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Thanks for the reminder. I saw the existence of this article flashed (on CNBC?) while I was at a broker yesterday, and had forgotten to look it up.
Every honest tax "expert" will say the same thing as stated here - that it's not the calculation of the tax (i.e. number of brackets) that adds complexity, it's the definition of income. I've stated in various posts, and I think you have as well, that if people want a flat tax, then they just need to look at AMT: How much did you make, subtract X dollars, multiply by 26 (or 28) percent, and send it in.
However, the writer here is being similarly disingenuous with some of the items he lists, in the sense that while they may be political hot potatoes, they too don't affect the personal income tax complexity. Employers' contributions to health care don't show up on the W2, so they don't make your income tax return more complicated. If anything, adding them to the W2 might make reporting more complex, if they were shown as a separate item to be added in, rather than integrated into your taxable wages. Likewise, pension contributions.
And the Earned Income Tax Credit is not part of the income tax calculation at all, but a part of calculating how much you owe, net. It's treated as a prepayment, the same as estimated taxes or withholding (see 1040 line 64a [EIC] vis a vis lines 62-63 (withholding, estimates)). Hey, I've got a good idea, let's get rid of estimated taxes (wonder how large a cash flow stream they create, vs. EITC); everyone who owes money can just pay it all April 15th.
The other items - different rates for different types of income (which would be taken care of with a flat tax), various deductions (mortgage, local taxes, etc.) do indeed make the calculation of tax liability more complex.
Well, yes, you are technically correct in your observations, but he mentioned those items more to expose and underline his main theme: that the so-called "flat" tax is in fact a scheme that would result in one of the most regressive tax polices yet. Talk about the 99% vs the 1%- you ain't seen nothin' yet, if that flat tax scam actually happens.
I have always liked the idea of a flat tax. It would take the ’political’ out of the equation. Any 1099-int, or 1099-div, or 1099-whatever, or any W2 would be simply income. It would be taxed at 10%, or 12%, or some fixed %, and it would start at some number – perhaps $30K or $40K. Along with that, I’d like a balanced-budget amendment to control the people in DC, as it is obvious they haven’t done a very good job.
Just a few flat tax highlights, removing special treatment of some types of income:
1) Capital gains taxed the same as ordinary income (since all income is taxed the same, and the 1099Bs, starting this year for equity, and next year for funds, will show your gains). Reagan approximated this.
Goodbye Schedule D back side (you'd still have to report gains on sale of home, etc. - there's no 1099 for that; which reminds me, no $500K exclusion for that sale)
2) No foreign tax credit on your foreign funds - goodbye Form 1116 and 1040 line 47.
3) No mortgage interest deduction - if you think a lot of homeowners are under water now, wait 'till you see what that does to their home values
4) No deduction for medical expenses/insurance, for charitable contributions, for state income/property taxes, etc.
3-4 - goodbye Schedule A
5) No more top line reductions of income: - no reduction for IRA contributions (1040 line 32), and no reduction of income from IRA distributions for taxes already paid (that's a figure you have to keep track of, the IRA custodian can't report it on a 1099) - goodbye form 8806 and 1040 line 15b - no Health Savings Accounts - you won't get the top line reduction (1040 line 25) and the annual income will now be taxable - etc. (See line 23-36 of the 1040)
6) No tax-sheltered income - for example, muni income is already reported on the 1040 (line 8b) and 1099-INT (box 8), and is already included in the taxation of SS, so it's not as though such income isn't already (sometimes) counted as income - watch what that does to state and local budgets
7) That reminds me, all Social Security income becomes taxable; none of this 15%-100% exclusion from income (1040 line 20b).
8) No special treatment for employee options (and no "qualified" options) - that should put a big dent in Silicon Valley
I've kept the list to what I consider pretty basic line items - I haven't gone into business income (Schedules C, E), treatment of insurance, etc. About the only thing possibly esoteric I touched on was employee options.
In other words, once you throw out all the lines, all the schedules, what you're left with is - how much did you take in, ignore all expenses in generating that income, subtract $40K, take a percentage, and mail it in. Welcome to AMT, simplified.
This penalizes people in high tax states (who can no longer deduct those taxes - so compared with similarly situated people in other states, their treatment is even more unequal than currently); it facilitates double taxation (by not granting credit for taxes already paid, whether foreign taxes paid by your fund or IRA distributions of post-tax money). It taxes the return of money (whether from post-tax IRAs, Social Security, or possibly elsewhere, such as interest on premium bonds).
It also removes the bias toward home ownership (by no longer exempting $500K in gain, by no longer allowing mortgage deductions); it removes the bias toward helping startups (by no longer making it cheaper for them to pay employees with equity in the form of options).
Do not infer from the above that I disfavor (or favor) any of the changes. Some I like, some I don't. I'm simply pointing out a few of the changes that a flat tax as described entails. Anything less would be picking and choosing, and at that point, one is no longer standing on the principle of a flat tax for the sake of a flat tax; rather one is talking about carefully crafted, item by item, politically discussed, tax simplification.
I dunno why I have to keep splainin' this stuff to you, msf. The idea is we need a flat tax that keeps all of that good stuff that you mentioned (for me, but sure as hell not for those other guys...).
