Arman's stuff
Taxes, taxes, taxes. Oh, and math.

(Fri Jul 15 17:31:02 2011)

If you hear something that sounds like a good idea... do a bit of math before you go for it.

I keep hearing people suggesting a "flat tax." Now, on the surface, this sounds like a brilliant idea; you eliminate all the muss and fuss from preparing your taxes, all those fat cats that are shirking their dues suddenly have to pay taxes instead of hiding behind loopholes, and everyone (except the fat cats, obviously) is happy.

Only that's not how it would work.

While, yes, tax prep would be much easier, it's only because you will never get a refund. 25% of your income will be skimmed off the top before you ever see it. Additionally, if you make any interest, sell your house, whatever, you'll pay taxes on that income, too.

A flat tax means you'll pay taxes on ALL your income, too - no more breaks for giving to charity, having children, supporting an invalid relative, being blind, having student loans, going to school full time, paying a mortgage, or even that nice little chunk they take off the front. A single mom with two kids and a mom with dementia will pay the same taxes as a single male with no dependents.

But at least those fat cats will pay more, right? ...wrong.

Say I have a billion dollars. That easily puts me in the 'richest 1%' crowd. Right now, I live off the interest from that billion dollars; effectively, I sit on it. I'm rich, but I do nothing for the economy... apart from spending the interest. At 8%, that's $80 million; I have modest taste for a billionaire, so I only spend about $2 million on myself. I don't really need the rest, and I don't want to pay taxes on it, so I give it away. Charities everywhere receive a total of $78 million... which means I only have to pay taxes on the $2 million I make.

Suddenly, the law changes. Flat tax for everyone! Well, I still only want to live on $2 million a year, but with a flat tax of, say, 25%, I'll be paying $20 million in taxes! If I really cared, the charities would be able to split the $78 million, minus the extra taxes - $19.5 million. If I didn't care, and just wanted to live on my $2 million a year, I'd say screw it, and put the money into interest-free checking accounts. I don't make any interest, and thus have to start digging into my billion dollars, but now I don't have to pay any taxes at all! I already own that money, and have already paid taxes on it; at $2 million a year, my money will last 500 years, less inflation.

So in the best of cases, the government takes $19.5 million away from charities, and in the worst case, the government and the charities both lose every red cent. And the government will have to take up the slack that the charities are forced to abandon, too.

Not only that, but the nearly 50% of the US that pays no taxes at all will suddenly start paying taxes. If I made $20,000 a year, I'd pay nothing in taxes - I'd be on the edge of poverty. A flat tax of 25% means I would start paying $5,000 a year in taxes. My take-home pay just went from $20,000 - the edge of poverty - to $15,000, which is well beyond that line. Which means that I'd have to go on some form of welfare to make ends meet. And, were I to get exactly $5,000 a year from welfare, plus my normal wage - exactly back where I had started - do you think it would be break-even? For me, yes, but the amount of overhead in that money is not zero. For every dollar the government takes in, it spends a few cents just to get the money at all. For every dollar it sends out, it spends a few more cents on processing. So, while I may have gotten my $5,000 back, holding onto it cost the government money.

So, to sum up: the rich will find a way around a flat tax - or any tax for that matter. There will be no benefit, apart from good will, from giving to charities, so that will suffer as well. The number of people on welfare will go up, as will the costs involved. And, I think most importantly, people will realize exactly how badly the government spends its money... because even if it manages to make more money, it will do nothing but spend every cent.

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This blag is tagged: Government, Taxes, All