Across the board tax rate...fair for all?

[Disney1fan2002]

I am not sure if this would be considered a political thread, if so please delete. I am wondering what people think of one tax rate for everyone.

MY DS21 is getting into economics. he has an internet friend over in England and they get into debates all the time. The other day he asked me if I agreed with one tax rate for all. I said ABSOLUTELY!!! He didn't agree.

I am thinking, of course he is not going to agree while he is starting out in the working world making $9/hour. As my income grows, I watch more and more get taken out. It is frustrating. Why do I have to pay 35-40% tax while other pay 25%?

He used this as an example. for easy math, tax rate for all is 10%. Joe make $20,000/ year and pays $2000 in taxes. Bill makes $2,000,000/year. He pays $200,000 in taxes. To that I said, "exactly". Bill is still paying way more taxes than Joe, but it is more fair because they are both paying the same rate. To this my son pointed out that Joe paying $2000 of his $20,000 only leaves him with $18,000 to live on. While Bill would still have $1,800,000. That's not fair.

I tried to get him to understand that Joe is still only going to have $18,000 to live on after his 10% tax is paid, whether Bill pays 10% or 40%. After going round and round with him, I realized I am just not educated enough on this topic to debate him, other than to say I am tired of seeing my take home pay shrink as I make more money.

 

[MillauFr]

It is better than what we have in Washington State where the lower income residents pay 20% and the high income residents pay around 5% in local and state taxes.

 

[elphaba91]

I am not sure if this would be considered a political thread, if so please delete. I am wondering what people think of one tax rate for everyone.

MY DS21 is getting into economics. he has an internet friend over in England and they get into debates all the time. The other day he asked me if I agreed with one tax rate for all. I said ABSOLUTELY!!! He didn't agree.

I am thinking, of course he is not going to agree while he is starting out in the working world making $9/hour. As my income grows, I watch more and more get taken out. It is frustrating. Why do I have to pay 35-40% tax while other pay 25%?

He used this as an example. for easy math, tax rate for all is 10%. Joe make $20,000/ year and pays $2000 in taxes. Bill makes $2,000,000/year. He pays $200,000 in taxes. To that I said, "exactly". Bill is still paying way more taxes than Joe, but it is more fair because they are both paying the same rate. To this my son pointed out that Joe paying $2000 of his $20,000 only leaves him with $18,000 to live on. While Bill would still have $1,800,000. That's not fair.

I tried to get him to understand that Joe is still only going to have $18,000 to live on after his 10% tax is paid, whether Bill pays 10% or 40%. After going round and round with him, I realized I am just not educated enough on this topic to debate him, other than to say I am tired of seeing my take home pay shrink as I make more money.

I think what you’re missing is that tax rates are calculated largely based on the end dollar figure that the government wants/needs to receive from taxpayers as a whole.

So just say Bill and Joe are the only taxpayers and the government has calculated it needs $202,000 from taxpayers.

Which of these is fairer:
a. They each pay 10% of their incomes so that Joe pays $2,000 and is left with only $18,000 to live off and Bill pays $200,000 and is left with $1,800,000 to live off.
b. Joe pays only 5% of his income i.e. $1,000 leaving him $19,000 and Bill pays 10.05% i.e. $201,000 leaving him with $1,799,000. Joe would have a 5.5% increase in his net income which would make a huge difference to his day to day life, whereas Bill would only have a 0.055% decrease in his net income, which would be a drop in the ocean.

Basically, taxing higher income earners a little bit more means that lower income earners can pay a lot less tax while the government still ends up with the same amount of money to use for services.

 

[mummabear]

I think what you’re missing is that tax rates are calculated largely based on the end dollar figure that the government wants/needs to receive from taxpayers as a whole.

So just say Bill and Joe are the only taxpayers and the government has calculated it needs $202,000 from taxpayers.

Which of these is fairer:
a. They each pay 10% of their incomes so that Joe pays $2,000 and is left with only $18,000 to live off and Bill pays $200,000 and is left with $1,800,000 to live off.
b. Joe pays only 5% of his income i.e. $1,000 leaving him $19,000 and Bill pays 10.05% i.e. $201,000 leaving him with $1,799,000. Joe would have a 5.5% increase in his net income which would make a huge difference to his day to day life, whereas Bill would only have a 0.055% decrease in his net income, which would be a drop in the ocean.

