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

The Baileys (
Sat, 20 Mar 1999 08:01:13 -0500

Michael Lorrey wrote:

>What Forbes' plan did was eliminate the double taxation that is present in
>corporate system of taxation. This loophole applies to everyone, not just
>ultra-wealthy, although the democrats tried to paint is as if it were.

This is similar to the obfuscation the GOP used when trying to pitch the capital gains tax rate of the Taxpayer Relief Act of 1997 on American taxpayers. The pitch was, "This capital gains tax rate cut affects 70% of all Americans". This was true. 70% of all Americans reported capital gains on their tax returns. However, this was simply a frequency figure, it did not capture the magnitude of capital gains reported by different quintiles. It also masked the size of the tax savings that would inure to different quintiles. Yet 90% of all capital gains are realized by the top 20% of taxpayers. This is like saying that if you have income type X and every American has it but 1 out of 10 Americans reported $100 of it while the other 9 reported $1 of it and you eliminate taxation on it that "everyone" receives an equal tax benefit from the tax cut. This is deception. This is a huge loophole.

>pointedly ignored that the biggest winners would be the pension plans of
>working middle class americans.

You really need to get a better grip on the actual tax data instead of believing GOP fairy tales. Please refer to the tax data area of the IRS site or try for something more instantly digestable. Another suggestion is "The Labyrinth of Capital Gains Tax Policy" by Leonard Burman.

>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.

Forbes has exempted all dividends and capital gains from taxation. Therefore, stock prices can converge on infinity and it won't mean a single penny in increased federal revenues. As I stated before, it would be the largest loophole for the wealthy in tax history.

>> 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
>> income he reduced his taxable income considerably resulting in only
>> 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.

Not quite. If you eliminate the effects of the charitable deduction, you must add approximately $200,000 in additional tax liability. Thus Bush's tax liability would be $400,000 on gross income of $1,300,000, or 31%.
>> As you might guess, the
>> average high income earner doesn't give away 40% of his income every
>> At income levels above $1,000,000, the average taxpayer only gives away
>> of their income. President Clinton, in 1997, earned $570,000. He had
>> charitable contributions of $270,000 (roughly 48% of his income) and
>> paid $92,000 in taxes (an effective rate of 15%).
>So the guy 'who feels your pain' is cutting it slick too.....

Actually this is another point. The flat tax would devastate philanthropy in the United States. The elimination of the need for a charitable deduction and the estate tax would completely eradicate the need to make charitable contributions. Additionally, there would be no more Rockefeller or Duke foundations (when Bill Gates states he's going to give 90% of his wealth to charity he's not talking about actually giving it away but instead funding his foundations). These costs would have to be picked up to some extent by the government. In addition, research funding would suffer 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
>> 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
>Do you have any links for this information?

Check out:

Burman and Weiner's, "Six Tax Laws Later: How Individuals' Marginal Federal Income Tax Rates Changed Between 1980 and 1995". National Tax Journal 51:3 (September 1998).

>> 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
>> 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
>> 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
>the government is finding it to sell its debt these days....a recent T-Bill
>auction only sold 20% of the bonds available..

The markets will only support so much capital in flow. A perfect example of this was the Reagan - Bush years where the wealthy gobbled up federal securities while also funding a run up in the stock market.
>> Forbes, Archer, and the rest of flat tax/national sales tax camp are
>> wrong. A comprehensive and objective review of the available data can
>> no other conclusion.
>Show me one. I haven't seen one yet.

The CBO performed a study of the effects of all the major tax reform initiatives in 1998. Additionally, the JCT performed a similar study of the tax effects of different tax reform proposals in 1996. I would look at these first before listening to more rhetoric from the Forbes and Archers of the world.

Doug Bailey