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Something I always founds surprising is that so few people seem to consider effective tax rate on disposable income as an indicator of fairness. For instance ma

Something I always founds surprising is that so few people seem to consider effective tax rate on disposable income as an indicator of fairness. For instance many people think a flat tax would be, even if undesirable, fair. Everybody pays let's say 10% tax so it must be fair. But individuals aren't taxed like companies, they're [generally] taxed on their gross income. So let's say a person is spending $2k a month on their basic necessities - housing, healthcare, insurance, transportation, and a little bit of entertainment. And now consider two people who spend the exact same amount. One earns $30k and the other earns $90k. The person earning $90k has $66k left at the end of the year after accounting for 12 months * 2k of spending. The person earning $30k has $6k left. The $90k earner is left to pay $9k in taxes. That's 9/66 = 13.6% of his disposable income. Pretty close to the nominal 10% rate. But the person earning $30k has to pay $3k. That's 50% of his disposable income! That 10% for all isn't exactly fair, in effect. I think this disparity is a much easier way to consider tax brackets. And I think it's a politically easier sell to both sides of the aisle, than the more abstract notions of this article. Citizen A earns $x and citizen B earns $y. They both, on average, pay the exact same share of their disposable income in tax. I think it's pretty hard to argue against that, yet the tax brackets this implies would also help inherently tackle extreme levels of inequality.

wallace_f 9y ago
In general, a reasonable axiom of public policy is to focus on correcting negative externalities and unjust outcomes while minimizing interference in well-functioning free markets. Your idea is nice, but we already have mortgage tax credits and have seen the negative effect that has had on the economy. What's more, is who gets to decide what is a necessity. Once upon a time I flew to Australia, bought a commercial van, a surf board, and converted it into a camper and travelled a loop around the country. I was by definition poor and homeless, but I was in heaven. I don't think this would qualify for any tax breaks under your plan. In this way your plan creates a complex tax code that does not align with me maximizing my utility function. There are vast benefits to simplifying the tax code, and I would argue a better version of your idea is to guarantee a basic income to everyone. BI won't work for everyone, such as the truly disabled, but it's a more efficient way of reducing inequality for the truly poor, and more capable of maximizing individual utility functions. I know you will say "but who will produce useful goods and services," but at the moment I would wager far less than 30% of the population produces useful commerce. The labor participation rate is only about 60%, and many jobs don't produce anything useful. For example, police officers in Utah that settle for 0.5MM for unconstitutional injustices are draining taxpayer funds. Wall St is completely out-of-control. Bureaucracy, military-congressional-contractor-complex, healthcare insurance companies... There is an extroardinary amount of waste. BI would also benefit the economy by increasing aggregate demand. It would stimulate investment by providing a safety net for indivisuals deciding to retrain or invest in education.
- alacombe 9y ago
  It could be argued that the whole concept of "basic income" is very much a "rent-seeking" behavior, as receivers are not technically producing anything of their own while relying on someone's else "surplus".
  - wallace_f 9y ago
    And nearly every living person on earth has been profiting from rent-seeking from the second they are born into a world with food, medicine, water, maths and science, etc that has been created and improved-upon by people long-dead now.
    - Aron 9y ago
      If all people benefit from something then it's hard to find a problem with it. That's presumably not the case for someone who is a high level producer comparing a UBI world to a non-UBI world and seeing only an outflow.
  - Aron 9y ago
    I'm curious how that's wrong.
- WalterBright 9y ago
  > BI would also benefit the economy by increasing aggregate demand. That would require that taking something from A and giving it to B would increase aggregate demand. I don't see how that can be. > It would stimulate investment by providing a safety net for indivisuals deciding to retrain or invest in education. This safety net may encourage people to drive around Australia in a van who would otherwise work, reducing investment.
  - dragonwriter 9y ago
    > That would require that taking something from A and giving it to B would increase aggregate demand. I don't see how that can be. Differing marginal behavior between A and B.
js8 9y ago
You correctly point out that individuals are taxed on gross income, while corporations are taxed on profits. I think it's wrong and everybody should be taxed on gross income, it's simpler and harder to avoid through loopholes.
- indubitable 9y ago
  Consider a simple supply chain of mining -> transport -> refining -> transport -> assembly -> transport -> retail The reason prices are able to stay relatively low is because players able to get by with very little profit made up for by enormous quantity. Tax on gross and suddenly you send the profit requirements at every link in that chain way up, and that's going to be reflected (strongly) in the price of the final products. Even take Amazon as an example as just one link in the chain - the retail. Their total revenue is $136 billion, but their net income is less than $3 billion. Even if they're playing fast and loose with operating expenses, their margins are not huge. Change to gross taxation and they'd have to be. Just to get into the black, you'd see prices raise dramatically from them. And of course the same would be true of all of their suppliers, producers, and so on - which means they'd be increasing not only to compensate for their own increase in costs, but for all the increases that go all the way up the development chain of every product you buy. It wouldn't be pretty. And corporations, unlike individuals, have another option. They can simply move. Citizens can't do this. Even if they move, they're unbelievably required to continue paying US tax - we're the only nation in the world that requires this of nonresidents. This idea would be devastating to the US.
tzs 9y ago
I don't think I've ever seen any "flat tax" advocate actually advocate a flat tax. They always seem to actually do a progressive tax with two brackets, with the lower bracket being wide and having a rate of 0%. For example, Ted Cruz's flat tax proposal a couple years ago had a $36k 0% bracket, and Rand Paul's had a $50k 0% bracket. NOTE: my referencing Cruz and Paul should in no way be taken as any endorsement or approval of their tax plans on my part. I just used them because they are fairly typical for recent flat tax proposals. For a lot of people the main selling point of a flat tax is its supposed simplicity. They have fantasies of spending two minutes a year doing their taxes. I say "supposed simplicity" because many of these proposals still include numerous deductions and exclusions, and THAT is where 99.99% of the complexity of the tax system resides. Once you have figured out your taxable income the actual computation of the tax is close to trivial under both the current system and the two bracket "flat" tax systems. All that changing from the former to the later does is shorten the Internal Revenue Code by about 5 lines. If a flat tax proposal does actually eliminate all the deductions and exclusions, so that your taxable income really is trivial to compute, then it would greatly simplify doing your taxes--but that has nothing whatsoever to do with it being flat. Such a simplification works just as well for a tax with several progressive brackets.
- TheCoelacanth 9y ago
  > For a lot of people the main selling point of a flat tax is its supposed simplicity. They have fantasies of spending two minutes a year doing their taxes. I say "supposed simplicity" because many of these proposals still include numerous deductions and exclusions, and THAT is where 99.99% of the complexity of the tax system resides. Exactly, no matter how many tax brackets you have, without the miscellaneous deductions, calculating your total amount of tax to pay involves simply looking at a table of income ranges for a set of three numbers that applies to you and then doing the calculation top_marginal_tax_rate*(income - top_tax_bracket_lower_bound)+tax_on_income_in_lower_brackets. So the entire work to calculate your tax burden is one table lookup, one addition, one subtraction and one multiplication. The flat tax proposals simplify that by getting rid of the addition (by making tax_on_income_in_lower_brackets zero) and making the table lookup only contain two rows instead of many. So you have removed one arithmetic operation(or three if you are under the 0% bracket cutoff), and cut down on the number of rows you have to scan through by a single digit number. That is completely negligible to dozens of pages of reading you would have to do if you have even relatively simple deductions.

