Why Can’t We All Pay The Same Tax Rate: Making Sense Of Taxes And Wealth In America

Explaining The Unexplainable

Anyone who has ever attempted to have a discussion about taxes has undoubtedly been met with the “we should all pay a flat tax” argument. On paper, it does sound like the only fair way to collect taxes: everyone pays the same percentage; no more loopholes or deductions.

In this article, we’ll take a look at the “Progressive Tax System” (the one we use now), and why it’s the best option for the moment. We’ll also dive deeper into the “Flat Tax” idea, and I’ll show you why it would actually be a disaster for low income families.

Warning

As with all of my articles, keep the partisan talking points out of it. By all means, discuss policy and theory, but leave the “X is a liar”, “Y is a Communist” rhetoric out of it. If you start using facts, then site your sources. Other than that my standard “If you can’t be nice, at least be clever” rules apply.

The Progressive Tax

The Progressive Tax system is what we have now. Basically, the way it breaks down is that the more you make, the more you pay. There are six different tax rates at the moment: 10%, 15%, 25%, 28%, 33%, and 35%. When you pay taxes, you pay in each bracket that you qualify for. Now I know I just lost most of you, so let me explain:

If you’re single, making \$50,000 a year, you qualify for three different tax rates: 10%, 15%, and 25%. So, using the current tax structure, you’ll pay the following:

10% on the first \$8,700 = \$870 which is (\$8,700 X 10%)

15% on everything from \$8,701 - \$35,350 = \$3,997.35 (\$26,649 X 15%)

25% on everything over \$35,351 = \$3,662.25 (\$14,649 X 25%)

Total Taxes = \$8,529.60 (\$870 + \$3,997.35 + \$3,662.35)

Now this doesn’t take into account any deductions or exemptions, this is just your base tax rate. Generally, when people talk about their tax rate, they are only talking about the highest bracket they qualify for; in this case, you’d say “I’m in the 25% bracket”, since that is the largest rate that you are taxed at.

You’ll notice that the \$8,529 is much less than what 25% of \$50,000 would actually be (\$12,500 for those who are wondering). So just because someone says that they’re in the “28% Bracket”, that doesn’t mean that they’re actually paying 28% of their total income. The only bracket that’s hard (meaning that is taxes at its value) is, of course, the 10% bracket, since that’s the only bracket with one rate.

Why The Progressive Tax Works

To put it plainly, the Progressive Tax works because it’s the only thing that can. If you’re going to have an income tax, a progressive tax system is the only way to do it in such a way that it’s not punitive. It applies equally, regardless of your race, nationality, or where you live. We’ll talk more about some of the alternatives a little later in the article, but for now, let’s focus on the Progressive Tax.

Moral and ethical arguments aside, there’s no legal basis for increasing the tax rate based on income. At face value, it even appears to violate the 14th Amendment; so how does the Government actually get away with it? Honestly, because no one can come up with anything better. Believe me, I’d love to be able to tell you there was a better way of doing things, but it’s just not the case; The Progressive Tax system is simply the lesser of all evils.

By placing a larger burden on those for whom it will have the least impact, you not only help fund the Government, but you also prevent a rebellion among the poor (see the French, Russian, and American Revolutions)of whom there are a much larger number than there is of the wealthy who are being taxed at the higher rates. It all boils back down to politics.

Now let’s take a look at some of those alternatives I mentioned earlier.

Taxes Based On The Cost Of Living

People asked about following the lead of some European countries, and basing taxes on the cost of living: either from a national average or by geographic region. There are a few problems with that philosophy however:

National Average: How would you deal with New York, California, and Hawaii? Those three states alone would “shatter the curve” and penalize people who live in places where the cost of living is much lower.

Based on Location: Illegality aside, it would penalize cities with a higher cost of living; leading to decreased populations and lost revenue, not to mention the resulting impact on local businesses. It would also fluctuate way too much to make it feasible.

Everything But

There is also a segment of the population that says all earnings should be paid in taxes, minus the cost of living in your area, plus some small percentage as a “bonus”, or incentive. I don’t really think I need to go into all of the things that are wrong with that theory, but here are some of the main points:

• It would destroy innovation and invention
• It’s racist in application, even if not in intent
• It’s Unconstitutional

There are plenty more arguments against, but those three should be enough to illustrate just how bad that idea is.

The Flat Tax

The most popular alternative to the Progressive Tax system is the “Flat Tax”. There are two main versions of the Flat Tax: one that allows for deductions (also known as a “Marginal Flat Tax”), and one that doesn’t (known as a “True Flat Tax”). Let’s take a closer look at both of them:

True Flat Tax: This is pretty simple: everyone pays the same percentage no matter how much they make. As I said above, it would appear that this method would be the only fair way to do it. But if we take a closer look, you’ll see that it would actually be devastating to the poor, and low income families. Using our example from before:

Assuming you’re single, making \$50,000 a year:

With a 10% Flat Tax: \$5,000.

With a 15% Flat Tax: \$7,500.

With a 20% Flat Tax: \$10,000.

As you can see, under the first two, your taxes actually go down from the \$8,529 you’re paying under the current tax system, giving you a “practical tax rate" of 17%.

