First, see the youtube from yesterday with Reynolds and McCardle, in which Megan briskly covers a number of points. Two favorites:

• The Dem's stunning arrogance in signing Obamacare —We're going to do this whether you like it or not, when in fact even a huge number of liberals were against it— is really working against them now... When Obama talks about compromise, no one gives a rat's ass. (This anger has had wounded loyalties in my own family. There are folks out there who think they can get into Heaven by spending other peoples' money, no matter how clear Baby Jesus is about this not being possible.)

But failure to find a solution to the current crises could have catastrophic and expensive consequences.

• Megan also reflected on the February foolishness in this recent tweet:

One thing that left/center-right underestimates: how much damage those sham spending cuts did. Folks are determined not to get scammed again.

• Megan notes that things won't get better until more people, not fewer, are sharing in the tax burden, something that neither Dems nor Republicans will have the courage to propose.

As George Will said at CPAC a couple years ago:

"When this administration gets in place all of its tax preferences, 60% of the American people, a large majority, will pay either no income taxes or less than 5% of their income. Now that is a majority that has zero incentive any longer to restrain the growth of a government they are not paying for."

But neither party will have the courage to deal with this, because whoever loses will bring out the senior vote in 2012 to bring back the Free Candy.

So, basically, I'm learning to like Megan McArdle. It's amazing how having a moderate, non-robot personality can make the dismal sciences seem worthwhile.

And I'm learning to hate Barack Obama.

We are, in the Biblical sense, fucked.

Aw, who am I kidding?

People love that guy....

"When this administration gets in place all of its tax preferences, 60% of the American people, a large majority, will pay either no income taxes or less than 5% of their income."

The problem isn't only those who pay no taxes, it also encompasses those who DO pay substantial taxes but who receive such a high % of their income directly or indirectly from the government that it makes financial sense for them to support expanded government EVEN THOUGH their taxes will rise--their income and career prospects will rise MORE. See my post paying higher taxes can be very profitable

Quite frankly, I think the country is past hope. We have one option, wait for the end and see what happens.

By the way, the flat tax and fair tax are different things, and I would encourage the author of this article not to sow confusion by conflating the two. The flat tax is an income tax that is the same across the board, the beauty of which is that it can be described in one sentence.

The fair tax does away with the IRS altogether and relies on sales taxes.

The number of people that can actually grasp the reality beyond the sound bites is such a small percentage that it scares me.

Anecdotally, I had several long discussions with a more liberal person -- she still thinks we should give Obamacare a try. Several times I led her to the logical conclusions (death panels, no Dr. accepting, rationing) and her reply was "That's socialism. That will never happen." I couldn't get her to step over and realize that it can, and probably will happen.

That happened on several other issues as well.

The amount of cognitive dissonance that the human animal will tolerate is amazing.

An example is the recent railing from Obama about the ownership of private jets by corporations and the rich. They left a five year depreciation in TARP (signed by Obama), but then he rails against the same tax break. (Refs here.)

I'm with Crid on this: We are so fucked.

The USA already has rationed healthcare. Healthcare is rationed in the USA and has been for decades. It's more heavily-rationed in the last fifteen years.
Obamacare will implement healthcare rationing? Healthcare is *already* rationed in the USA.
It's the health insurers who ration healthcare. And it's been like that for *decades*. As it gets more rationed by health insurers, some of the witless wake up and point their fingers at anything moving.

Just don't touch my Social Security! ;-P

since it's the rare person (and certainly the extremely rare politician) who will release their lips from the teat for the good of the country

This is why we're screwed. It's a form of the "tragedy of the commons". No one will give up their benefits voluntarily.

No, the system will have to crash and burn and the benefits yanked with great violence from their grasp. Mathematics is a harsh mistress and she bows to no man...sadly, this will be a very bad thing to have to live thru and the people most attached to the teat will be the least able to provide for themselves.

Also, a number of those folks not paying income taxes are receiving checks from the IRS in the form of earned income credits after they file their returns.

