A flat income tax will benefit the rich at the expense of the middle-class

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With the surging popularity of the FairTax (H.R.25 and S.155) DC power-brokers and members of the leadership of both parties are beginning to worry that they might lose their Golden Goose – the one thing that gives them the most power – the income tax. So they have taken a new tack, in order to kill any real tax reform.

It seems that they learned two things from their failure to stop President Reagan from cutting the number of tax brackets from 16 rates to just two and eliminating most carve-outs. First, they learned that that fighting tax reform head-on, won’t work. Second, they learned that a flat income tax or even a nearly flat income tax won’t stay flat. So in their desperation to save the income tax, they’re resorting to subterfuge. While the leaders in Congress aren’t out promoting it, they have a number of candidates out talking about implementing a flat income tax. They are telling voters, “We need to pass a flat income tax, so we can abolish the IRS and send our tax returns in on a postcard.” It all sounds well and good… at least, so long as you don’t look too deeply at the facts.

The first fallacy of that statement should be obvious. If we had a flat income tax and abolished the IRS, where would taxpayers send all those postcards? Think about it… That’s right. As pointed out in a previous article, as long as the government taxes income, there will, by necessity, be an IRS.

But the most important issue, concerning a flat income tax, is not so obvious. You see, a flat income tax would result in an increased tax load on the middle-class. This isn’t just some projection or hypothesis, either. It’s based on solid facts that are available to everyone and easy to understand. Consider the following.

  1. The only flat income tax bills currently in Congress, H.R.1040 and H.R.1824, both maintain the standard deduction.
  2. The ongoing flat tax rate in both bills is 17%. Also, 17% is the rate most often cited by flat income tax supporters.
  3. The IRS reports that under the current income tax, the top 1% of taxpayers pay an average tax rate of 22.83% in 2012.
  4. The CBO (Congressional Budget Office) reports that the middle quintile (fifth) paid an 11.1% tax rate in 2009.

Look at those sources – the text of the Flat Tax Act, IRS Collections Data, and the CBO Distribution of Household Income and Federal Taxes Report. These are solid numbers. So let’s put these facts together and look at the picture they clearly paint. The standard deduction that remains in both H.R.1040 and H.R.5882 (and will certainly remain in any other flat income tax bill) insures that the poor will not see any appreciable change in their tax rate under a flat income tax. (There is one other flat income tax plan that I would normally not mention, since it has never been introduced as a bill in Congress. But I feel that, I should address the Gohmert plan, since it is the plan that presidential candidate Sen. Ted Cruz heartily endorsed in 2012, even calling it, “ideal”. The Gohmert plan departs from the rest, in that it does eliminate the standard deduction and so, would amount to a huge tax increase for the poor and lower-middle-class.) But the rich, who currently pay an average of 22.83% income tax would see their tax rate drop almost six percent (5.83%), under H.R.1040 and almost eight percent (7.83%), under H.R.5882. Under H.R.1040, a 5.83% drop, from 22.83%, amounts to a 25% tax cut for that top 1% of taxpayers ( 5.83% / 22.83% = 25.5% ). Under H.R.5882, a 7.83 drop, from 22.83%, amounts to a 34% tax cut for the top 1% of taxpayers ( 7.83% / 22.83% = 34.3% ). The same data source shows us similar tax savings for other high income brackets. Using H.R.1040, which is the best-case scenario, we find that the average tax rate for the top 2% is currently 22.52%, which would amount to a 24.5% tax savings under H.R.1040 and it’s 21.97 for the top 3%, giving them a 22.6% tax savings. Those numbers are even larger under H.R.5882.

With those facts in mind, ask yourself this question. If the poor continue to pay a flat income tax at about the same rates as today and the rich get a 25% to 34% tax break, who will make up the difference? But if Gohmert and Cruz have their way, it won’t be just the middle-class who will take a tax hit. It will seriously impact the poor, who will no longer have access to the standard deduction.