Now let’s look at a second example of someone only making \$20,000 a year:

With a 10% Flat Tax: \$2,000.

With a 15% Flat Tax: \$3,000.

With a 20% Flat Tax: \$4,000.

Under the current tax system, they were paying \$2,564 giving them a practical tax rate of just under 13% (12.82% to be exact). So where your taxes went down under the 15% Flat Tax, their taxes would actually go up.

There is also the impact factor. Even though the two tax rates would be the same at 15%, \$3,000 represents a larger impact on someone only making \$20,000 a year than \$7,500 does on someone making \$50,000.

Marginal Flat Tax: A Marginal Flat Tax is really just another type of progressive tax, only instead of the “more you make, the more you pay” philosophy, they take the “the less you make, the more you keep” angle, which is substantially different.

A Marginal Flat Tax allows for some very basic deductions, usually only the standard deduction plus things like mortgages and medical costs.

Tax Controversy And Class Warfare

There has been a lot of talk this election cycle about the wealthy “not paying their fair share” and how there is a war currently being waged on the lower and middle classes by the wealthy. Regardless of which side you’re on, there is a growing divide between the two prevailing economic philosophies in the country:

The Entitlement State: This is the segment that believes that everyone is entitled to a certain quality of life, and that it’s the Government’s responsibility to provide it.

The Free Market State: This group believes that the playing field is level and that Government should “stay out of the way” and allow the markets flourish.

The conflict is coming from the polarization and subsequent vilification by each side of those who disagree with them. A prime example of this sentiment emerged last fall with the Occupy Wall Street movement.

The feeling among the Occupy Movement is that there is too large a disparity between the rich and poor, and that the Government should level the playing field, creating more equality among the people. Specifically there major concerns were with:

• Corporations that received “bail-outs” paying bonuses to executives
• Record Corporate profits while the economy was collapsing
• The high foreclosure rate
• Income disparity
• The lack of available “good” jobs

Their rallying cry of “We are the 99%” (referring to the disparity between the top 1% of wage earners and the remaining 99% of Americans), has become part of pop-culture in the last year.

Not to be outdone, the other side launched the “We are the 53%” campaign; the 53% referring to the 53% of Americans who pay income taxes.

So is there actually a class war raging in America? No, there isn’t. What there is, is a much larger amount of animosity between the two factions than there’s ever been before. The simple fact is, neither side is right, and neither side is wrong.

The Reality Of Taxes And Wealth In America

The simple fact is, despite your political views or social beliefs there isn’t just “one right answer”. In the best of times, the economy is a constant balancing act, and in some cases it’s like juggling chainsaws, while blindfolded, running through a minefield.

The simple fact is that yes, of course the Government has some social obligation to the citizens that empower it. Does this mean that everyone should share in wealth and prosperity equally? No, absolutely not. What it means is that the Government should ensure that everyone starts off on an equal playing field. Education, basic health care, and public safety are all things that the Government should provide. Beyond that, it’s up to the individual to succeed or fail on their own.

Should the wealthy be taxed excessively? Only within the structure of the tax policies that exist, whatever they happen to be. The argument that people who only want to pay what they’re actually required to pay, are somehow coldhearted, unscrupulous, or unpatriotic, is just another example of divisive things have gotten in this country.

It’s the same with the people who think that individuals who need Government assistance are just lazy deadbeats who don’t want to work. I worked on a Congressional staff for three years, and I’ve been to town hall meetings and seen grown men in tears, not because they wanted a handout, but because they just wanted to work. They weren’t asking for charity, they wouldn’t have accepted it even if offered. They simply wanted to be able to get up in the morning and do a job.

I understand why things are the way they are, believe me I do. Compromise isn’t sexy. Bipartisan ship doesn’t boost ratings, or fill column inches. No one cares when two Congressmen come together and reach across the aisle to draft legislation; conflict sells- period.

“Here endeth the lesson”

More by this Author

David Mein 4 years ago

One of the arguments in favour of a flat tax is that wealthy corporations who can hire teams of accountants are unable to use loopholes to pay very little taxes. In that case, from what you've written, it seems like the marginal flat tax is ideal. It wouldn't be punitive on the poorest earners, but the highest earners still have to pay their fair share.

Mr. Happy 4 years ago from Toronto, Canada

"Moral and ethical arguments aside, there’s no legal basis for increasing the tax rate based on income." - When dealing with social issues (taxation being a social issue), we cannot leave morals and ethics aside. We have to act in a responsibly moral and ethical manner, in my opinion. Therefore, the more one's income increases so should the taxes paid - it is the moral thing to do: society helps You make lots of money, give back a little more. Seems not only moral but also logical in my mind.

When TARP money is used as bonuses to fill the bankster's pockets, You say that there is no class war? Well, I actually should agree: it isn't a full out war on the street yet. Here I must ask though, what do You make of the middle class slowly dissipating?

"Government should ensure that everyone starts off on an equal playing field." - When there will be a serious inheritance tax imposed, that is when the playing field may become a little more equal at the beginning (birth), until then ...

All the best!