The current tax system has serious perversions in it, especially tax credits and especially the earning income child credit. Tax credits allow you to not just zero out your tax burden, but to get a check for thousands of dollars from the federal government in excess of ALL taxes paid that year (including Medicare and FICA.)

Then there's the perversity of "Head of Household" and don't get me started on the myriad of ways to deduct tuition (which are among the most confusing parts of the tax return, even with a computer program.)

And for the record, EVERYONE with income should pay at least 5% income tax. They should also pay income tax on ALL income, including benefits (corporations should pay no income tax at all.) I'd make no distinction between short and long capital gains and income; income would be income.

clarification: ...get a check for thousands of dollars from the federal government in excess of ALL taxes the tax payer paid that year (including Medicare and FICA.)

Fun with numbers:

The last time the federal government actually paid down debt was in 1960.

The Baby Boomers have paid a fortune into Social Security. Every last dollar has been borrowed by the federal government and spent. (Imagine if you put money into your 401K every month but borrowed it right back out and spent it.)

59% of Americans are receiving a federal government check of one type or another.

The government takes in about $2.3 trillion in tax revenues each year but spends $2.4 trillion on these transfer payments to the 59% of Americans mentioned above. This makes up 60% of spending.

The remaining spending (interest on debt, military, and discretionary spending) is covered by borrowing.

I R A Dearth Aggie is right. Math bows to no man, and the benefits will only be reduced when they are jerked violently away. The next twenty or thirty years are going to be painful.

From the bigger perspective, our problem is that we've stopped taking care of ourselves and each other, and allowing the government to take care of us. My kids get me a welfare check and tax breaks, and the government takes care of educating them, as well as even feeding and clothing them sometimes. I don't have to take care of my kids, the government will do it for me. Same thing for my elderly parents. It's not up to them to save their own money, and I don't have to take care of them either. The government will do it for me.

We DO need to "return to the family" - although contrary to Republican bible-thumping, this has nothing to do with gays or abortion.

I'm with Crid on this: We are so fucked.

Psssh, I been sayin' this for years. Problem is, no one is providing a solution. Well, some (few) people are, but NO ONE IS LISTENING. And when people finally DO wake up, it's gonna be way too frakkin' late.

Psssh, I been sayin' this for years. Problem is, no one is providing a solution. Well, some (few) people are, but NO ONE IS LISTENING. And when people finally DO wake up, it's gonna be way too frakkin' late. -- Flynne at July 10, 2011 11:15 AM

Not meaning to disrespect anyone -- Flynne I don't remember you saying that discreetly. But I could tell from your posts you were on the side of reason.

While I'm not a faithful follower of Brother John Birch -- I'm at the point of screw you all, let it crash and see what comes out the other side.

I'm as likely to be screwed as anyone else, but I'd rather live free of constant intrusion than being a serf to the government.

I'm with ya all the way, Jim P. But too few others are. And I'm a lot more politically incorrect than people give me credit for!

One of the problems with most flat tax proposals is that computing tax is actually two problems:

1. Determining and measuring income
2. Determining the tax rate.

Most flat tax proposals address, reasonably I think, problem 2.

But they don't seem to discuss problem 1.

And many bogus tax shelters, and many bogus tax schemes are all bound up in problem 1, measuring income.

So in problem 1, we have, in addition to "normal wage slave income", questions of:
1. Passive / investment income
2. Pay to hedge fund managers which is taxed at passive / investment income rates as opposed to wage slave income.
3. All other ways of hiding income, by normal means that businesses use to offset it with expenses, etc.

I would be interested in a very much simpler tax scheme, I think it would do a whole lot to reinvigorating entrepreneurship and manufacturing and all that stuff.

And I would love to see the enormous waste of dollars that go to tax attorneys and accountants reduced. We need some amount of that, but not to the extent it is used today, which is mainly to game the system.

Regardless, perhaps due to my ignorance, I am not aware of flat tax schemes that address the various measurement issues.