I thought about Herman Cain's 9-9-9 plan and here's what I think. People like Robert Iger the Disney CEO made $16.26 million last year in income. His tax bracket is 35% so his tax could be as much as $5.69 million. Cain's plan would reduce that to $1.46 million for a benefit of $4.23 million. At the same time, low income people that pay little or no tax would pay the 9% plus a 9% sales tax on everything they buy. In Massachusetts that would bring the total sales tax to 15.25% and the income tax to 9% federal and 5.3% or a total of 14.3%. Imagine living on social security and finding out you now have to give up 15.25% of your check whenever you buy something but Bob Iger now has enough extra money to buy 109 2012 Cadillac CTS Coupe vehicles. Mr. Iger also exercised $21.18 million in stock options last year. Enough to buy an additional 547 2012 Cadillac CTS Coupe vehicles. The good news, GE would finally pay a tax.
Comments
Every honest tax "expert" will say the same thing as stated here - that it's not the calculation of the tax (i.e. number of brackets) that adds complexity, it's the definition of income. I've stated in various posts, and I think you have as well, that if people want a flat tax, then they just need to look at AMT: How much did you make, subtract X dollars, multiply by 26 (or 28) percent, and send it in.
However, the writer here is being similarly disingenuous with some of the items he lists, in the sense that while they may be political hot potatoes, they too don't affect the personal income tax complexity. Employers' contributions to health care don't show up on the W2, so they don't make your income tax return more complicated. If anything, adding them to the W2 might make reporting more complex, if they were shown as a separate item to be added in, rather than integrated into your taxable wages. Likewise, pension contributions.
And the Earned Income Tax Credit is not part of the income tax calculation at all, but a part of calculating how much you owe, net. It's treated as a prepayment, the same as estimated taxes or withholding (see 1040 line 64a [EIC] vis a vis lines 62-63 (withholding, estimates)). Hey, I've got a good idea, let's get rid of estimated taxes (wonder how large a cash flow stream they create, vs. EITC); everyone who owes money can just pay it all April 15th.
The other items - different rates for different types of income (which would be taken care of with a flat tax), various deductions (mortgage, local taxes, etc.) do indeed make the calculation of tax liability more complex.
Regards-
1) Capital gains taxed the same as ordinary income (since all income is taxed the same, and the 1099Bs, starting this year for equity, and next year for funds, will show your gains). Reagan approximated this.
Goodbye Schedule D back side (you'd still have to report gains on sale of home, etc. - there's no 1099 for that; which reminds me, no $500K exclusion for that sale)
2) No foreign tax credit on your foreign funds - goodbye Form 1116 and 1040 line 47.
3) No mortgage interest deduction - if you think a lot of homeowners are under water now, wait 'till you see what that does to their home values
4) No deduction for medical expenses/insurance, for charitable contributions, for state income/property taxes, etc.
3-4 - goodbye Schedule A
5) No more top line reductions of income:
- no reduction for IRA contributions (1040 line 32), and no reduction of income from IRA distributions for taxes already paid (that's a figure you have to keep track of, the IRA custodian can't report it on a 1099) - goodbye form 8806 and 1040 line 15b
- no Health Savings Accounts - you won't get the top line reduction (1040 line 25) and the annual income will now be taxable
- etc. (See line 23-36 of the 1040)
6) No tax-sheltered income - for example, muni income is already reported on the 1040 (line 8b) and 1099-INT (box 8), and is already included in the taxation of SS, so it's not as though such income isn't already (sometimes) counted as income - watch what that does to state and local budgets
7) That reminds me, all Social Security income becomes taxable; none of this 15%-100% exclusion from income (1040 line 20b).
8) No special treatment for employee options (and no "qualified" options) - that should put a big dent in Silicon Valley
I've kept the list to what I consider pretty basic line items - I haven't gone into business income (Schedules C, E), treatment of insurance, etc. About the only thing possibly esoteric I touched on was employee options.
In other words, once you throw out all the lines, all the schedules, what you're left with is - how much did you take in, ignore all expenses in generating that income, subtract $40K, take a percentage, and mail it in. Welcome to AMT, simplified.
This penalizes people in high tax states (who can no longer deduct those taxes - so compared with similarly situated people in other states, their treatment is even more unequal than currently); it facilitates double taxation (by not granting credit for taxes already paid, whether foreign taxes paid by your fund or IRA distributions of post-tax money). It taxes the return of money (whether from post-tax IRAs, Social Security, or possibly elsewhere, such as interest on premium bonds).
It also removes the bias toward home ownership (by no longer exempting $500K in gain, by no longer allowing mortgage deductions); it removes the bias toward helping startups (by no longer making it cheaper for them to pay employees with equity in the form of options).
Do not infer from the above that I disfavor (or favor) any of the changes. Some I like, some I don't. I'm simply pointing out a few of the changes that a flat tax as described entails. Anything less would be picking and choosing, and at that point, one is no longer standing on the principle of a flat tax for the sake of a flat tax; rather one is talking about carefully crafted, item by item, politically discussed, tax simplification.
People like Robert Iger the Disney CEO made $16.26 million last year in income. His tax bracket is 35% so his tax could be as much as $5.69 million. Cain's plan would reduce that to $1.46 million for a benefit of $4.23 million. At the same time, low income people that pay little or no tax would pay the 9% plus a 9% sales tax on everything they buy. In Massachusetts that would bring the total sales tax to 15.25% and the income tax to 9% federal and 5.3% or a total of 14.3%. Imagine living on social security and finding out you now have to give up 15.25% of your check whenever you buy something but Bob Iger now has enough extra money to buy 109 2012 Cadillac CTS Coupe vehicles. Mr. Iger also exercised $21.18 million in stock options last year. Enough to buy an additional 547 2012 Cadillac CTS Coupe vehicles. The good news, GE would finally pay a tax.