Tax Advice for GOP Presidential Candidates

Taxesby Jon N. Hall    1/20/16
Presidential candidates have been trotting out their ideas on taxes. One doesn’t need to spend much time analyzing Democrat ideas, as they like the current system and just want to tax the wealthy more. Where we find some interesting ideas about tax reform is among the Republican candidates. Ted Cruz has proposed a 10 percent tax rate on wage income, while Ben Carson has floated the idea of “tithing,” a 10 percent rate on all personal income.

An individual income tax system with a single rate, i.e. a “flat tax,” might actually be able to have a rate that is even lower than Carson’s 10 percent and still bring in the same revenue as now. The Tax Policy Center reports that for the 2014 federal individual income tax, the effective tax rate for all taxpayers was 9.2 percent. That’s the average of what everyone pays, and it hews closely to what’s been the average for decades, as the Center also shows that from 1979 through 2011 the highest effective rate for all income taxpayers was 11.9 percent (in 1981) and the lowest was 7.2 percent (2009).

One alternative to the flat tax is the “progressive tax,” which has multiple rates. The federal individual income tax currently has seven statutory rates, and the lowest of them happens to be 10 percent. Also, 10 percent is lower than the rate on capital gains. So a flat tax might allow Congress to tax all sources of income at one rate.

On December 5, National Review ran “Try as They Might, Progressives Can’t Make the Case for Progressive Taxation” by George Will:

[M]any Republican presidential aspirants […] favor a “flat” or proportionate income tax: If taxpayer A earns 20 times more than taxpayer B earns, taxpayer A pays 20 times more dollars.

Proportionate taxation always is what progressive taxation never is: simple. What justifies progressive taxation, and characterizes progressivism, is confidence that at any moment in society’s endless evolution, what is equitable can be known and society can be fine-tuned to achieve it. Which is how we got our baroque tax code.

Consider a single rate designed to bring in the same revenue as the current seven rates. If that single tax rate were 10 percent, it would constitute a significant tax hike for 90 percent of Americans, as only the top 10 percent of taxpayers have an average effective rate that tops 10 percent. Yes, there are taxpayers in the bottom 90 percent, and even in the bottom 50 percent, whose effective rates are above 10 percent, but they are the exception.

Under any flat tax rate, the only taxpayers who would be neither winners nor losers would be those who were already paying at the new flat tax rate. And if that rate were 10 percent, most of them would be clustered right around the 91st percentile. So a flat tax isn’t going to appeal to most Americans. Even some of the swells at the top, like Bill Gates, wouldn’t go for it.

A taxpayer whose income is currently the lowest that is taxed, would see his income tax liability go from $1 to $1,015 under a 10 percent flat tax. That would be entirely unacceptable to the American people, so Flat Taxers get around that problem by exempting the lower rungs from taxation. Because the bottom half contributes only about 3 percent of income tax revenue, the Flat Taxers could exempt the entire bottom half of income earners and the flat tax rate wouldn’t need to go up much more to retain revenue neutrality. But the middle class would see an even larger tax hike.

The reason we tax billionaire hedge fund managers at a higher rate than burger flippers if because that’s where the money is. The top 1 percent of income earners has an effective rate of about 25 percent. That same cohort provides 30-some-odd percent of the personal income tax revenue; they provided more than 40 percent in 2007. But with a 10 percent tax rate, the Flat Taxers would cut revenue from the One Percenters by 60 percent.

On the Nov. 29 edition of Fox News Sunday, Carly Fiorina discussed taxes, along with several other issues, with anchor Chris Wallace. You can read the transcript at Fox, but I recommend this Grabien webpage, as both its video and transcript deal only with the taxation portion of Fiorina’s appearance on Fox News. Here’s a bit of what she said:

A 73,000-page tax code is so complicated.  This is how the government maintains power. […]

The fundamental design philosophy, however, is lower every rate, close every loophole, […]

This is what the government does.  It takes away too much money and then with all those deductions and loopholes, it exerts power. […]

If you go from 73,000 pages down to three pages, everybody’s ox gets gored — every politician, every lobbyist, every accountant, every lawyer.  The only people who benefit are the small, the powerless, the new business. […]

The tax code, the complexity of government, favors the big, the powerful, the wealthy, the well-connected.  It’s called crony capitalism. […]

If you level the playing field by simplifying, then you help the small, and the powerless, and the middle class.  

