We already have a flat tax. It just has bumps and potholes.
The fact that neither political party will acknowledge this is one of the reasons both parties are a useless disservice to the voting public.
Instead, both parties have a vested interest in the theatrical possibilities created by the idea of graduated tax rates. Notice that I said “the idea” of graduated tax rates. It should not be confused with reality.
Democrats argue that taxes on the rich should be raised because others need the money. This wins votes from the legions of voters who aren’t rich.
Republicans argue, with great piety, that high taxes crush incentives and should be reduced. Only then will The American Way See a New Dawn.
Politicians talk this way because they talk about only one tax. They talk about the federal income tax, which offers graduated rates from 10 to 35 percent.
Politicians never talk about what real people experience, the true maze of taxes and government benefits. If someone put them all together, we could see what our actual tax burden was. We could see who pays at the highest, or lowest, rates. Discussions of tax policy wouldn’t be a waste of time.
Well, someone did it.
In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that our all-in marginal tax rate is pushing 40 percent.
Yes, you read that right, 40 percent.
Earlier studies by the Congressional Budget Office showed lower figures. But those studies failed to include state income taxes, sales taxes, and the offsetting benefits of major government programs. This research incorporates all those factors and shows our real tax burden.
It’s 40 percent, give or take a bit.
That’s not our average tax rate. It is what most workers will pay on each additional dollar of income when all taxes— federal income, employment, state income, sales taxes, and the major benefit programs— are considered. Worse, the researchers found that it is about the same on a life-cycle basis, meaning that future Social Security and Medicare benefits won’t offset the burden of current taxes.
If this seems improbable to you, consider how easy it is to hit 40 percent. Just be self-employed (15.3 percent) and earn enough (anything over a taxable $31,850 single, $63,700 joint, or $42,650 head of household in 2007) to hit the 25 percent tax rate.
And there you are, paying 40.3 percent on each additional dollar of income. (Some readers will say that most people are employees, not self-employed, and the employer pays half of the employment tax, but that’s just window dressing to make the tax go down easier.)
What we really have is a bumpy flat tax. As a consequence, a 30-year old couple earning only $20,000 a year has a marginal tax rate of 42.5 percent, while a 45-year old couple earning $500,000 pays at 43.2 percent. At all ages and income levels in between, the marginal tax rate ranges from a low of 24.4 percent for a 30-year old couple earning $50,000 a year to a high of 47.7 percent for a 60-year old couple earning $150,000 a year.
Crazy.
The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3 percent, the median tax rate is 41.8 percent, and the standard deviation of all those rates is 5.3 percentage points. Basically, we all pay at about 40 percent, plus or minus 5.3 percentage points.
That’s not a big range, particularly when you notice that it covers an income rise of 2,500 percent.
We have a de facto flat tax, with bumps and potholes (see table below).
The Tax Rate We Really Pay—The De Facto Flat Tax
| This table shows the all-tax marginal tax rate for couples, as calculated by Kotlikoff and Rapson | |||||||||
| Age | $20,000 | $30,000 | $50,000 | $75,000 | $100,000 | $150,000 | $200,000 | $300,000 | $500,000 |
| 30 | 42.5% | 42.3% | 24.4% | 36.9% | 37.0% | 45.9% | 36.8% | 43.9% | 44.0% |
| 45 | 41.7% | 41.8% | 35.8% | 36.1% | 36.1% | 45.1% | 35.9% | 40.9% | 43.2% |
| 60 | 32.0% | 36.3% | 36.5% | 45.5% | 45.5% | 47.7% | 43.2% | 45.8% | 45.0% |
| Source: http://econ.bu.edu/kotlikoff , “Does It Pay, At the Margin, To Work and Save?” | |||||||||
So I have a modest proposal: Ask your congressman or senator if he has a clue about this. If he doesn’t, regardless of party, he shouldn’t be in office. Vote accordingly.
On the web:
Why do you favor the flat tax?
Clarification:
Celine Dion fans please note. The $444 dollar price for orchestra seats quoted in last Sunday’s January 21st column was a reseller price, found by Googling “Celine Dion tickets” on the web. A representative for A New Day assured me that the direct purchase price from Ticketmaster, www.ticketmaster.com, ranges from $87.50 for second mezzanine to $225 for front orchestra.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) A. M. Universal, 2007