wallace_f 9y ago

In general, a reasonable axiom of public policy is to focus on correcting negative externalities and unjust outcomes while minimizing interference in well-functioning free markets. Your idea is nice, but we already have mortgage tax credits and have seen the negative effect that has had on the economy. What's more, is who gets to decide what is a necessity. Once upon a time I flew to Australia, bought a commercial van, a surf board, and converted it into a camper and travelled a loop around the country. I was by definition poor and homeless, but I was in heaven. I don't think this would qualify for any tax breaks under your plan. In this way your plan creates a complex tax code that does not align with me maximizing my utility function. There are vast benefits to simplifying the tax code, and I would argue a better version of your idea is to guarantee a basic income to everyone. BI won't work for everyone, such as the truly disabled, but it's a more efficient way of reducing inequality for the truly poor, and more capable of maximizing individual utility functions. I know you will say "but who will produce useful goods and services," but at the moment I would wager far less than 30% of the population produces useful commerce. The labor participation rate is only about 60%, and many jobs don't produce anything useful. For example, police officers in Utah that settle for 0.5MM for unconstitutional injustices are draining taxpayer funds. Wall St is completely out-of-control. Bureaucracy, military-congressional-contractor-complex, healthcare insurance companies... There is an extroardinary amount of waste. BI would also benefit the economy by increasing aggregate demand. It would stimulate investment by providing a safety net for indivisuals deciding to retrain or invest in education.

