The Flat-Tax Fraud

Herman Cain’s bizarre 9-9-9 plan would replace much of the current tax code with a 9 percent individual income tax and a 9 percent sales tax. He calls it a “flat tax.”

Next week Rick Perry is set to announce his own version of a flat tax. Former House majority leader Dick Armey – now chairman of Freedom Works, a major backer of the Tea Party funded by the Koch Brothers and other portly felines (I didn’t say “fat cats”) — predicts this will give Perry “a big boost.” Steve Forbes, one of America’s richest billionaires, who’s on the board of the Freedom Works foundation, is delighted. He’s been pushing the flat tax for years.

The flat tax is a fraud. It raises taxes on the poor and lowers them on the rich.

We don’t know exactly what Perry will propose, but the non-partisan Tax Policy Center estimates that Cain’s plan (the only one out there so far) would lower the after-tax incomes of poor households (incomes below $30,000) by 16 to 20 percent, while increasing the incomes of wealthier households (incomes above $200,000) by 5 to 22 percent, on average.

Under Cain’s plan, fully 95 percent of households with more than $1 million in income would get an average tax cut of $487,300. And capital gains (a major source of income for the very rich) would be tax free.

The details of flat-tax proposals vary, of course. But all of them end up benefitting the rich more than the poor for one simple reason: Today’s tax code is still at least moderately progressive. The rich usually pay a higher percent of their incomes in income taxes than do the poor. A flat tax would eliminate that slight progressivity.

Nowadays most low-income households pay no federal income tax at all – a fact that sends many regressives into spasms of indignation. They conveniently ignore the fact that poor households pay a much larger share of their incomes in payroll taxes, sales taxes, and property taxes (directly, if they own their homes; indirectly, if they rent) than do people with high incomes.

Flat-taxers pretend a flat tax is good public policy, for two reasons.

First, they say, it would simplify paying taxes. Baloney. Flat-tax proposals don’t eliminate popular deductions. (I’ll be surprised if Perry’s plan eliminates the popular mortgage-interest deduction, for example.) So most tax payers would still have to fill out lots of forms.

Second, they say a flat tax is fairer than the current system because, in Cain’s words, a flat tax “treats everyone the same.”

The truth is the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).

For example, no one pays any income taxes on the first $20,000 or so of their income (the exact amount depends on whether the person is married and eligible for tax credits like the Earned Income Tax Credit of the Family Tax Credit.)

People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.

So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion peoples’ incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.

Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They’d only have to pay the 39 percent rate on $1,000 – the portion of their incomes over $250,000.

Get it? We already have a flat tax – flat within each bracket.

The real problem is the top brackets are set too low relative to where the money is. The top-most bracket starts at $375,000 a year. People with incomes higher than that pay 35 percent – again, only on that portion of their incomes exceeding $375,000.

This is absurd. It means a professional who’s making, say, $380,000 a year pays the same income-tax rate as a plutocrat pulling in $2 billion or $20 billion.

Our current flat tax at the top is treating the nation’s professional class exactly the same as it treats super-rich plutocrats. My doctor pays the same rate as Steve Forbes.

Actually, it’s worse than that because the plutocrats get most of their income in the form of capital gains, which are taxed at only 15 percent. That’s why America’s 400 richest people – who earned an average of $300 million last year, and who have more wealth than the bottom 150 million Americans put together – now pay at a 17 percent rate (according to the IRS).

The Republicans’ push for a flat tax masks what’s really going on.

Remember: The top 1 percent is now raking in over 20 percent of the nation’s total income and owns over 35 percent of the nation’s wealth. Under almost anyone’s view of fairness, these are grotesque portions. They’re especially large relative to what they were as recently as thirty years ago, when the top 1 percent raked in under 10 percent. And these huge portions at the top continue to increase.

Meanwhile, the top tax bracket is now 35 percent — the lowest it’s been in three decades. Between the end of World War II and 1980 it never fell below 70 percent. 

Simple fairness requires three things: More tax brackets at the top, higher rates in each bracket, and the treatment of all sources of income (capital gains included) exactly the same.

