Re: Problems with the Flat Tax (was "Re: Forbes Camp.")

Michael Lorrey (
Fri, 19 Mar 1999 19:57:12 -0500

The Baileys wrote:

> Michael Lorrey wrote:
> >Those critics at the time failed to do two things:
> >a) they expected to keep all existing loopholes (most would be closed under
> >Forbes' plan)
> This is incorrect. The CBO estimates use pure gross income numbers. They
> do not incorporate any existing Internal Revenue Code provisions. Actually,
> the Forbes plan includes huge "loopholes" for the ultra-wealthy in that it
> exempts dividends and capital gains from taxation. Such a loophole would
> dwarf all existing loopholes of the existing tax system.

What Forbes' plan did was eliminate the double taxation that is present in the corporate system of taxation. This loophole applies to everyone, not just the ultra-wealthy, although the democrats tried to paint is as if it were. They pointedly ignored that the biggest winners would be the pension plans of hard working middle class americans. This loophole is also necessary to optimize dynamic scoring. Note that as the return on investment goes up, stock values go up, increasing total capital gains and thus generating more revinues than without the loophole.

> >b) they refused to utilize dynamic scoring (which we can see by today's
> >unexpected surplus is in fact the proper way to calculate tax revenues.)
> "Dynamic scoring" is the new word for supply side economics (aka
> Reaganomics). While I agree that the effects of tax changes should be
> determined on a dynamic economic landscape, it is too easy to manipulate
> this method to make the tax outcome be whatever you want. Additionally, the
> effects of tax cuts are not understood well enough to start quoting figures.
> Historically, significant tax cuts have been followed by years of growing
> deficits and average to below average economic growth. The years following
> Reagan's effective tax rate reduction are a perfect example. Even if you
> remove the spending increases beyond the average for the prior 20 years, the
> result is still ballooning deficits. Furthermore, GOP pundits forcasted
> 5-6% GNP growth if the tax cuts of the early 80s were adopted. This never
> occurred.

Reagan's 20% tax cut on income taxes occured for only ONE year. The democrats in control of congress killed as soon as they could. Part of the reason much of the deficit was needed was to soak up all of the excess dollars floating around due to Carter's fiat overprinting of money and to kill the vicious cycle of inflation triggered by the oil crisis, but exacerbated and fed back upon by the union and AARP's winning COLA increases in entitlement payments which were higher than the inflation rate.

> I think you need to take a closer look at Bush's 1991 tax return. His
> extremely low effective tax rate is because he had a huge charitable
> contribution deduction that year. In 1991, Bush had approximately
> $1,300,000 in gross income. His itemized deductions were $670,000.
> $550,000 of that were charitable contributions. By giving away 40%+ of his
> income he reduced his taxable income considerably resulting in only $200,000
> in taxes owed. You've picked an anomalous case to claim the wealthy will
> pay more in taxes under the 17% flat tax system.

Even if you deduct the charitable donation in toto, the $200,000 he paid in taxes was less than 30% of the remainder.

> As you might guess, the
> average high income earner doesn't give away 40% of his income every year.
> At income levels above $1,000,000, the average taxpayer only gives away 2%
> of their income. President Clinton, in 1997, earned $570,000. He had
> charitable contributions of $270,000 (roughly 48% of his income)
and still
> paid $92,000 in taxes (an effective rate of 15%).

So the guy 'who feels your pain' is cutting it slick too.....

> Instead of handpicking a case that supports an argument, lets look at the
> effective tax rate for the average ultra wealthy taxpayers. In 1995,
> according to the Internal Revenue Service, the average effective tax rate
> for the top 1% of all taxpayers in terms of gross income was 38.9%. Top 5%
> was 30.6%. Top 20% was 26%. The top 40% excluding the top 5% was 19.9%.
> The middle 60% (the middle class) was 18.9%. The lowest quintile was 0%.
> The overall effective tax rate for all taxpayers was 15.9%. Clearly, the
> ultra wealthy will receive a HUGE tax windfall as a result of the
> implementation of the flat tax system. Lets not forget that all these
> effective tax rates include taxes on capital gains and dividends (70% of
> which inure to the top 5% of all taxpayers) which will not be taxed
at all!

Do you have any links for this information?

> What will happen if a flat tax is implemented? The same thing that happened
> when Reaganomics was implemented in the early 80s.

Reaganomics was only allowed to last for one year, so it is hardly a qualified measure of whether the concept works.

> The rich will receive
> the lions share of tax cuts generated by the flat tax regime. Government
> revenues will go down. The GOP will not have the political will to support
> the drastic spending cuts required to preserve the budget surplus or even
> minimal deficits. The federal government will resume the its huge
> borrowings on the capital markets. Guess who will have cash in hand
to loan
> to the federal government? All these ultra-wealthy taxpayers who've
> received these huge tax cuts. Thats the infamy of it all. The rich will
> take the money they would have been paying under the old system and then
> loan it to the government and earn interest on that money.

I doubt it. They could earn far more money on the stock market. Notice how hard the government is finding it to sell its debt these days....a recent T-Bill auction only sold 20% of the bonds available..

> Forbes, Archer, and the rest of flat tax/national sales tax camp are clearly
> wrong. A comprehensive and objective review of the available data can yield
> no other conclusion.

Show me one. I haven't seen one yet.


   Michael Lorrey, President
                        Lorrey Systems
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