A challenger appears

In regards to my previous post about flat tax, someone has taken it upon themselves to point out supposed "flaws" in my argument. I don't usually make a whole new post out of a comment and a response, but it's damn late and I worked a long time on writing the reply, and I think both comment and response are worth reading so here it is.

At 4/19/2006 9:06 PM, Anonymous said...
Interesting but I see two problems with your analysis. First a minor one and that is that your numbers are wrong. You combine monthly with weekly numbers when there aren't exactly 4 weeks in each month. If you look at only the yearly numbers, I think you'll find that Joe actually pays a rate of 32.5% and George pays a rate of 15.3166%. Still not good but not as bad as 40 and 16.

Second, and much more importantly to a flat tax, I've never seen any tax idea , flat tax included, that didn't have a substantial exemption on the first x amount of income. By ignoring that, you basically codify your result into your numbers.

Looking at a simplified Steve Forbes flat tax, let's say that we only have 1 exemption and it's 15000. Plugging that into your numbers, I think you'll find that Joe pays a 9.0625% rate while George pays a 9.7938% rate. Just for fun, I ran a Bill Gates who makes $500 an hour and his tax rate would have been 9.9941%. As you make more money, you would asymptotically approach the actual rate because the exemption would be a smaller number in relation to your income.

No tax would ever be so regressively set up as yours. Perhaps a pure libertarian might envision a flat tax such as yours but I'm guessing that most of the rest of us would expect those who are truly misfortunate to not pay taxes on a sizable portion of their income.

Of course, none of this speaks to the core issue of whether it makes sense to desire a tax rate related to disposable income. Maybe that can be another post. ;-)

Scotch

Actually your first critique is incorrect, and I see exactly where you made a mistake in your math. You criticize me for relating a week to a month, when there is not truly a four week month. But as I said “For Joe, that means $400 a week, $1,600 a month (4-week month, that is)” so I was obviously using a 4-week month. I chose to use a month-to-month comparison because that is actually how most people understand their income and pay their bills. That is better, I think, than using the larger relationship of the year, just because of the way most people’s finances are structured.

But that does not mean that the relationship I have between the week and the month is arbitrary or untrue. The “month” I’m using is a 28 day month, which, again, I said I was using in the first place. That makes a month exactly 4 weeks of 7 days. Weeks have more of a relationship to a year, that is true. There are exactly 52 weeks in a year.. The reason your numbers come out wrong is because weeks have a 4-1 ratio to lunar months, and a 52-1 ratio to a solar year. In other words, 4w=1mo, and 52w=1yr. Ok, so what’s the relationship between lunar months and years then? We use a simple ratio:
X mos./4wks=1yr/52wks. Multiply the 52 across, you get 52/4mos.=1yr. 52 divided by 4 is 13. Oops, looks like you forgot that 12 lunar months don’t make a year. You noted that months don’t have a true relationship to a year, but you used the monthly COL and related it to a year without taking that into account. That’s sloppy. You multiplied the monthly COL by 12 to get a yearly COL of $14,400. But in truth, you should have multiplied it by 13 to get a yearly COL of $15,600. And then you factored that number into the disposable income (D). And then you used my ratio to prove your erroneous point. Let me demonstrate.

T%=(G*R)/D*100

Wrong: t%=(20800*0.1)/6400*100=32.5
Right: t%=(20800*.01)/5200*100=40%

Ok, now that I’ve demonstrated that you did the numbers wrong on that, I’m not going to feel the need to defend myself from your mathematical criticism again. If I say it’s right and you say it’s wrong, I think I’ll trust my own math skills. But I did what you asked and took your $15,000 exemption into account. I found out that even with your “flat” tax, the actual tax effect is regressive against the poorest.

Bill makes 50 times what Joe makes and 25 times what George makes. George makes twice what Joe makes. But with a minimum cost of living of $15,600 a year, Joe’s D (which is calculated before taxes of any sort) is $5200. George’s is $26000. Bill’s is $1024400. Bill’s D is 197 times Joe’s, and 39.4 times George’s. Now compare the 10% tax with no exemption against each income. J pays $2080 in taxes, George pays $4160, and Bill pays $104000. If you compare those ratios, that means Bill pays 50 times what Joe does in taxes and 25 times what George pays. That stands to reason because Bill makes 50 times what Joe makes and 25 times what George makes. Look back up though, and compare that to the relative D’s each man takes home. In terms of those, Bill gets 197 times the amount of money Joe has for only 50 times the taxes. Here though, is where you want to argue that the flat tax exemption makes a difference. Let’s look at it.
Using your exemption, Joe now only pays $580 in taxes annually. That’s a nice break for him. Bill pays 102,500. So right now we can notice that Bill is paying a lot closer to what he use to pay than Joe is. What, could this flat tax and exemption actually be fair? Further evidence for your argument: Bill’s taxes are now 176.72 times what Joe’s are.