Note that Nan & Barry are still smirking:

http://tinyurl.com/6dmre2t

The just can't believe it's over.

I hate them.

> they don't seem to discuss problem 1.

What, of problem 1, is new to the flat tax?

If it would be a problem then, why isn't it a crisis now?

For the record, to make it over-the-top clear:

> Depending upon the threshold set for
> the personal deduction, people on the
> lower side of the economic scale would
> owe no taxes.

That's exactly the problem. More and more of America's genius is unconcerned with how Washington (or the statehouse) spends money.

Progressive taxation is NOT compassionate.

I agree with Crid and Jim. P. With this lot in power (Big Orange Crybaby vs. Communists) we are so scroooooooooowed.

Maybe the best idea for a flat tax is 10 to 15 percent, with a small personal deduction of maybe $500 bucks so he can have an extra night on the town, hire a "pro", buy a TV, feed himself, or whatever floats his boat. Even the poor should be paying some tax, albeit a small amount, so they will also take interest in what the government is doing.

I thought of an standard deduction of income up to the poverty level for whatever family size, but that would still exclude tens of millions from paying, I'm sure.

It's nice to see that Social Darwinism is back in fashion.

"> they don't seem to discuss problem 1.

What, of problem 1, is new to the flat tax?

If it would be a problem then, why isn't it a crisis now?"

Crid, I am not sure what you are getting at, and I don't know what is new in flat tax theory these days, but as an example, Steve Forbes once said this:

"The flat tax would be so simple, you could fill it out on a post card. A post card that would say, in effect, having a wonderful time; glad most of my money is here."

And that's true.

ONCE you have determined what is income and what is not, multiplying that number by another number is pretty easy.

But that's what the flat tax as I've heard it is. It's problem 2, determining the rate.

All the scams are in problem 1, hiding the income.

So... under a flat tax is investment income the same as wage income? Can one still depreciate your jet airplane in 5 years, or can you accelerate it to 3 years? Large businesses can deduct health care of employees from their taxes, can self-employed people deduct 100% of theirs?

What about overseas income? What about all those wonderful offshore tax havens?

If you invest in a hedge fund, your investment gains are taxed as investment income at the capital gains rate. Fine.

But the hedge fund manager, who is taking salaries and fees from the fund, his *wage* income has a special tax break and is ALSO taxed as investment income at the capital gains rate. WHY?

Measuring/hiding the income is the other half of the tax problem, and it's not clear to me that flat tax theory addresses any of that.

But in my experience, that's the hard problem to fight politically.

This will make me unpopular, but I hate seeing the rich take advantage of govt programs. The statement about family got me thinking. It is an international program. The anecdote I will cite is in France and Switzerland, but I am sure the premise holds.

I have a cousin who is very wealthy, having made a fortune being a director for a luxury brand. His 3 kids are approx. my age or a bit younger, late 20s to 30s. The 2 sons both have jobs that don't cover everything, and are on welfare and unemployment programs to cover the rest.

The rich dad brags about how well they know the system. He'd tell you he's not responsible for them, thay are adults, his money is his, not theirs, and he'd be right, but... hell, is this why the working schmos of France pay taxes? To subsidize this rich guy's kids???

international problem not program, wish there was sn edit button.

The problem with govt pensions is that this was in the contract when someone was hired, its a deferred payment. To not pay them is like buying a fancy dress on your visa, and then saying "Oh, I no longer have the money because I spent it on other stuff so I am not going to pay you."

Sure, maybe you should not have bought the fancy dress. But you did.

You can buy on sale here on out, but you gotta pay for the dress.

> I am not sure what you are getting at

How could it be more obvious?

You say that "determining and measuring income" is a difficulty under flat tax systems. Why isn't it a problem under the wickedly progressive system that we have now?

It is!

That's not in question.

Reread Amy's post, reread what Peter Rush claims about the Flat Tax.

If the measurement/income hiding issue is a real issue, HOW does a flat tax address that?

