Monday, April 18, 2011

Taxes - how they should be (part 1 Not The Flat Tax)

Fundamental to the current Republican rhetoric is the enshrinement of lower taxes for all.  This rhetoric is most powerfully realized in a refusal to permit tax increases on the very wealthy, but it shows up all over the place.  In the next few posts I'm going to present common beliefs and arguments about the tax code and show how everyone is wrong about basically everything.  First on the menu is the idea of the Flat Tax.  Ready set go:

1. The Flat Tax.

Some people think that taxes should be "flat" which is to say that every person, regardless of income, should pay the same portion of their income as taxes.  This is dumb for a pile of reasons, but here's reason number one: The better off you are, the less of your income you spend.
This seems obvious to me, and anyone who is living paycheck to paycheck can attest the lower end of this, but it's hard to get data on the upper end.  This spreadsheet sort of gestures at the trend.  You'll notice that % of income spent monotonically decreases with education, while the raw income monotonically increases.  We don't get into any REALLY extreme cases, but the trend is clear.  This has bearing on flat tax in two ways.

Way  1:

People in the lowest income bracket of that spread spend more than 90% of their income each year.  If they were paying a 10% tax, they would be unable to save any money, and likely would be unable to afford even the meager standard of living they currently enjoy.  By contrast, people in the highest income bracket of the spreadsheet, already living better, would, under a 10% tax, still have the same proportion of their income available for saving as the lowest income bracket would have available if they were left untaxed.  Note that that proportion translates into quite a lot more objective money, but that's for another discussion.

Way 2:

What's not always clear to people is that this trend means that the rich are contributing disproportionately little to the economy.  Saving money is essentially removing it from the economy, it isn't doing anything which means that it's not creating demand for products or services which means that it's killing America. Basically, the rich aren't carrying their share of the economic load, so we should be forcing them to do their part by taking their money and putting it to good use.

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