From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: why progressive tax rates (was Re: Clinton's Economic plan attacked)
Date: Wed, 12 Aug 92 11:03:36 EDT
Organization: IFS Project, University of Michigan
Reply-To: jwh@citi.umich.edu

In article <1992Aug12.135211.2141@cs.tulane.edu>, lang@cs.tulane.edu (Raymond Lang) writes:
|> In article <1992Aug12.113301.16060@midway.uchicago.edu> sug6@usite-next.uchicago.edu (Patrick Sugent) writes:
|> >                                         You are correct that the flat
|> >tax would have to be around 19%, but you either ignored/were unaware that
|> >all such reasonable proposals include exclusion of the first $X thousand
|> >dollars earned from any form of taxation. (I believe $X thousand is
|> >usually $20k, but I would have to look it up.)
|> >
|> >  So, you see, in both of your examples above the people making less
|> >than $20k would pay $0 in taxes, while everyone else paid 19% on
|> >everything over the first $20k.  Also, flat tax proposals include virtually
|> >no deductions outside of this $20k.  The idea is not only to make taxes
|> >fair, but to eliminate many of the distortive effects that our current
|> >system causes.
|> 
|> Fine, put a cut-off any where you like; but then you end up with someone
|> just above the cut-off having less left over than someone just below.
|> Isn't that a "distortive effect"?

No, you only pay the tax on the amount *over* the cutoff.  If the
cutoff is $20,000, you pay 19% on $1.00 if you make $20,001.

|> 
|> Besides that, the basic argument still applies.  If the cut-off is at
|> $20K, then Joe Taxpayer with income of $21K still has a much harder time
|> coming up with $4,200 than H. Russ Billionaire with income of a million
|> a year has finding an extra $200K.

He only has to come up with $190.00 (at 19%), not $4,200.

|> Finally, none of the serious proposals for a flat tax that I've seen
|> have proposed a rate anywhere near 20%.  It also stands to reason that,
|> the higher your cutoff is, the higher the rate will have to be since
|> you're reducing the tax base.

You seem to ignore the simple fact that we are currently *spending*
too much.  Spending should be limited to what citizens can reasonably
afford to pay.  I think a maximum of 17% is plenty.  You also have
to remember that high taxes have a dampening effect on the economy.
A smaller economy will yield fewer tax revenues.  Simplifying the
tax system will free up an enormous amount of resources that currently
are spent on tax related activities.

|> 
|> To switch topics somewhat, it occurred to me that this discussion about
|> tax rates has overlooked an important point: income taxes are only a portion
|> of the an individual's total tax burden.  It is true that our federal income
|> tax structure is mildly progressive; but, as a matter of fact, when you
|> consider all the taxes one must pay (social security (very regressive in
|> itself), state income, sales, etc.) the complete tax structure in this
|> country is actually mildly regressive.
|> 

FICA (Social Security) is a big problem.  The system should be phased
out and individuals should be required to invest a fixed percentage
of their income in reasonable retirement investments.  The investment
would belong to the taxpayer and the return would be higher than 
what Social Security will be able to pay.  In addition, the investment
will actually be doing more good for the economy than the 'investment'
made in SS.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         
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