does the widget trader deserve to pay double the tax rate of the capital trader? They both financed seed money with after-tax dollars, but one of them enjoys a lower tax rate because the law says so and little other reason. Makes no sense.

 

Tis difficult to discuss because people are too contradictory (including myself of course). I generally like Mark Levin but he provides an excellent example-- On the one hand Levin rails against the wrongness of the government picking winners and losers, and the wrongness of directing economic activity with tax policy. And then apparently he doesn't even notice the contradiction when he says we should slash capital gains taxes in order to encourage people to invest and "get the economy moving again." The guy proposed gov intervention and steering of the economy with tax policy, something he also believes is wrong for the government to do! Which is it, do you want to meddle or do you want to leave people's decisions to themselves?

 

In fact, I'm not even certain it would be "the right thing to do" to encourage people to invest in those things subject to capital gains tax. Assuming it would be right to manipulate people with tax policy, which I do not believe. The chain of hyped burst bubbles got the economy into its current shape. So if you are encouraging people to pump bubbles, then you are a part of the problem rather than part of the solution?

[Oh Shoot]

...I have thought about capital gains tax over the years and ....

 

Always a stimulating and thoughtful read,  Lester....

 

One thing's for sure ... it would sure cut through a bunch of chaff to have a consumption tax (like Fair Tax). And sure, there seem to be plenty of obvious and not so obvious inequities even in that -- certain consumables would likely have to be taxed at different rates, and so on and so forth, so that there would still be quite the regulatory  bureaucracy involved -- BUT, by being anonymous except for a quite extended statistical analysis, it couldn't help but to be run more logically on a ledger like basis rather than by the largely political machinery which determines its incredible labyrinth of fluctuating nooks and crannies now.

 

Oh yeah, one other thing's for sure: because the parties would give up most of their control to tweak money and votes from targeted demographics and business, it will never happen.

 

(I think there's an echo in here, and I think it's me).

 

- OS

Edited January 31, 2013 by Oh Shoot

[Rowdy]

Then you just right back into exemptions, deductions, whatever. Would inevitably just be tweaked constantly, like now. Because it's not anonymous, the pols couldn't resist manipulating it, just like now.

- OS

This is the dilemma. All solutions are required to be solved by politicians. How do you make a program non-political when politicians are responsible for implementing it?

[Guest 270win]

What is the point of working when you have to give a third of your money to the govt in income, sales, and property taxes?

 

It is a lot cheaper to get free housing in Memphis, have lots of children and get more govt benefits, and get the free cell phones, and sell drugs on the side for cash.

Edited January 31, 2013 by 270win

[Guest Lester Weevils]

I agree with your point. The truly poor shouldn't have to pay the taxes. Many of the flat tax proposals I've seen have a point at which they begin. In other words, everybody's first $50,000, for example would be exempt.

 

I'm not saying for sure that po folks shouldn't be taxed. Was merely mentioning the typical argument that it would "rile up" too many people if the gov makes people go hungry in order to pay taxes. Too many politicians would get thrown out of office if that happened. Too dangerous for the job security of career politicians.

 

But the "furor" at that situation would be a "morality based" anger, because it is against our modern sense of common decency to take food out of people's mouths to feed uncle sam. Against both humanistic and most religious conceptions of "common decency".

 

It seems weird that $50,000 might be the modern poverty line, but not too far off and maybe we'll reach it soon enough. It just depends on how fast the federal reserve continues to print money, and how many more $trillions they print to prop up the government and the banks. I think the poverty level back around 1974 was about $5000 (depending on family size) and $10,000 back then was about the same as $50,000 nowadays. The 2012 HHS poverty line for a family of 3 is $19,090, and here is a list of HHS poverty line figures back to 1982-- http://aspe.hhs.gov/poverty/figures-fed-reg.shtml

 

Then you just right back into exemptions, deductions, whatever. Would inevitably just be tweaked constantly, like now. Because it's not anonymous, the pols couldn't resist manipulating it, just like now.

 

- OS

 

Neil Boortz' Fair Tax consumption tax plan, a major feature is that the gov would send every citizen a check for the amount of the sales tax that would be charged on a poverty line income. Thataway everybody would get off "scott free" of taxes up to the poverty line. Certain humanitarian motives, but over and above that-- Without such a provision, a fair tax plan would be even more than merely impossible politically feasible. Without the low-income exclusion, the fair tax would be impossible-squared to get passed. :)

 

But a check sent to everybody would be more anonymous than what we have to go thru now with all the IRS forms.