But wait, there’s more! Let’s just apply this equation right now and see what happens when we factor in our friend’s exemption.

For Joe: t=((20800-15000)*0.1)/5200*100=11.15%
For Bill: t=((1040000-15000)*0.1)/1024400*100=10.01%

What’s that? The percentages you got were wrong? Oops. Again, Joe is paying proportionally more in taxes than Bill. I’m not going to put them up, but I also used George’s numbers, and guess what, he also paid proportionally more in taxes than Bill. Those three points suggest that the part of the line where someone would pay proportionally less tax than Bill is where they have a higher income than Bill. Yeah, that’s a fair tax right there.

And even if we were to manage things so that Joe paid only as much in actual taxes as Bill, I would question the values of anyone who would take proportionally as much from the poor as the rich. Why is it right for you to take 1 dollar from a guy who has 10? Just because you took 10 from a guy who has 100? That doesn’t make sense. And if you still said to the poor man that you at least needed a quarter, I would ask you what is wrong with you? If we’re so strapped for cash that we need quarters from the poor, then why don’t we just take dollars from the rich? Wouldn’t that make a hell of a lot more sense?

Among a vast horde of problems with the flat-tax lies this one: it’s supposed to replace the revenue stream of the income tax, but overall would produce something like less than half the current tax revenue. Where the hell else is that money supposed to come from? I know that Forbes’ plan does not include taxes on dividends and the kinds of things that typically only earn a great deal of money for the wealthy. Other flat-tax backers might include stocks and bonds and such, but even so that wouldn’t make up the deficit. Where is that money supposed to come from, huh?

The only tax that makes sense is a progressive tax, somewhat like what we have now, but with much higher rates at the upper end. I would not want to suggest that anyone ever be forced to pay more than 50% of their earnings in tax, but if you stop and think about it, you’ll see that it’s not really an onerous idea. Let me demonstrate this with a real-world example.

Gmail (Google’s free email), gives you a nominal storage capacity. That capacity is increasing 100% of the time (but even if it only increased in stepped increments at specific times this would still be true). I myself am using an increasing portion of that capacity. When I first signed on, Google said I had 2GB of storage. That is an awesome number, and I believe it will be a long, long time before I come close to using that much. But as I said, Google is always increasing my Gmail capacity. I started with 2GB, and am at 2.716GB now. And as I said, I’ve been using my gmail (constantly, as a matter of fact). In the same time that my gmail capacity has increased by 716MB, the actual amount stored in it has increased by 340MB. Ok, now when I had used 10MB and still had only 2GB of storage, I had used ½ a percent of storage. At this point, I am using 13% of my storage capacity. But because the stored amount and the storage capacity grow at least in a direct proportion of 1 to 1, I can never use the maximum capacity of my gmail, even when it’s 99% full. At this rate, when my gmail is 99% full, I’ll still have a capacity more than I can use at the rate that I grow.

Now don’t make the mistake of thinking that I’m applying that growth to an individual taxpayer. What it demonstrates is that on a scale of people with money vs. tax taken, at the very top someone could be taxed at 99% and still have more money than they can spend, even if they spend money as freely as I write emails. That is of course dependent on an economy with no upper limit, which theories for or against I am not addressing (and will not, so don't bother).

In short, I have not yet seen any compelling reason for flat tax other than that rich people want out of yet more taxes and that poor people are too uneducated, lazy, or just plain tired to want to handle the "complex" tax system we have now.

Lastly: "Of course, none of this speaks to the core issue of whether it makes sense to desire a tax rate related to disposable income. Maybe that can be another post." I can see a problem with the practicality of it, yes. But I cannot see a problem with either the rationality of it or the morality of it. I admit that attempting such a tax scale would fail, but I wasn't advocating such in the first place. I'm only demonstrating why flat tax is not flat and why our tax rates as they currently stand are unfairly regressive against the poor. Does not everyone agree that any law should not only make sense, but be enforceable and just?