Billy Hicks 4 years ago Author

David Mein: Corporate Taxes are a separate issue, one that definitely needs reform as well. The problem with the marginal flat tax is knowing where to make the cut-offs.

Mr. Happy: The reason I said "moral and ethical arguments aside", is precisely because taxes are a policy issue, and not a social one. Apparently we're going to have to agree to disagree on that point.

I would like to thank you both for taking the time to drop by and read my article. =)

Mr. Happy 4 years ago from Toronto, Canada

I actually can agree with You Here Mr. Billy Hicks, taxation is a policy issue but because taxation and taxes affect societies then, in my mind this policy issue also becomes a social issue and thus, we have to think of morals and ethics as well. Things are more connected than they appear to be, in my opinion.

"The truth is rarely pure and never simple." - Oscar Wilde

Thank You for the conversation.

Cheers!

Kathleen Cochran 4 years ago from Atlanta, Georgia

“If you can’t be nice, at least be clever” rules apply.

This qualifier is the only reason I can imagine that this hub doesn't have 100 comments.

Are you familiar with "The Fair Tax" authored by Neil Bortz and former Congressman John Linder (R-Georgia) It's basically anational sales tax with provisions for the poor. Would love to hear your opinion.

I'd like to think if there were a better way, someone would have implimented it already, but I don't have that much faith in Washington.

I have a hub on the income gap in America that basically blames, not our tax system as it is established, but our tax system as it has been altered in the last 11 years. Would love your feedback.

UP - Interesting - SHARING

jellygator 4 years ago from USA

I love seeing thought-provoking and controversial topics in hubs. While I generally agree with your premise, I feel a few important points were not addressed:

1. Tax revenues aren't keeping up with government spending. This creates a huge problem in the long run and means the problem must be attacked from both ends: There must be a way for government to make more money, and to curb spending.

2. Those in the "extreme wealth" category - household incomes in the seven digits - pay a net tax that is a much smaller percentage of their income than the average joe making \$50 grand. Using your same example, the average joe household spent 17% of income on income tax. Compare: In 2010, Warren Buffett spent 11% of his income on income tax. In 2011, NBC News reported Romney spent 14%. This means they contributed more dollars, but a lower percentage. These "more dollars" make up a HUGE cumulative chunk of the overall portion of taxes paid. The top 11% of earners pay something like half of all the income tax revenues in the country.

People focus on one aspect or the other to argue their side of things, but every argument I've seen ignores what I believe is an important question that goes far beyond what's "fair" on paper: "Who has enough money to live?"

At what point do the lower income people turn to government safety nets or crime to make ends meet? At what point do the wealthy have more than they can realistically use?

3. Finally, the "extremely wealthy" category also includes corporations, which are taxed as individuals. This also had a dramatic effect.

I'm not a tax expert, and I don't even do math very well. But I have enough common sense to see that placing an 80% tax on "all income over \$2,000,000 per year" would NOT hurt anyone significantly, and would NOT hurt their incentive or innovation to a greater degree than the lower incomes are hurt by stripping them of social benefits if they go to work. We pay either way, but the burden remains on the lower and middle classes to such a degree that actual, material harm results, which wouldn't be the case if a few changes to a progressive tax were initiated.

ib radmasters 4 years ago from Southern California

Flat Tax still keeps the IRS in business, and its 23% and residual offset adjustment are not good.

A National Sales Tax, the kind like they have in most states is fair. Any argument against it you have apply to the sales tax as well.

In order to make NST replace income tax because the Internal Revenue Code is the problem, must be done by significantly reducing government spending, including the very expensive tax payer paid benefits, and defined benefits pensions. This would also include simply reducing the number government employees as well.

You keep mentioning statements as FACTS, and the only FACT in it is that they are not FACTS.

Billy Hicks 4 years ago Author

@Kathleen, lol, trust me, I have to delete about as many comments as I approve because people can't follow that one simple rule.

I've read about the "Fair Tax" plan, but there are two big problems with it (or any National Sales Tax): a) It's a sales tax, so it's dependent on consumer spending. b) it's a de facto tariff on imports that could potentially trigger retaliatory tariffs on our exports.

Taxes are neither the problem, nor the solution; spending is insanely out of hand, and until it gets reigned in, drastically, none of the rest of this really matters.

Billy Hicks 4 years ago Author

@jellygator Thanks for taking the time to read, always nice to know someones actually seeing this stuff =)

You're absolutely right about spending, it's out of control. As for your other two points, that's a discussion for the forums, or at the very least, a different Hub.

This is just a beginners guide, a "schoolhouse rock" version if you will, to give people a very basic frame of reference about the tax rates in this country. You're talking Calculus and this Hub is designed to be 5th grade math. =)

Billy Hicks 4 years ago Author

@ib Thanks for stopping by ib, always nice to hear from you.

ib radmasters 4 years ago from Southern California

Billy

I stopped by but no one was home. I left a note, but it wasn't opened.

Sorry, I missed you.

jellygator 4 years ago from USA

LOL, Billy! I feel like the whole tax topic is calc and I'm the fifth grader usually. I appreciated the simplicity, actually, even if I did take it a bit beyond.