If it doesn't, how much time saving will Amy enjoy, how much more fair will this tax become?

A wage slave with no income outside of a W2 will have it easier, but even Amy, the small business person will still be trying to figure out what office expenses are deductible, which need depreciation, what she can do with her health insurance payments, etc.

And the rich enough to pay for tax attorneys, and the like will still go to them to figure out how to hide their income and the like.

Just like now.

I would love to sweep all that crap away. And if flat tax folks could address that, then sign me up!

Seriously? "Wage slave?" Gah..

I think one reason a revamped/flat tax could possibly help is that once you remove the myriad rules that currently allow ways to "hide" income, then they can no longer hide it. This means you also drop all (or most?) of the deductions as that's a primary way people offset taxable income. I'd happily give up the mortgage interest deduction (which is just about the only one I get) if my overall tax didn't go up sharply and it really was just a postcard to fill out vs spending hours each year in a tax program. Oh, and if the gov't were actually living within it's means of course.

I also like some concurrent ideas to change how some forms of income are taxed in order to make it all easier to report. The primary reason you see side-run payouts (like the mentioned hedge fund stuff) is precisely because of the insanely convoluted rules in place today with those loopholes in place due to lobbying or connections to those in power. Get rid of all that.

How about this jerry

As a wage earner you earn 80,000 gross from your employer. Your various savings accounts earn you 1200 in interest. Your investments net you 10,000 for the year

91,200 @10% = 9,120 in taxes

As an business executive you get a 200,000 salrary, performance bonus of 150,000 for the year, investments net 50,000, bank intrest on savings account is 25,000

425,00 @10% = 42,500 in taxes

As a business owner you dont pay yourself a salary for a few yrs, you pay yourself just enough to live on until your business gets going.

x Salary @10% = .1x in taxes

As a succsessful small busniess owner you pay yourself just enough to survive and buy everything you legally can thru your company.

After you sell the business for 400,000 you liquidate the companies funds of 1,500,000 and pay it to youself.

1,900,000 + xSalary = 190,000 +.1x in taxes

No corperate tax, and therefore no business deductions, no exemption, no breaks, no defferals, no bailouts.

95% of the IRS gone and the rest only working cases of small business owners wher the head of the company owns nothing and the business owns homes in 12 different countries

lujlp, I think most of that sounds great.

Do any of the flat tax schemes actually suggest that in writing?

Also, what do you do about corporate profits? Do the shareholders get taxed on them (as dividends plus mark to market of shares?) Or do corporations just become blackholes of profits? (What happens to non-public companies, what happens to companies with no dividends, ...) Does everything have to happen at liquidation!?

Not criticizing, I'm generally curious.

I would love to see the business of America stop being about how to game the system.

When you ask what the corporate tax rate would be under a flat tax you are not grasping the reality.

The effective corporate tax rate is 0.0%. Why? Because a corporation is taxed at up to 39% in the U.S. What does that corporation do with the 39% cost? It raises the cost of their goods by 39% to cover those taxes. What -- you thought companies operate at a loss? (GM and Chrysler not withstanding. They are an effect of the political system.)

Then when you buy that big screen TV at Wal-mart you have X% local sales tax. That comes out of your pocket. The 39% corporate overhead is also coming out of your pocket. But of course all the rest of that money is retained by GE America? Not all -- 30%+ is going to China or another Asian country that has laxer EPA, NLRB, and other regs. They of course overpay the actual production company for the product. Who are they buying from -- GE China -- who is a totally separate company. But some how GE America could access that money if it needed to.

Meanwhile look at your pay stub and see the Medicare, FICA, SS, Worker's Comp and all the rest of your money coming out to government programs. How much do you want to bet that if you bought the Gold-Plated AFLAC program that would cover you at work or at home, it would still be cheaper than worker's comp that only covers you at work? How about the amount going to SS. If you dumped that same amount of money into CD's for your whole life -- which do you think would give you more retirement money?