alacombe 9y ago
It could be argued that the whole concept of "basic income" is very much a "rent-seeking" behavior, as receivers are not technically producing anything of their own while relying on someone's else "surplus".
- wallace_f 9y ago
  And nearly every living person on earth has been profiting from rent-seeking from the second they are born into a world with food, medicine, water, maths and science, etc that has been created and improved-upon by people long-dead now.
  - Aron 9y ago
    If all people benefit from something then it's hard to find a problem with it. That's presumably not the case for someone who is a high level producer comparing a UBI world to a non-UBI world and seeing only an outflow.
- Aron 9y ago
  I'm curious how that's wrong.
WalterBright 9y ago
> BI would also benefit the economy by increasing aggregate demand. That would require that taking something from A and giving it to B would increase aggregate demand. I don't see how that can be. > It would stimulate investment by providing a safety net for indivisuals deciding to retrain or invest in education. This safety net may encourage people to drive around Australia in a van who would otherwise work, reducing investment.
- dragonwriter 9y ago
  > That would require that taking something from A and giving it to B would increase aggregate demand. I don't see how that can be. Differing marginal behavior between A and B.

js8 9y ago

You correctly point out that individuals are taxed on gross income, while corporations are taxed on profits. I think it's wrong and everybody should be taxed on gross income, it's simpler and harder to avoid through loopholes.

indubitable 9y ago
Consider a simple supply chain of mining -> transport -> refining -> transport -> assembly -> transport -> retail The reason prices are able to stay relatively low is because players able to get by with very little profit made up for by enormous quantity. Tax on gross and suddenly you send the profit requirements at every link in that chain way up, and that's going to be reflected (strongly) in the price of the final products. Even take Amazon as an example as just one link in the chain - the retail. Their total revenue is $136 billion, but their net income is less than $3 billion. Even if they're playing fast and loose with operating expenses, their margins are not huge. Change to gross taxation and they'd have to be. Just to get into the black, you'd see prices raise dramatically from them. And of course the same would be true of all of their suppliers, producers, and so on - which means they'd be increasing not only to compensate for their own increase in costs, but for all the increases that go all the way up the development chain of every product you buy. It wouldn't be pretty. And corporations, unlike individuals, have another option. They can simply move. Citizens can't do this. Even if they move, they're unbelievably required to continue paying US tax - we're the only nation in the world that requires this of nonresidents. This idea would be devastating to the US.

tzs 9y ago

I don't think I've ever seen any "flat tax" advocate actually advocate a flat tax. They always seem to actually do a progressive tax with two brackets, with the lower bracket being wide and having a rate of 0%. For example, Ted Cruz's flat tax proposal a couple years ago had a $36k 0% bracket, and Rand Paul's had a $50k 0% bracket. NOTE: my referencing Cruz and Paul should in no way be taken as any endorsement or approval of their tax plans on my part. I just used them because they are fairly typical for recent flat tax proposals. For a lot of people the main selling point of a flat tax is its supposed simplicity. They have fantasies of spending two minutes a year doing their taxes. I say "supposed simplicity" because many of these proposals still include numerous deductions and exclusions, and THAT is where 99.99% of the complexity of the tax system resides. Once you have figured out your taxable income the actual computation of the tax is close to trivial under both the current system and the two bracket "flat" tax systems. All that changing from the former to the later does is shorten the Internal Revenue Code by about 5 lines. If a flat tax proposal does actually eliminate all the deductions and exclusions, so that your taxable income really is trivial to compute, then it would greatly simplify doing your taxes--but that has nothing whatsoever to do with it being flat. Such a simplification works just as well for a tax with several progressive brackets.

TheCoelacanth 9y ago
> For a lot of people the main selling point of a flat tax is its supposed simplicity. They have fantasies of spending two minutes a year doing their taxes. I say "supposed simplicity" because many of these proposals still include numerous deductions and exclusions, and THAT is where 99.99% of the complexity of the tax system resides. Exactly, no matter how many tax brackets you have, without the miscellaneous deductions, calculating your total amount of tax to pay involves simply looking at a table of income ranges for a set of three numbers that applies to you and then doing the calculation top_marginal_tax_rate*(income - top_tax_bracket_lower_bound)+tax_on_income_in_lower_brackets. So the entire work to calculate your tax burden is one table lookup, one addition, one subtraction and one multiplication. The flat tax proposals simplify that by getting rid of the addition (by making tax_on_income_in_lower_brackets zero) and making the table lookup only contain two rows instead of many. So you have removed one arithmetic operation(or three if you are under the 0% bracket cutoff), and cut down on the number of rows you have to scan through by a single digit number. That is completely negligible to dozens of pages of reading you would have to do if you have even relatively simple deductions.