Basically, taxing higher income earners a little bit more means that lower income earners can pay a lot less tax while the government still ends up with the same amount of money to use for services.

The problem becomes those in the middle.
For those earning $20,000 there is often other support that they are entitled to, which makes living in threat amount easier. But as you earn more, you are taxed more, and enrolled to less of that support, and it leaves a band who are better off to earn less.

While I do think we have to look after everyone as part of a caring society, the Robin Hood aspect of taxes can be frustrating. Frankly $200,000 isn’t that much for a family to be living off, it is not rich. And yet here in NZ at least someone earning $70,000 is paying the same tax rate as someone earning $200,000 or even $1M.

Someone earning $70,000 does not nessecarily have more disposiable income than someone earning $65,000.

Property taxes (here called rates) based on house value is another similar issue. I believe it should be based on the number of bedrooms not the value of the house.

 

[SirDuff]

I am not sure if this would be considered a political thread, if so please delete. I am wondering what people think of one tax rate for everyone.

MY DS21 is getting into economics. he has an internet friend over in England and they get into debates all the time. The other day he asked me if I agreed with one tax rate for all. I said ABSOLUTELY!!! He didn't agree.

I am thinking, of course he is not going to agree while he is starting out in the working world making $9/hour. As my income grows, I watch more and more get taken out. It is frustrating. Why do I have to pay 35-40% tax while other pay 25%?

He used this as an example. for easy math, tax rate for all is 10%. Joe make $20,000/ year and pays $2000 in taxes. Bill makes $2,000,000/year. He pays $200,000 in taxes. To that I said, "exactly". Bill is still paying way more taxes than Joe, but it is more fair because they are both paying the same rate. To this my son pointed out that Joe paying $2000 of his $20,000 only leaves him with $18,000 to live on. While Bill would still have $1,800,000. That's not fair.

I tried to get him to understand that Joe is still only going to have $18,000 to live on after his 10% tax is paid, whether Bill pays 10% or 40%. After going round and round with him, I realized I am just not educated enough on this topic to debate him, other than to say I am tired of seeing my take home pay shrink as I make more money.

But, if everyone is paying the same, they will not be going with the lowest percentage (in your example, 10%). If they did, there would be a lot less tax collected (because no one would be paying more than they are now, but everyone but those already paying 10% would go down). So, Joe would see his tax payment increase and be left with less to live on. Or, there would have to be significant cuts to the government's spending.

Not getting the argument about whether it should happen (seems political to me), but pointing out the major flaw in your argument.

BTW - if you take home is actually shrinking as you make more money, you're doing something wrong. The increased tax rate pertains only to the amount above the threshold, not everything. Take a really simple example where the rate is 10% up to $70K and 40% above $70K. Someone making 70K would pay $7,000. If they got a raise to $90K, they'd pay $7,000 on the first $70K and then $4,000 on the next $20K, for a total of $11K. Yes, more than before. But previous take-home was $63K and now it is $79K. More tax does not mean less take home. Caveat is that there are some deductions/credits which are all or nothing (i.e. not done on a sliding scale of income) and in some cases it is possible that this loss outweighs the salary increase.

 

[danielocha30]

if only Bill was willing to paid Joe more...

 

[ravenclawtrekkie]

10% of my income makes a heck of a lot more difference to my life than 10% of Bill Gates' income. I'm with your son.

 

[Christine]

I'm not sure this is a debate that has a right or wrong answer. It's a philosophical issue and the right answer depends on your views of society and how you feel about low-income earners.

 

[GreatLakes]

He used this as an example. for easy math, tax rate for all is 10%. Joe make $20,000/ year and pays $2000 in taxes. Bill makes $2,000,000/year. He pays $200,000 in taxes. To that I said, "exactly". Bill is still paying way more taxes than Joe, but it is more fair because they are both paying the same rate. To this my son pointed out that Joe paying $2000 of his $20,000 only leaves him with $18,000 to live on. While Bill would still have $1,800,000. That's not fair.

Yes, it is fair. Bill makes more so Bill should have more to spend. Bill should be able to spend the same % of his income as Joe. That is the most fair model out there. You keep 90% of what you make no matter what it is. If Bill chooses to pay more in taxes, like some wealthy people claim they should, he is free to. Bill has no right though to say because he feels he should pay more other people at his income level should also pay more.