Candidate Fiorina has been criticized recently for not being specific enough about her tax plan. Actually, Ms. Fiorina has said plenty, but what she’s said may be so radical, so “paradigm-shifting,” that journalists can’t really grasp what she’s saying, which is: that she would eliminate every exception in the Tax Code, including the deductions for home mortgages and charity.

If you want the lowest possible tax rate(s), then you need to accept ending all exceptions, as Fiorina advocates. In fact, the only reliable way that George Will’s example of taxpayers A and B paying proportionately the same is if there are no exceptions whatsoever.

It’s “unfair” that the income earners at the top pay so much more than everyone else. But there is another issue of disproportionality that is also unfair, and even more irritating. That’s when taxpayers earn the exact same incomes but don’t pay the exact same income taxes. This second type of disproportionality, however, can be fixed without the severe dislocations of the flat tax. It entails ending all exceptions and setting statutory tax rates to effective rates. (Get an idea of what those new rates would be.)

The Mises Institute is running a 2009 speech by Laurence Vance that should be read by everyone who favors a flat tax: “The Flat Tax Is Not Flat and the FairTax Is Not Fair.” The transcript begins with a two-paragraph history of the personal income tax from 1913 to 2009 that alone is worth the price of clicking. Vance’s piece is eminently readable and I highly recommend it.

Nonetheless, a flat tax is “fair”; taxing everyone at the same rate is the very definition of “fair.” A capitation, or head tax, whereby everyone pays the same amount, is also “fair.” To produce the same revenue as we are now, replacing the individual income tax with a capitation would mean taxing every man, woman, and child in America more than $10,000 each. But taxing everyone the same amount is also “fair.”

American voters should be heartened by the Republican field. Watching the CNN debate on Dec. 15, this voter was proud of them all. Any one of them would make a far better president than Hillary Clinton. Despite that, some keep trotting out a truly awful idea: the flat tax. So I’m going to once again trot out a better way to reform the income tax. Read it, love it, live it.

Jon N. Hall is a programmer/analyst from Kansas City. • (1374 views)

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19 Responses to Tax Advice for GOP Presidential Candidates

  1. Timothy Lane says:

    What I favor is a single rate with some sort of deduction that enables those who are poor to escape the tax. It would also have to include the FICA, or else there would need to be some way of handling FICA through a tax credit, which is effectively the same thing as including it in the tax, or by adding higher rates as the top limit on FICA is reached. The corporate rate would be the same as the personal rate, and with all the special corrupt deductions removed. This would require replacing the existing tax code with a new bill. A few means-tested deductions (home mortgage interest, charitable deductions) might be acceptable; realistically, I doubt the more popular (i.e., heavily used) ones could be eliminated anyway.

    Of course, just because the tax code starts out relatively simple doesn’t mean it will stay that way. There’s a reason members of the tax-writing committees do so well in campaign donations.

  2. Bell Philips says:

    Do we really need taxes at all? We already put something like a third on the Master Card and no one can seriously believe there is any intention of paying it off. Why not just eliminate taxes altogether?

    If all goes well, I’ll kick the bucket just before it all blows up. And people call Social Security a ponzi scheme…


    A flat income tax would be fair, but the problems are that because the poor would pay more (as they damn well should!) it would never be enacted, as Jon says, and because if we allow Congress to tax incomes at all it will never have the self-restraint to avoid the complicated tax code it has created because it is a source of tremendous power.

    Therefore, I think the only answer is to repeal the 16th Amendment and replace it with one that not only forbids an income tax but many other taxes as well. Giving Congress a virtually unlimited power to tax was one of the great errors in the Constitution (intended to correct an error in the Articles of Confederation, which gave Congress no way of raising money but to pass the hat among the states). Some sort of consumption tax would be fair (more on this in a moment) and would not discourage production the way income taxes do.

    Now it will be said that the poor must spend a greater percentage of their incomes on consumption, and this is certainly true, but it doesn’t mean they will spend more on consumption than the rich. A $200,000 yacht is going to carry a pretty hefty tax, and the rich will still be paying more in taxes than the poor – not that that should be our measure of fairness.

