From: mccall@mksol.dseg.ti.com (fred j mccall 575-3539)
Subject: Re: why progressive tax rates (was Re: Clinton's Economic plan attacked)
Organization: Texas Instruments, Inc
Date: Fri, 14 Aug 1992 20:13:33 GMT

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"?

Geez, no wonder we wind up with such economic bozos in charge of the
country!  A little basic math here:

Person A makes $20,000.  He pays $0 in taxes (because the first
$20,000 is exempt from tax).  Person B makes $20,001.  He pays $0.19
in taxes (because the first $20,000 is exempt).  How, pray tell, is
anyone making more money going to have less left over if they get to
keep the first $20k and pay 19% on everything else?

Secondly, 'distortive effect' refers to effects ON THE ECONOMIC
ALLOCATION OF GOODS.  Right now, the tax code drives a lot of
decisions that people make insofar as what they invest in, buy, etc.
This is considered, in general, to be a Bad Thing (tm) from the point
of view of economics, so ideally one would like to have a tax system
which distorts economic allocation of resources as little as possible.
That tax system IS a flat tax on income.

>
>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.

Except that Joe Taxpayer with an income of $21k doesn't need to come
up with $4,200; he needs to come up with $190.  This is somewhat
easier. 

>
>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 don't think that Jerry Brown was serious?  His 'flat tax' came out
around that (13% on income plus 13% on purchases).

>
>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.

Quite true.  Also generally a Bad Thing (tm).  An equitable tax system
which distorts as little as possible should probably be heavily
progressive at low leves and then go flat at higher levels.


-- 
"Insisting on perfect safety is for people who don't have the balls to live
 in the real world."   -- Mary Shafer, NASA Ames Dryden
------------------------------------------------------------------------------
Fred.McCall@dseg.ti.com - I don't speak for others and they don't speak for me.
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