I am 100% for a flat tax. The more you earn the more you pay but it is the same proportion of your income. That is what I wish we did. I don't like paying a higher % as you go up the ladder.

BTW - if you take home is actually shrinking as you make more money, you're doing something wrong. The increased tax rate pertains only to the amount above the threshold, not everything. Take a really simple example where the rate is 10% up to $70K and 40% above $70K. Someone making 70K would pay $7,000. If they got a raise to $90K, they'd pay $7,000 on the first $70K and then $4,000 on the next $20K, for a total of $11K. Yes, more than before. But previous take-home was $63K and now it is $79K. More tax does not mean less take home. Caveat is that there are some deductions/credits which are all or nothing (i.e. not done on a sliding scale of income) and in some cases it is possible that this loss outweighs the salary increase.

That is true of absolute dollars but if you income doubles in a year the % of what you make you take home, all else being equal, is less. That is what needs corrected. A jump from $100,000 to $200,000 should see an equal jump in what you take home as a % (90% in the examples we have been using).

 

[Hikergirl]

I'm not sure this is a debate that has a right or wrong answer. It's a philosophical issue and the right answer depends on your views of society and how you feel about low-income earners.

Or how you feel about high income earners.

I'm OK with a flat tax, anyone who wants to contribute more because they feel they should since they earn more is always free to do so.

 

[jevs]

Property taxes (here called rates) based on house value is another similar issue. I believe it should be based on the number of bedrooms not the value of the house.

Like window tax in the UK

Err, I don’t agree btw, rates need to be based on the value of a property.

 

[StitchesGr8Fan]

While I think a flat tax rate is more fair, unless everyone can make a living wage and government spending gets under control I don’t think it is feasible. I do feel like my husband and I get punished for having good jobs. But I understand the arguement that low wage earners feel an impact when such a large portion of their check goes to taxes. However, part of the taxes I pay go to programs available for low income families that I don’t qualify for. So it’s a complicated issue that won’t be solved by one action alone. It would take several changes in society and tax reform.

 

[Hikergirl]

While I think a flat tax rate is more fair, unless everyone can make a living wage and government spending gets under control I don’t think it is feasible. I do feel like my husband and I get punished for having good jobs. But I understand the arguement that low wage earners feel an impact when such a large portion of their check goes to taxes. However, part of the taxes I pay go to programs available for low income families that I don’t qualify for. So it’s a complicated issue that won’t be solved by one action alone. It would take several changes in society and tax reform.

 

[Colleen27]

What you're missing is that for everyone to pay the same rate, it has to be MUCH higher than current bottom rates. If Joe is paying 10% now and Bill is paying 40%, a flat-rate plan wouldn't have both Joe & Bill paying 10%. By most analysis, a flat tax would have them both paying at least 25% to keep the amount of revenue flowing to the government constant. So when you talk about a flat tax rate, you're really talking about raising taxes significantly on those with the least in order to lower them on those who have the most. Or, you can keep the rate somewhat lower by cutting government spending but the things that are cut first tend to be those that directly impact the lowest-income Americans, so it has a similar net effect. Maybe their taxes only double to 20%, but they also lose the food stamps that were supplementing their income or the daycare subsidy that kept them from paying more for childcare than they earn or the income-based health coverage that let their kids go to the doctor. Either way, you're making life significantly more difficult for those at the lower end of the income scale in the name of fairness to those who already have everything they need.

The other aspect of this is that income taxes aren't the only taxes. While you're income tax rate goes up as you earn more, your effective rate for other taxes (sales, gas, etc.) goes down as your income rises because you're spending less of your income on those things and after a certain point, you reach the SS cap so even your effective payroll tax rate declines.

Property taxes (here called rates) based on house value is another similar issue. I believe it should be based on the number of bedrooms not the value of the house.

That makes no sense, frankly. I can't even imagine how it would work... My inlaws would pay less for their custom-built waterfront home than I would on my century-old fixer upper that is half the size because they have 3 bedrooms (plus a den, family room, bonus room, etc.) and I have 4 (with none of those extras)? It seems like that would quickly make owning homes in older and less affluent areas not worth the taxes you'd pay, while allowing those building new homes to keep their taxes artificially low by choosing floor plans with a lot of extra rooms that aren't bedrooms.