Actually, we don’t have to surmise who will pay the difference. This is where the data from the CBO comes in. The IRS data is only broken down as top 1%, top 5%, etc. So, to see how middle-class taxpayers will fare, we’ll go to the CBO numbers, that are broken down in quintiles. That data is three years older than the IRS data, which ends at 2012. But that data should still be fairly close to today’s numbers. Using the CBO data, that middle quintile paid income tax at 11.1% in 2009. So under a flat income tax, they will pay tax at a rate either 3.9% or 5.9% higher than under the current income tax. As a percentage of what they pay now, that amounts to a 53% tax increase, under H.R. 1040 ( 5.9% / 11.1% = 53.2% ) and a 35% tax increase under H.R.5882 ( 3.9% / 11.1% = 35.1% ). Of course, under the Gohmert/Cruz plan those numbers would drop somewhat, since the poor would pick up a portion of that tax load.

In fairness, a flat income tax typically includes a higher standard deduction than does a progressive income tax, so this would have the effect of un-taxing a few more people at the low end. But when you un-tax more people at the low end, all it does is shrink the middle and increase the tax rates on that smaller middle-class.

Make no mistake, under a flat income tax, it’s always the middle-class who end up bearing the additional tax load.

Remember that Ronald Reagan reduced the number of tax brackets from 16 to just two (15% and 28%). But before one term of Congress had expired after he left office, George H.W. Bush signed into law a third, higher tax bracket. Although the economy was doing great, due to the fact that Reagan had also lowered the top marginal rate from 70% to 28%, the middle class were paying a larger share of the tax load. This was seen as unfair, so a 31% bracket was proposed and ultimately signed into law in November of 1990 (less than two years after Reagan left office). The idea was to tax the rich more, to make up for the effective tax cuts they received and thereby relieve some of the additional tax load on the middle-class. Of course, one of the primary reasons why the power brokers in DC are willing to consider a flat income tax, is because they know that it will give them this exact excuse for making the tax code progressive again.

Under currently proposed flat income tax plans, the poor will likely see little change (except for the Gohmert plan), the rich will get a massive break and the middle-class will end up shouldering the additional tax load.

Now you know why a number of very rich people, who shall remain nameless, are out there promoting a flat income tax. They know that if a flat income tax becomes law, they will get a major tax break and all they would have to do to get this break, is keep the middle class from realizing that they will paying more, till it’s too late.

Only the FairTax completely un-taxes poverty. Only the FairTax eliminates, or even can eliminate, the IRS. Only the FairTax provides true tax reform without placing a heavy burden on the producers who make up the middle class.

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A flat income tax will benefit the rich at the expense of the middle-class — 2 Comments

  1. Create more jobs in America and in urban areas by… untaxing those making less than 3x the poverty line or $50,000 a year until such time by exempting their wages from taxation… these lower wage workers can take 30% of their earnings out of the money supply to use to purchase new homes or an education for themselves and or for their family.. and to do this for as long as it takes to pass the FairTax…. and their investment in these urban areas has allowed them to afford better transportation.. new or used and the opportunity to raise a family in a safe and healthy environment.. without segregation.. and to be able to borrow with good credit on their savings… to make home improvements where they live.

    • James, your concept sounds interesting, but I think you would have trouble getting that through Congress. Think about the fact that 3X the poverty line for a family of 4 (2+2), is roughly $96,000. That would have the effect of un-taxing the bottom 80% of taxpayers (or the economic bottom 90% of all U.S. citizens, since the Joint Committee on Taxation tells us that 51% of households do not have a positive tax liability). Do you really think that you could get half of both houses of Congress to vote for something that un-taxes 90% of Americans?

      Furthermore, if such a tax regimen were to overcome all of the obstacles and become law, it would drive most of the remaining wealth out of the USA. The top 20% of today’s taxpayers (the group that would be left paying ALL of the tax under your plan) currently pay roughly 80% of all federal personal income taxes that are actually collected. If just half of that group were to leave, that would be a loss of 40% of all personal income tax revenue. To make up the difference, the remaining half of that top 20% of taxpayers would see a 66.7% tax increase, which would set a fire under them to leave, too.

      Obama is finding out that “soaking the rich” does nothing but drive that critical resource (the job-creators) out of U.S. tax jurisdiction, taking with them not only tax revenue, but the jobs they used to create. Since Obama took office and began his “soak the rich” agenda, formal renunciation of the wealthiest U.S. taxpayers has increased 1500%. I don’t think any of us want that to continue.

      By contrast, the FairTax will turn around the flight of capital and jobs that is currently underway. Further “soaking the rich” can only hurt the economy and drive taxes up for the rest of us. The FairTax is the answer.