By now your eyes are probably glazed over.

The federal government being involved in benevolent programs is the worst thing the federal government could do.

Taking the responsibility away from the individual to save for retirement has left us with an unfunded/underfunded program that your grandchildren may pay off.

Also, what do you do about corporate profits?
Nothing

Do the shareholders get taxed on them (as dividends plus mark to market of shares?)
Share holders get the year net divideds taxed at the same 10% rate as everything else, when shares are sold off they pay a 10% on the net gains(assuming they have their purchase price paperwork) or 10% of the sale assuming they dont

Or do corporations just become blackholes of profits?
And what would they do with all that money? Hire people and pay salaries, buy inovations that streamline their operation, buy goods and services from other companies - all of it taxable transactions. Its not like the cash is going to sit in a bank account and never be touched

(What happens to non-public companies, what happens to companies with no dividends, ...) Does everything have to happen at liquidation!?

No, not at liquidation, at the time the money goes from the corperation into a private citizens hands.

Jim, in econ 102 you learn that depending on price elasticity, corporations *do* pay income tax. Apart from that, I am fine with corporations not paying income tax -- I wish you would address the questions I ask, instead of the ones your party tells you to put in my mouth.

lujlp, right now corporations are sitting on massive amounts of cash and profits and not investing, expanding, hiring. And this is at a time, when we might use tax money to help expand the economy in other directions, invest in science and the future, or rebuild bridges about to fall down.

I am not as optimistic as you that an economy that does not tax corporate profits until it goes into the private citizen's hands, does not indeed create blackhole corporations whose intent is to sequester profits well... forever.

What do US companies do with funds they make overseas, that, (I believe) are taxed heavily if they bring them ashore? They keep them overseas. Forever. They use the offshore funds to pay for offshore transactions.

What do US individuals with offshore bank accounts filled with funds they made with offshore wages, salaries, investments, ...? They keep them offshore and hidden.... Forever. They use the offshore funds to pay for offshore transactions.

Similarly a setup in which a company's profits are never taxed until it gets into the hands of the shareholder will just result in a million private banks.

That's a nice car. Whose is it? Oh, it's my corporations. That's a nice house. Whose is it? Oh, it's my corporations.

A lot of that happens now, but as I said, a flat tax doesn't seem to address these things.

And I doubt you could get a tax reform that does address these things passed, although I will be right next to you, once I hear the specifics.

jerry the reason alot of companies ar esitting on profits is they need a reserve for lawsuits and poor investments, also with the "finacial showdown" in washington their waiting to see what new tax laws and regulations are going to cost them to enforce.

As for the cars and houses owned by the buisiness we can keep a small remnat of the IRS to investigate corperate fraud. Also when the guy no longer works for the company the comapany isnt going to let him live in the house.

Plus while owned by the corperation the buisiness is still going to have to pay property taxes.

As for oversea ventures, the reason most companies have them is to safgaurd their pofits against taxation, once there is no tax in america businesses will flee the former tax "havens" and come back.

As for offshore investment I'll admit I hadnt got that far, but as for ex pats I'd suggest(unless they are working for the US government) that they pay only a 1/4 of teh tax rate as while they are overseas the only level of government service they rely on is the feds.

Now, I dont know if I subscribe to the idea that most people are fairminded and honerable and wouldnt cheat on their taxes if the governemtn hadnt set up the current system to fuck everyone over.

But I do beilve that a large majority of people would go along to get along if the system werent so intentionally and needlessly complicated

Very small nit: it's not ex-pats I was referring to, more like nicely situated consultants that do live in the US.

Anyway, I'm basically okay with much of what you wrote, sadly, neither of us will see it or anything like it implemented. :(

"Regardless, perhaps due to my ignorance, I am not aware of flat tax schemes that address the various measurement issues."

What the hell?

This is covered by the Fair Tax, the national sales tax.

But this requires some thinking, which is apparently unpopular.

@JOSHCROFT109 they have professional