 

[Guest MilitiaMan]

If I eventually get my way, I will work fully off the books and not pay one single red cent in taxes to our corrupt government. 100% off the grid is what I strive for. That includes no cable (been without since 2006), no smart phone (got rid of last year). no internet (I use the public library when the urge hits me) and I don't recieve any public assistance. I live in a community that where you can survive, roughing it, with trade skills and bartering along with the occassional trip t the farmers market. We own a few cows, many rabbits and chickens, a handful of goats (some for milking and some for meat) along with other edible critters and we have had 2 years of practice planting and growing goods.

 

This has been 2 years in the making and may take an additional 4 years to completely set myself and family up for total off the grid living. I'll keep all that I earn, thank you. No more interest free loans to this government.

 

 

The greatest thing I can do for my family is to gear us towards total self-sufficiency.

[Guest Lester Weevils]

The thing you're missing is that they already were taxed on that money. Here's a simplified version of what is going on:

 

A guy, let's call him Mitt, makes millions over his lifetime running businesses. That money is taxed at a rate of over 39%. After years of running businesses he decides to retire with whatever is left over in his bank accounts. For the sake of easy math let's assume he made $10 million. $3.9 million of that went to Uncle Sam leaving him with $6.1 million. He then invests that money in stocks, etc. That money then begins to make a profit. That profit is taxed at the lower capital gains rate of 15%. 

 

The thing that you're missing is that the situation is the same for you. If you also invest in the stock market, etc. your dividends will be taxed at the exact same rate. Another thing you seem to be missing is that both rates - the taxes on earned income and the capital gains rate tax - are too high. This is not the government's money to begin with. This is money that is taken from someone who earned it honestly under the threat of violence. The unfair part is not that you pay less than anyone else, the unfair part is how much we ALL pay.

 

As earlier mentioned, there is no double-taxation going on, except in some cases there is double-taxation which is the result of illusory profit from inflation. If you bought a house for $100,000 when burgers were $2 apiece, then you paid 50,000 burgers for the house. Then you sell the house for $200,000 when burgers are $4 apiece, so you get back exactly what you paid-- 50,000 burgers worth. So you shouldn't owe any tax at all in that case, and uncle sam unfairly trims you $15,000 (3,750 burgers worth) on a break-even transaction. You started out with 50,000 burgers then after you sell and pay the tax you are left with only 46,250 burgers. :)

 

But the seed money is never taxed, only the profit. In cases where the cap gains profit is "real" and not an artifact of inflation, IMO it ought not benefit from a "special rate". ALL businesses are financed with after-tax dollars, except bank loans with money created from the air via fractional reserve banking. If you are financing a business from savings or sales of corporate stock, the financing is all after-tax money. You paid tax on your savings, and stockholders paid tax on their money before they bought the stock.

 

So in cases where capital gains are REAL and not an artifact of inflation, there's no difference between a dry goods business versus a real estate, stock or bonds business. They are all based on after-tax financing, and ought to be taxed at the same rate.

 

Always a stimulating and thoughtful read,  Lester....

 

One thing's for sure ... it would sure cut through a bunch of chaff to have a consumption tax (like Fair Tax). And sure, there seem to be plenty of obvious and not so obvious inequities even in that -- certain consumables would likely have to be taxed at different rates, and so on and so forth, so that there would still be quite the regulatory  bureaucracy involved -- BUT, by being anonymous except for a quite extended statistical analysis, it couldn't help but to be run more logically on a ledger like basis rather than by the largely political machinery which determines its incredible labyrinth of fluctuating nooks and crannies now.

 

Oh yeah, one other thing's for sure: because the parties would give up most of their control to tweak money and votes from targeted demographics and business, it will never happen.

 

(I think there's an echo in here, and I think it's me).

 

- OS

 

Yes a consumption tax might be better in some regards.  A "modified flat income tax" would also be better in some regards.

 

Any tax scheme will distort the market, because people will cut off their noses to spite their faces. All tax schemes will offer non-constructive methods for people to legally avoid tax, which will distort the market in various fashions. In the past I described some of the distortions which would come from a fair tax, but the current system also tortuously distorts the market.

 

EXCEPTIONS TO THE TAX are what kills any plan. The Fair Tax exceptions are what would distort the market, and some previous flat tax proposals had exceptions that would warp the market rather drastically.

 

The most extreme no-exceptions consumption tax would be described as a transaction tax. Any time money changes hands it is taxed at the same rate, for any and all transactions. That would also distort the market, raising the price of products with long supply chains and giving vertical-integrated big businesses price advantage over smaller companies with numerous supply sources. But with a transaction tax, no matter what you spend your money on, it costs you the same amount of tax, so you wouldn't be tempted to cut off your nose to spite your face. Because you get reamed exactly the same no matter what you do, you would think long and hard to do the smartest thing possible with your money.

 

The other advantage is that a universal transaction tax would have the very lowest rate.