    Above all we must avoid the current situation, deadly to a republic, in which the majority can tax the minority without mercy, and worse, without paying any of the taxes it’s voting for. Poor people can vote Democratic with impunity knowing the Democrats will tax “the rich” only. Let the poor pay taxes and then think twice about voting for Democrats who will be forced to raise taxes on them as well as everyone else if they want to raise them, as Democrats (i.e. Leftists) always will.

    A consumption tax would also be simpler than what we have today, although not as simple as a flat income tax.

    • Timothy Lane says:

      The problem with a consumption tax is that the poor, while paying less in total taxes than the rich, would pay a larger percentage of their income as taxes. I think a good tax system would exclude the genuinely poor (as opposed to the relatively poor, which is the meaning today in America) from paying. By that I mean the sort of destitute people that Kung Fu Zu saw in foreign countries; they may be rare in America (partly because of welfare), but they do exist. This could be done with a consumption tax that excludes food, as many states do.

    • Bell Phillips says:

      You are 100% correct that it is vital for all (or nearly all) of the population to feel the pain of the idiotic things they vote to pay for. However, I would not agree that a fundemental change to the current system of taxation is wise.

      The biggest problem with a consumption (or VAT or whatever income tax alternative one might suggest) is that, realistically, the way it will happen will involve lots of promises to repeal the 16th amendment or otherwise eliminate the income tax, but there will be some “problem” that prevents that from happening on schedule and we will forever be saddled with two tax systems.

      Even supposing that the income tax were eliminated, tinkering with the tax code is irresistible to politicians. We start by excluding groceries. Then there is a rebate for dim light bulbs. And a special discount card for people on welfare. And no tax on wedding cakes, but only for properly documented homosexuals. But a special extra tax on prime-rib and butter. And on and on. I think the way it has remained so simple at the state level is because income tax provides an outlet for political tinkering. And, it’s on the state level.

      And there is another HUGE problem with transitioning from an income tax to a sales tax. If you have $10,000 in the bank, you can buy $10,000 worth of stuff. After the transition, you can only buy $7,500 worth of stuff. So you either get screwed out of $2500, or there is a very complicated process of paperwork to make adjustments to account for the difference. Or there is some crazy government program to across-the-board add a percentage to your bank account, in the process screwing some people and providing a windfall to others.

      I could go on for quite a while on this subject, but I’ll just say that I think the best bet is to stick with the income tax, and try to address the flaws in its implementation.

      • Timothy Lane says:

        Switching to a consumption tax of any sort would have to come after repealing the income tax, or the latter would never happen. It’s like the spending cuts promised after raising taxes, which always turn out to be fairy gold. Or the border control promised after legalizing the illegal aliens, which gets held up forever by those who didn’t want to control it to begin with. “Trust but verify”? In the case of Beltway Bandits, we already know from abundant experience that we can’t trust them.

      • Brad Nelson Brad Nelson says:

        What can I say? Geez, I don’t wish to be so open with praise (it’s so rare these days, it might shock) but, Bell, I think you’ve nailed it. And I never had thought of the difficulties of transitioning to a national sales tax.

        My official position is easy, smart, clear, and logical: Politicians talk about “tax reform” like the passengers on the Titanic talk about rearranging the deck chairs or what the band should be playing as the boat goes down. It’s a distraction.

        “Tax reform” is not what we need. Government reduction is what we need. From that all else flows. And it’s not that a better tax system couldn’t be devised. But the system we have right now, while highly imperfect, is not the problem. The problem is too much government. Too much government dependency. Too much borrowing and spending.

        Leave the damn chairs alone and repair the hole in the side of the ship.

        • Bell Phillips says:

          Brad, I’ve spent a sleepless night contemplating what you just said. (It was sleepless because OSHA thinks backup beepers are necessary safety devices on snow plows, and not useless noise pollution.)

          But you are right that mucking about with the tax code amounts to rearranging chairs. What I was thinking about was “repairing the hole in the side of the ship.”

          I want to ask what that means to you, but maybe it would be better to make another request. How about a call for papers on the subject, like you did for the 7 Deadly Sins series?

          I’m still thinking, and if I come up with something coherent I’ll contribute it, but I want to hear what other people have to say.

          • Brad Nelson Brad Nelson says:

            How about a call for papers on the subject, like you did for the 7 Deadly Sins series?

            Offhand, Bell, I’d rather shave with a cheese grater than discuss tax policy. Even so, I don’t expect anyone would have much to say on the matter that would be of much relevance and/or that anyone would care to read. One reason I jumped on what you posted is because it was readable and made abundant sense.

