Posted: Apr 29, 2005 By: Carl Kemnitz

Subject: A Progressive Flat Rate Income Tax

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COMMENT:

A Progressive Flat Rate Income Tax
April 29, 2005
by Carl Kemnitz (Individual), Bakersfield, California

Summary:
The idea is simple; everyone is taxed equally based on a percentage of their discretionary income. Discretionary income is defined simply as the income that is made beyond that required to live without undue hardship. The amount required to live without undue hardship corresponds to a conceptually meaningful value to the populace (as opposed to standard deductions) and will be determined transparently. The system is fair because it is a flat rate (probably around 30%) that allows the working poor to pay little tax. The simplicity of the system will help prevent fraud and speed the processing of taxes.
I. Description of Proposal: A Progressive Flat Rate Income Tax. The following proposal hopes to make the tax code simple and fair. A simple system prevents fraud and removes loopholes. Since loopholes are disproportionately exploited by the rich, a simpler system is also more fair. Everyone benefits from government intervention, whether it be through public education or the use of interstate freeways. It seems reasonable that each person ought to contribute to the government’s upkeep according to their ability. The government provides a safety net for the needy, in hopes that they will contribute to society when they are able. In contributing to the needy, the government is also supporting the economy because the needy spend all of their subsidies on goods that drive our economy. That economy employs our middle class and makes our entrepreneur class wealthier. The proposed system is a variant on the flat tax—a variant that is fair.
The idea is simple; everyone is taxed equally based on a percentage of their discretionary income. Discretionary income is defined simply as the income that is made beyond that required to live without undue hardship. The specifics of how to determine the discretionary income will be covered later. Let’s compare two individuals; one middle class single worker earning $40,000 per year one upper class worker earning $400,000 per year. If the IRS determines that the amount necessary to live without undue hardship is $20,000 per year and the tax rate is set to 30% above that then the middle class taxpayer would pay (40K - 20K) x .30 = $300 in taxes while the upper class taxpayer would pay (400K -20K) x .30 = $114,000. The numbers $20,000 and 30% are just examples; the true numbers would be determined by the IRS to ensure two factors: fairness and revenue neutrality.
Why is this fair? Because once someone has paid for the basic necessities of life the rest is discretionary spending. If each person is contributing to the extent that they are able that implies that they should contribute the same percentage of their discretionary spending regardless of what that is. The key to fairness would be the openness and debate that would go into determining the level of income by which people can life “without undue hardship.” If the IRS declared this amount to be $8000 (similar to our current standard deduction) the people would cry foul. Surely, someone trying to pay for basic food, housing, work-related-transportation, and health insurance cannot do so with only $8000.
Why is it progressive? The working poor pay nothing if they are working just to pay for their families to get by.
Details:
The IRS would annually determine the amount required to live without undue hardship with real-world averages for the following necessities:
Basic Living for Single Adult
*Food expenses.
*Housing costs (with utilities and upkeep).
*Transportation to Work (including insurance, maintenance, etc.).
*Necessary incidentals (e.g., clothes, toiletries, etc.).
*Out-of-pocket healthcare expenses.
*State and local taxes. (May need to be applied differently in different tax districts.)


Duductions: Dependents, Healthcare, Charitable Giving, and NOTHING ELSE.
The costs to raise children or care for dependent adults would be based on average actual costs including increased housing costs, etc. These costs would be deducted from the salary just as average basic living expenses are but applied for each dependent.
The following deductions would be applied in a different manner: healthcare costs and charitable giving. All healthcare costs and charitable giving should be documented by receipts and deducted from the salary. Any other “credits”, “deductions,” “exclusions,” and “alternative minimum taxes” only serve to complicate the system. If the government wants to encourage people to buy hybrid cars, invest in certain areas, or teach in low-income school districts then they should offer direct rebates or other incentives. There’s NO REASON to muddy the tax code with these items. Complicated tax codes are unfair to the poor because they cannot afford to hire lawyers and accountants to find loopholes for them.
This system is purely a personal income tax system. Businesses should still pay their fair share but this proposal does not seek to address how to determine what that is.
II. Impact of Proposal Relative to Current System .
The benefits of the proposed system is that it is extremely simple, very fair, transparent at all levels, predictable from year to year, and very similar in style to our current system. The simplicity would make it much cheaper to administer than the current system.
The impact of the proposed system need not be drastic. Let’s use four examples from our current system and follow what they would pay according to the proposed system. The examples are based on the averages from the lowest quintiles, the median taxpayer, and the taxpayer earning within the top 1%. Numbers for our current system may be a bit out of date but they are from the Tax Policy Center.
salary tax
(old system) discretionary income* tax
(new system)**
lowest quintile $9,300 $778 $0 0
second quintile $20,600 $2,887 $6120 $1958
median taxpayer $34,400 $6,453 $19920 $6,374
top 1% taxpayer $1,117,000 $349,837 $1,102,520 $352,806
*For the sake of simplicity the discretionary income was defined as income minus the poverty level, which was $14,480 for that same year. To be fair, this number probably needs to be adjusted upwards a few thousand dollars.
**The flat rate applied to the discretionary income was 32%. (This just happened to be the even percentage that came closest to making the tax revenues tax neutral).
III. Transition, Tradeoffs and Special Issues . Since most individuals would be paying similar levels of tax and the mechanisms are already in place to collect them, the transition would be particularly easy.