Math and taxes

Posted Wednesday, October 26, 2011 in Analysis

Math and taxes

by Gina Hamilton

A lot of the Republican field are flirting with the 'flat tax' and doing away with the progressive income tax altogether.  Not a surprise, really, the flat tax comes around as frequently as, well, death and taxes.  But the last time anyone took a flat tax seriously was in 1996, when Republican Steve Forbes advocated a 17 percent flat tax that would apply equally to personal income and business income.  However, he advocated keeping the first $33,000 of income exempt and maintaining Social Security as is ... quite a departure from what the Republicans are talking about now.  Forbes did not fare well in the 1996 campaign, nor did he do well in the 2000 campaign, even after abandoning the flat tax idea.

What's the difference between a flat tax and a progressive tax?

Under a pure flat tax, with no exemptions or deductions, someone who earns $200,000 a year would pay exactly 10 times the amount of tax paid by someone who earns $20,000 a year. All income would be subject to one flat rate.

Under a progressive system, even if there were no exemptions or deductions to help poorer people, the $200,000 earner would pay more than 10 times the amount of tax paid by the $20,000 earner. That's because he pays higher rates on the upper portions of his income.

Supporters of progressive income tax systems say the feature is important to social fairness because other taxes tend to be regressive. For instance, a 5 percent state sales tax hits lower-income people proportionately harder than high earners because they must spend a larger portion of their income on necessities. That leaves them less able to save, invest or otherwise protect their income from the sales tax.

Payroll taxes, gas, property, and other taxes and fees also tend to be regressive because they essentially are flat.

Flat taxes are tax shifts from the wealthy to the middle and lower classes.  Because the existing tax code is complex, a new system often gets a hearing until it becomes clear that, adding all taxes a family pays together, those who benefit from a flat tax tend to be the most affluent, while those who suffer the most from flattening tax tend to be those who can least afford it.

Cain's 9-9-9

Herman Cain has staked his hope for the presidency on something called the 9-9-9 plan, basically a flat 9 percent income tax plan combined with a national 9 percent sales tax and a 9 percent national business tax.  There are plenty of exemptions for businesses that do business in the U.S., or have net exports, or invest in capital improvements, but there is only one exemption for individual income tax, and that is for individuals living or working in so-called "Empowerment Zones".  Cain is not shy about his ultimate goal, which is to eliminate taxes and repeal the 16th Amendment to the Constitution.

Although Cain claims that the poorest won't get hit any harder than they already are, the facts simply don't support his claims.

The way the plan would work, according to Herman Cain's own research (, everyone would pay the 9 percent of income.  If you earn $20,000 per year, your income tax would be $1,800, less any charitable deductions you might give.  There would be no other deductions, including the child tax credit, mortgage interest, college tuition, individual health care, weatherization, or any other deduction the low-wage taxpayer might be eligible for today. 

So a taxpayer earning $20,000 would take home $18,200. 

A taxpayer earning $150,000 would also pay 9 percent, which is $13,500.  Leaving aside the issue of charitable deductions for the moment, the high-income taxpayer takes home $136,500. 

Then, each of these taxpayers would be hit with the 9 percent sales tax.  What would that look like to each of these taxpayers?

The low-income taxpayer spends every dime he brings in on basic expenses.  Not counting state income tax, he has a monthly income of about $1,567.  With this, he pays rent, utilities, transportation, food, energy, clothing, and so on. There is little left at the end of the month to save.

Every one of these items would be subject to a 9 percent sales tax.  So the low-income taxpayer pays an extra $1,638 per year in tax. Together with income tax, the low-income taxpayer pays $3,438.

Total tax bill for the low-income taxpayer is 17.19 percent on his income of $20,000.