            But don’t let me stop you. I’m not the final say. If several people want to do a one-essay symposium on taxes, I’ll do the behind-the-scenes work.

            As for repairing the hole in the side of the ship, I’d be all for that. We don’t need a complete overhaul, although that might be nice. The problem is we have regressed to a German-like point where rationality (in regards to their immigration policy, for example) isn’t even on the table. Who sees a leaky ship? The pols would love “tax reform” if it allows them to add some kind of national sales tax. And the dependency class would love “the rich” to be soaked even more.

            Neither class (who are clearly a governing majority) acknowledge the ship, let alone the sea it floats in and the necessity for floating. So I consider most efforts regarding the discussion of tax policy to amount to little more than mental masturbation. We might as well discuss how many angels can dance on the head of a pin.

            But that’s just my opinion. If the braintrust here wants to do a one-essay symposium on taxes, and if you can get at least seven people, then I’ll do it.

            Also, if you’d like to write an essay all by your lonesome, that might be the best approach. It sounds as if you have more to say about the subject.

            • Bell Phillips says:

              Oh, good God! I have totally miscommunicated my request. I’m with you on the irrelevance of tax policy.

              My question was about the hole in the ship. If tax policy isn’t the way to fix it (and it’s not), then what is? What are the gigantic structural problems that have to be tackled as a first priority?

              • Timothy Lane says:

                The hole is a spending hole, and fixing it will require major reductions — which will have to involve entitlements reform. This can only be done over a long period due to the need to wean people off of dependency on taxpayer-supplied largesse (e.g., Cruz’s notion of a 5-year phaseout of the ethanol subsidies and mandates).

                If it can be done at all. Certainly there’s nothing like a majority at present, either in government or the population, that would support such an effort.

              • Brad Nelson Brad Nelson says:

                Oh, okay. That “hole” can be more than about tax policy (although it could include it, of course). Okay, that’s certainly a broader topic. Let’s see who is interested and what their general approach might be. I’m listening.

      • Brad Nelson Brad Nelson says:

        Another aspect of this, Bell — and I’m commenting on the politicians, not Jon’s thoughtful handling of the subject — is that focusing on “tax reform” is a completely amoral, technocratic approach…perfect for today’s gutless politicians (particularly on the right) who can view the whole matter as simply one of tinkering with the system, as you would an old car.

        But the problem with taxes is first and foremost a moral problem — should that car even be on the road? And few people today are prepared to discuss it in these terms.


        I would say that tax reform probably needs to be at the level of a Constitutional Amendment, since we can never trust Congress not to tinker with the tax code. Clearly Congress’s power to tax needs to be severely reigned in. As to the income tax, I will always be opposed to it because as long as it exists the temptation will be there to make it progressive. Note that massive income redistribution, a great evil, is more difficult to implement without a progressive income tax; thus junking the income tax will be a blow against the welfare state – perhaps the first of many that will be needed until we have abolished it altogether.

        • Timothy Lane says:

          The welfare state of today cannot be eliminated without major changes in society. So getting rid of the income tax would still mean allowing some other tax that can generate the needed income. How this can be solved in the long run, I don’t know; probably it can’t be.

          • Brad Nelson Brad Nelson says:

            The welfare state of today cannot be eliminated without major changes in society. So getting rid of the income tax would still mean allowing some other tax that can generate the needed income.

            That’s exactly right, Timothy, thus the “rearranging the deck chairs on the Titanic” analogy. Plus, I think it’s inherently dishonest to simply think about jiggering the tax code without acknowledging what you just acknowledged.

  4. Brad Nelson Brad Nelson says:

    This can only be done over a long period due to the need to wean people off of dependency on taxpayer-supplied largesse (e.g., Cruz’s notion of a 5-year phaseout of the ethanol subsidies and mandates).

    Timothy, that is the same thing as saying “Nothing will be ever done.” You have to rip the band-aid off. Spreading out entitlement reduction just means this issue festers and festers and there is more and more opportunity not to do anything. If one vote at any one time can simply put a kibosh on the phasing out, you’ll never phase out.

    You have to cut like Calvin Coolidge. Sort of a catchy phrase as well. Collapse is our best hope of entitlement reform. And for libertarians, this includes a likely side benefit: anarchy.

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