When Is a Flat Tax Not a Flat Tax?
Wednesday November 19, 2008
In reponse to Do Richer People Pay a Higher Proportion of Tax Under a Flat Tax? a reader writes:
What you have said makes absolutely no sense to me at all. The concept of a flat tax is that everyone pays the same percentage of their income to taxes. So the Forbes plan is not technically a flat tax if the wealthier end up paying a higher percentage of their taxes after the complicated math formula you spoke of is implemented.Under this definition almost every flat tax proposal is not a true flat tax, because it has two tax rates - a level of income (called a personal exemption) that is taxed at 0% and only income above that level is taxed at a flat non-zero rate. So is it misleading to call any tax proposal with a personal exemption a flat tax?
Comments
MIKE
I agree with your reader. I suspect the solution is to call the tax, say, a flat rate or proportional tax. Thus the rate of the tax is flat, but the revenue it raises is not if exemptions from from the tax occur, unless the exemptions are also calculated proportionally.
It is all in how one defines income. A tax on gross for a business is a sales tax, not an income tax, so it is misleading to call a tax on gross for individuals an income tax. It is a sales tax on labor, not an income tax. An exemption level at least tries to come to grip with the expenses incurred in producing that revenue, however inadequate it may be.
Isn’t it true that word exemption would no longer be used in a flat tax scenario making it much harder to achieve adoption among homeowners and business people?
Could a flat tax have prevented the mortgage crisis? I believe it would have making the quest for ownership less glamorous.
Would it quell the entrepreneurial spirit? I don’t believe that people go into business solely for the tax write-offs.
Flat tax would be the great economic stabilizer. I never thought I would say that but after what we are witnessing…
Would tax people be out of work? Probably.