For the upper-income taxpayer, who has a monthly income of $11,375, his expenses, while higher in amount, are less in percentage.  For simplicity, let's say that our upper-income taxpayer has a $3,000 mortgage, two $500 car payments, and a private school tuition of $2,000 per month, with assorted other expenses totalling an additional $1,000 per month.  His expenses are $7000 per month, easily within his income.  He has $4,375 left over at the end of the month.  At the end of a year, his expenses of $84,000 leaves him with untaxed savings of $52,500.

The upper-income taxpayer pays sales tax on the $84,000, of $7,560.  Together with his income tax, he pays $21,060.  His total tax burden is 14.04 percent, more than 3 percent LESS than the low-income taxpayer.

The disparity has angered even some conservatives, and Cain has added a feature for those at poverty level or below, exempting them from personal income tax (although they would pay the 9 percent sales tax).  But poverty level has not kept pace with inflation.  Poverty level for a single adult is only $10,830, and for a family of four is only $22,050.  Calling this revision the 9-0-9 plan, Cain didn't seem to understand that under current tax code, these individuals would also be tax-exempt because of standard deductions and personal exemptions, and might even qualify for Earned Income Tax Credit or child tax credits, bringing in more than they actually earned.  Under Cain's revised plan, they would still do much worse at the end of the day, plus they would pay a national sales tax they are not currently paying.

Cain also eliminates payroll taxes, which currently fund Social Security.  He does not say where the funding for Social Security would come from under his plan, except that he claims whatever his plan is will "empower" seniors.  We suspect, although there is scant evidence one way or the other, that this is a euphamism for privatizing Social Security.

Romney's 59 point plan

Mitt Romney announced a 59-point economic plan in September, which generally called for a flatter, broader tax, but amazingly for such a long document, was really quite short on details. 

Essentially, Romney would lower marginal tax rates and eliminate interest, dividend, and capital gains taxes for middle-income earners.

He would also lower the corporate tax rate to 20 percent.

He would slash government regulation, and repeal the new health care plan.  He would create a net-zero cap to the cost of any new regulation (new regulation would not be able to cost anything, once other factors were taken into account).

Romney is a free-trader, and would insist on more free trade agreements, but would take a tougher stance on China, he said.

Romney would drill 'everywhere it can be done safely, taking into account local concerns.'

He would also cut back on union influence, taking a strong position on union elections and cutting back the National Labor Relations Board, which gets involved in labor elections and makes sure they are fair.

He would push for a balanced budget amendment.

And Romney would cut a sizeable fraction of the government workforce, putting many more people out of work.

Perry's Cut, Balance and Grow plan

On Tuesday, Rick Perry, too, jumped on the flat tax bandwagon.  His plan was endorsed by Steve Forbes. 

Perry's plan is curious.  It gives Americans a choice between a flat tax of 20 percent, or the tax rate they are currently paying.  For folks earning under the filing minimum (about $9,350 for a single person), their tax bracket could continue to be effectively zero, although technically they are in the 10 percent bracket.  Why the distinction?  Because each person is entitled to the standard deduction ($5,800 for a single filer) and a personal exemption ($3,700 for one exemption), these exemptions are deducted before any tax is withdrawn.  For married persons and heads of household, these sums are higher. Also, many of these taxpayers receive earned income tax credits and child credits, which bring them a small extra income.

For the broad swath of the middle class, tax brackets are typically in the 15 percent range, up to a married filing status of less than $69,000 after deductions, exemptions, and credits.  Typical deductions that can be taken without itemizing include retirement income saving and health insurance, and credits may include tuition credit for a college student, or home improvement credit. 

So it's unlikely that the majority of Americans would leap aboard Perry's flat tax bandwagon, once they gave it some thought.  Almost everyone would be doing better without it. More than 50 percent of all American families earn less than $26,000 per year, putting them in the 10 percent bracket.  However, those who would benefit ... again ... would be the super-wealthy, meaning that that revenues would sharply fall under Perry's plan.

Perry says that his tax plan will save billions in tax compliance expenses. 