 

[Christine]

What you're missing is that for everyone to pay the same rate, it has to be MUCH higher than current bottom rates. If Joe is paying 10% now and Bill is paying 40%, a flat-rate plan wouldn't have both Joe & Bill paying 10%. By most analysis, a flat tax would have them both paying at least 25% to keep the amount of revenue flowing to the government constant. So when you talk about a flat tax rate, you're really talking about raising taxes significantly on those with the least in order to lower them on those who have the most. Or, you can keep the rate somewhat lower by cutting government spending but the things that are cut first tend to be those that directly impact the lowest-income Americans, so it has a similar net effect. Maybe their taxes only double to 20%, but they also lose the food stamps that were supplementing their income or the daycare subsidy that kept them from paying more for childcare than they earn or the income-based health coverage that let their kids go to the doctor. Either way, you're making life significantly more difficult for those at the lower end of the income scale in the name of fairness to those who already have everything they need.

The other aspect of this is that income taxes aren't the only taxes. While you're income tax rate goes up as you earn more, your effective rate for other taxes (sales, gas, etc.) goes down as your income rises because you're spending less of your income on those things and after a certain point, you reach the SS cap so even your effective payroll tax rate declines.



That makes no sense, frankly. I can't even imagine how it would work... My inlaws would pay less for their custom-built waterfront home than I would on my century-old fixer upper that is half the size because they have 3 bedrooms (plus a den, family room, bonus room, etc.) and I have 4 (with none of those extras)? It seems like that would quickly make owning homes in older and less affluent areas not worth the taxes you'd pay, while allowing those building new homes to keep their taxes artificially low by choosing floor plans with a lot of extra rooms that aren't bedrooms.

Great explanation on the impacts to low-income earners under a flat tax. It's never as *simple* as it sounds on paper!

As to the property tax, I can't imagine it being done by bedrooms either. Ours is currently assessed on value. I guess to do it by actual "property" would be to do it by square footage of the home and acreage of lot?

 

[PollyannaMom]

I'm torn on this one. I can definitely see both sides...except that both arguments assume a simple rate, when the actual process is really so much more complicated. If someone who is supposed to be paying more ends up paying less because of loopholes and deductions, then it throws all the calculations off.

I wonder if taxing on the consumption end would work better than on the income end? Then those who don't have much wouldn't pay much, and those who have a lot (or a lot better "stuff") would pay more.

I'd have to give it a lot more thought.

 

[SirDuff]

I'm torn on this one. I can definitely see both sides...except that both arguments assume a simple rate, when the actual process is really so much more complicated. If someone who is supposed to be paying more ends up paying less because of loopholes and deductions, then it throws all the calculations off.

I was actually coming to ask about that. Are the people proposing a flat rate also proposing removal of credits/deductions/whatevers?

 

[Christine]

I was actually coming to ask about that. Are the people proposing a flat rate also proposing removal of credits/deductions/whatevers?

In my mind, that's what goes along with a flat rate.

 

[GreatLakes]

I was actually coming to ask about that. Are the people proposing a flat rate also proposing removal of credits/deductions/whatevers?

Yes. I think you should still be able to pay a very minimal amount of things pre-tax, such as healthcare expenses, and should still be able to put money into retirement investments pre-tax since you'll pay tax on that when you use it (same flat rate no matter if it is earned or unearned), but mortgage deductions, child deductions, etc would go away.

 

[Colleen27]

I'm torn on this one. I can definitely see both sides...except that both arguments assume a simple rate, when the actual process is really so much more complicated. If someone who is supposed to be paying more ends up paying less because of loopholes and deductions, then it throws all the calculations off.

I wonder if taxing on the consumption end would work better than on the income end? Then those who don't have much wouldn't pay much, and those who have a lot (or a lot better "stuff") would pay more.

That has a lot of the same problems. The people paying the highest effective rate would be those who have no choice but to spend all or most of their income on basic necessities like food, medication and clothing, while those with disposable income have the choice to spend less/save more and therefore lower their effective tax rates. Also, most proposals that have raised this issue put the rate in the 20-30% range to be viable, so again you're talking about a significant additional burden on lower income families who pay little to nothing in income taxes now but would abruptly have to adjust to spending 25% more (give or take) on every single thing they buy.

I was actually coming to ask about that. Are the people proposing a flat rate also proposing removal of credits/deductions/whatevers?

That is generally integral to any flat tax plan, as eliminating or dramatically shrinking the IRS is usually a major part of the plan.