Not only fairness demands it, but also fiscal prudence. A truly progressive tax would bring in tens of billions of dollars a year from the people at the top who are in the best position to afford it.

Regressives are pushing the flat tax as a smokescreen. They’d rather not have anyone talk about the unfairness and fiscal absurdity of the current system.

Rather than merely oppose the flat tax, sensible people should push for a truly progressive tax – starting with a top rate of 70 percent on that portion of anyone’s income exceeding $5 million, from whatever source.

 

* This article was sourced from http://robertreich.org. (Rights retained by author.)


About The Author

Robert Reich author of Wall Street Occupiers and the Democratic PartyRobert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written thirteen books, including The Work of Nations, Locked in the Cabinet, Supercapitalism, and his most recent book, Aftershock. His "Marketplace" commentaries can be found on publicradio.com and iTunes. He is also Common Cause's board chairman.


Recommended Book:

Aftershock by Robert ReichAftershock: The Next Economy and America's Future (Vintage) by Robert B. Reich (Paperback - Apr 5, 2011) In Aftershock, Reich argues that Obama's stimulus package will not catalyze real recovery because it fails to address 40 years of increasing income inequality. The lessons are in the roots of and responses to the Great Depression, according to Reich, who compares the speculation frenzies of the 1920s–1930s with present-day ones, while showing how Keynesian forerunners like FDR's Federal Reserve Board chair, Marriner Eccles, diagnosed wealth disparity as the leading stress leading up to the Depression.


More Articles By Robert Reich

You May Also Like

InnerSelf celebrates 30 years!

 

Support InnerSelf by
using this Amazon link

 

follow InnerSelf on

google-plus-iconfacebook-icontwitter-iconrss-icon

 Get The Latest By Email

{emailcloak=off}

MOST READ

Do Sex And Violence Actually Sell?
Do Sex And Violence Actually Sell?
by Robert Lull, University of Pennsylvania and Brad Bushman, The Ohio State University
Is Yoga The Missing Link To Stroke Survivors' Rehabilitation?
Is Yoga The Missing Link To Stroke Survivors' Rehabilitation?
by Maarten Immink, University of South Australia
Why Has America Done So Little To Stop Gun Violence?
Why Has America Done So Little To Stop Gun Violence?
by Peter Squires, University of Brighton
Why Do Patients Want Treatment That Doesn’t Work?
Why Do Patients Want Treatment That Doesn’t Work?
by Clark Hobson, University of Birmingham

DID YOU KNOW?

Forging the Diamond Soul: The Saturn Return Cycles
in Planets & Transits by Anne Whitaker
In terms of complete Saturn cycles, you have three to work with at the most. The…
It's None of My Business... or Is It?
in Creating Realities by Marie T. Russell
For many years, I never watched TV. I remember my TV breaking down and as I placed it out…
Compassion & Tonglin Practice
in Meditation by Andrew Weiss
Tonglin practice is rooted in the breath. If you can breathe in and out, you can practice…
VITAMIN GUIDE
in Herbs & Supplements by Staff
A guide to vitamins, from A to K, with benefits, symptoms of deficiency, and natural food…
What Diet is Best: Pet with Arthritis
in Pets & You by Shawn Messonnier
It is important to consider how diet can affect the pet with arthritis. Let’s take a look…
Each Astrological Sign Has Its Difficulties
in Astrology by Margaret Koolman
We all know people who show us the negative side of their Sun sign... every sign has its…
Inner Brat in Action
in Yourself by Pauline Wallin, Ph.D.
Too often the inner brat influences us to say or do things that we later regret, just…
Children of Divorce
in Couples by Montel Williams and Jeffrey GardFre, Ph.D.
Here's a stunner: 64 percent of all marriages that began in 1990 ended in divorce by the…

LIVING IN HARMONY

Latest Articles & Videos

PERSONAL DEVELOPMENT

Latest Articles & Videos

SOCIAL & POLITICAL

Latest Articles & Videos

Do Sex And Violence Actually Sell?

Do Sex And Violence Actually Sell?

Robert Lull, University of Pennsylvania and Brad Bushman, The Ohio State University
in Economy