He also eliminates estate taxes in his plan, claiming by so doing it will provide 'needed certainty' to American family farms and small businesses, but in fact, most small businesses and farms avoid estate taxes easily by establishing trusts before the older generation dies, anyway.  The real winners of the abolition of the estate tax will be the super-wealthy.

He lowers the corporate tax rate to 20 percent as well, and will lower it still further ... to 5.25 percent ... to 'encourage' repatriation of corporate monies estimated to be about $1.4 trillion, in accounts overseas.  He also gives corporations a huge loophole by stating that he will transition to a territorial tax system that only taxes in-country income, thus encouraging businesses to move most of their operations overseas.

On the other hand, Perry's plan eliminates tax on Social Security benefits, but privatizes Social Security for younger workers.  He would end capital gains and qualified dividends taxation altogether - another boon for the wealthy at the expense of the poor and middle class.

Perry's plan also calls for capping federal spending at 18 percent of the GDP, banning earmarks and bailouts, and passing a Balanced Budget Amendment.  He requires freezing civilian hiring and salaries until the budget is balanced, establishes a moratorium on pending federal regulations, and repeals the new health care plan.

Just eliminate the IRS

Ron Paul historically favors a flat tax, too ... it's just that his flat tax number is zero.  Really, honestly, he's said that in the past. Paul has made no secret of his desire to eliminate the IRS.  But in this election cycle, his rhetoric has been somewhat more circumspect. 

His plan is to cut corporate taxes to 15 percent, allow all businesses to repatriate their funds without additional taxation, and end the estate tax.  He isn't saying much about personal income tax this time around.

Curiously, Paul lambasts Cain's 9-9-9 plan as 'regressive'.

His plan also involves allowing young workers to opt-out of Social Security and Medicare, and cuts waste in government spending by 10 percent, while working to balance the budget and end the national debt.  However, Paul does not give us any clues about how he would do all these things.

Bachmann's 'Real Jobs Right Now'

Even less organized is Michele Bachmann's plan, which at least right now, is mostly generalities.  She is in favor of flattening the tax brackets, is in favor of tax-free repatriation of the trillions corporations hold overseas, and is in favor of cutting government spending and services, but so far, there aren't a lot of numbers attached to these general notions.

Santorum's Free Corporate State

Rick Santorum wants to end all taxes on corporations and declare a tax holiday to repatriate funds.  Like many of his fellow GOP field, he decried the Cain 9-9-9 plan, but so far, his economics plan is still in the nascent stages.

Gingrich latest to tout flat tax

Newt Gingrich has also started talking about a flat tax plan.  After listing personal income, the taxpayer would subtract a standard deduction of up to $12,000 per adult, then deduct any charitable contributions and mortgage interest. That would mean the poor and the middle classes probably wouldn't pay any tax at all.  What would be left over after all that would be the taxable income, which would be taxed at a rate of up to 15 percent.  The right kind of tax reform, coupled with regulatory reform, would  help “ensure” long-term economic recovery in America, according to Gingrich.

Huntsman's odd war on the poor, middle class, and seniors

In stark contrast to the rest of the field, Jon Huntsman favors increasing taxes ... on most of us.  His plan would pay for a half-million-dollar tax break for the richest 0.1 percent of Americans with tax increases on the middle class and new taxes on seniors, veterans, and poor families.

Huntsman would drop the marginal rate paid by the richest Americans by more than a third to 23 percent — a lower rate than rich people paid since 1920. He would also eliminate all taxes on all capital gains and dividend income — the primary forms of income for the wealthiest Americans.

Huntsman says he will pay for these cuts by eliminating all so-called 'tax expenditures.' What are tax expenditures?  This is just a partial list:

So far, few if any of the GOP have done the real math of what it costs to run the country and how to get the dollars needed to reduce the debt while providing essential services.  The math seems fairly plain ... even with draconian cuts to spending, some tax increases - and not just on the poor and middle classes - will need to occur.  But so far, no one on the right has the political courage ... or perhaps the understanding ... to admit that.

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