[Guest sL1k]

side note the federal income tax turns 100 today. ugh

[Guest carter]

nope not correct, i just did the eligibility on the IRS web site and it said my total earned income must be less than $13,980 

[TMF]

As earlier mentioned, there is no double-taxation going on, except in some cases there is double-taxation which is the result of illusory profit from inflation. If you bought a house for $100,000 when burgers were $2 apiece, then you paid 50,000 burgers for the house. Then you sell the house for $200,000 when burgers are $4 apiece, so you get back exactly what you paid-- 50,000 burgers worth. So you shouldn't owe any tax at all in that case, and uncle sam unfairly trims you $15,000 (3,750 burgers worth) on a break-even transaction. You started out with 50,000 burgers then after you sell and pay the tax you are left with only 46,250 burgers. :)
 
But the seed money is never taxed, only the profit. In cases where the cap gains profit is "real" and not an artifact of inflation, IMO it ought not benefit from a "special rate". ALL businesses are financed with after-tax dollars, except bank loans with money created from the air via fractional reserve banking. If you are financing a business from savings or sales of corporate stock, the financing is all after-tax money. You paid tax on your savings, and stockholders paid tax on their money before they bought the stock.
 
So in cases where capital gains are REAL and not an artifact of inflation, there's no difference between a dry goods business versus a real estate, stock or bonds business. They are all based on after-tax financing, and ought to be taxed at the same rate.
 

 
Yes a consumption tax might be better in some regards.  A "modified flat income tax" would also be better in some regards.
 
Any tax scheme will distort the market, because people will cut off their noses to spite their faces. All tax schemes will offer non-constructive methods for people to legally avoid tax, which will distort the market in various fashions. In the past I described some of the distortions which would come from a fair tax, but the current system also tortuously distorts the market.
 
EXCEPTIONS TO THE TAX are what kills any plan. The Fair Tax exceptions are what would distort the market, and some previous flat tax proposals had exceptions that would warp the market rather drastically.
 
The most extreme no-exceptions consumption tax would be described as a transaction tax. Any time money changes hands it is taxed at the same rate, for any and all transactions. That would also distort the market, raising the price of products with long supply chains and giving vertical-integrated big businesses price advantage over smaller companies with numerous supply sources. But with a transaction tax, no matter what you spend your money on, it costs you the same amount of tax, so you wouldn't be tempted to cut off your nose to spite your face. Because you get reamed exactly the same no matter what you do, you would think long and hard to do the smartest thing possible with your money.
 
The other advantage is that a universal transaction tax would have the very lowest rate.

But then how do you screw people who are smart and responsible with their money? More importantly, how do you prevent the taxation of the welfare queens who vote based on who will give them the most government "entitlements"?

[Guest Lester Weevils]

But then how do you screw people who are smart and responsible with their money? More importantly, how do you prevent the taxation of the welfare queens who vote based on who will give them the most government "entitlements"?

 

Yep, there wouldn't be any manipulation knobs with no exceptions.

 

The welfare queens already pay sales tax like everybody else, even on "free" money. And when they buy stuff, they are basically paying the merchant's income tax. The merchant gets his money to pay his tax from the customers. So assuming a revenue-neutral universal transaction tax, maybe her tax rate would be "about the same" as it is now. Dunno.

 

A revenue-neutral transaction tax rate would be very low, so people on the bottom of the totem pole would probably have a very low tax burden. The slack would come out of people higher on the totem pole who avoid tax with any number of exceptions nowadays. So it would be a weird animal, an absolutely flat tax that still hits rich folks the hardest. By comparison, Forbes' flat tax proposal of a few years ago, or Neal Boortz' "fair tax" had giant tax shelters built-in for rich folks.

 

I'd try to calculate the rate but would be very difficult. I don't think merely dividing the current federal receipts by the GDP would give an accurate revenue-neutral rate, because many transactions are not counted in the GDP. The rate ought to be much lower than Revenue / GDP. Any economist worth his salt could figure it easy enough.

 

However, revenue-neutral wouldn't really do it. Currently the government is printing nearly 1 dollar out of 2 it spends. Barring some kind of miracle of electing sane politicians who know how to balance a checkbook, and radically cutting spending, the only path to balancing the budget monster is to basically double government revenue. The only way to do that is basically double EVERYBODY's tax rate. If you shift things around so one group "accidentally" has the same or lower tax rate, it just means some other group will get raped even worse than "merely" doubling their tax. There is NO magic tax plan that will put our house in order and cut everybody's tax rate. A loss is a loss no matter how you shuffle it around. As long as they are gonna spend trillions, they've either got to collect trillions or print trillions, or both.

 

I heard some liberal congresscritter advocating a transaction tax a couple of years ago, so it almost makes me think its a bad idea just because a liberal happened to like it. But I think he wanted to add it onto all the other crap we pay, rather than completely replacing the old taxes with a transaction tax.