I have always argued that, when considering a flat tax, officials and candidates should focus on a household’s disposable income.
A 15 percent flat tax, for example, is hardly a burden for a taxpayer with $1 million a year in disposable income (by that I mean income left over after the basic bills are paid). But 15 percent is a significant burden for a family with a disposable income of $10 or $20 a week.
If that 15 percent is increased to 20 percent, the millionaire may shorten his planned European vacation. The working class family may start eating hot dogs for dinner twice a week.
There is, flat-out, a substantial difference in how the flat tax treats the rich vs. the poor and middle class.
In addition, most taxpayers have no idea what rate they actually pay to the IRS. The “effective” tax rate – after deductions, credits and exemptions — for middle-income families is typically in the range of 4 percent to 8 percent. Yes, when you reach the bottom line on your income tax form, you are paying less than 10 percent.
So, the Herman Cain plan, which would stick you with a 9 percent income tax and a national sales tax that would raise the price of everything by 9 percent, is clearly a loser for everyone but the upper income taxpayers.
In the new Congressional Budget Office report on income inequality, one chart, all by itself, shows why a flat tax is not for everyone – in fact, not for anyone except those in the top income brackets.
As with many government charts, it divides the nation into fifths – “quintiles” – based on income, top to bottom. This CBO chart analyzes relative tax burdens by demonstrating federal income taxes as a percentage of a household’s income for each of those slices of the population, each of those quintiles.
It clearly shows that a flat tax of 15 percent, as suggested by Newt Gingrich, or the 20 percent under Rick Perry’s plan, in exchange for the loss of most deductions, is clearly not a winner for anyone in the bottom four- fifths of the country.
In fact, those in the broad middle – the second, third and fourth quintiles of the nation – currently pay, on average, just 4 percent of their income in federal income taxes.
The reason for that low rate is clear – the credits and deductions and exemptions that have been loaded into the IRS code in recent years by Congress were largely designed to help the middle class.
Next time you hear a politician talking about cleaning up the tax code and eliminating all the “loopholes,” consider what that means for you.
I couldn’t figure out how to download the chart from the copy of the CBO report that was posted online by the House Ways and Means Committee Democrats. But you can view it here.
