Brad, I warn you that this will be long. At the end of the post, I’ll give you an idea of my ‘end game’, having gone through what I think is a reasonable proposal for the balance of taxation.
But first of all, let me outline what I see as the intent in overall taxation policy, as I’ve outlined before but perhaps in more detail. It is to extract from the national economy the costs to the State of operating the government, in a way that causes least harm to the overall economy and to the people as a whole but does not leave a deficit problem. Additionally, you can then apply some parameters such as using taxation to ‘nudge’ behaviours or link activity to the costs arising (such as higher duties on tobacco or alcohol, or reduced/zero taxation on healthy foods). But I would always maintain that the key point is that taxation should be based on the ability to pay for it. When it comes to ‘redistribution’, I would argue that this is more about the spending policies than the taxation, or from other taxes than income (which I shall come to).
So, when you originally outlined what you called a ‘flat tax’, but which was a series of incremental bands, what you were actually outlining was a system that is simpler than the current US one, with the same underlying principles, but just flatter and lower. My preference would be to have a simpler system than the US one as well, but probably not lower, and certainly not as flat.
What’s more, if I’m going to outline my taxation ideas, it’s not just payroll taxes that I’d be concerned about, but the whole range of taxes (and not being an Americans with sensitivity about the Constitution, I shall ignore the difference between Local, State and Federal taxes but I recognise that this may not work will with my ideas).
So, Income Tax and Social Security. Basically, I think it makes some sense to keep these as separate items, but to make them as consistent with each other as possible. Basically, people who are retired or otherwise getting exemption from Social Security would pay slightly lower rates than these if liable. To start with, a tax-free allowance on all income below a defined ‘subsistence’ level should apply. I’m not sure what that would be in the USA but $12,500 per person sounds like a minimum wage rate. So, if
everyone pays zero tax on the first $12,000 I think that’s fair. The initial rate I would argue should be low, so as not to unduly discourage people out of work or on low incomes from moving upwards. So a low rate of about 10-15% on the next few thousand a year would mean that people are starting to contribute but work still pays. I would then argue for a pretty broad standard rate, of about 20-25% on the next set of income. Now, checking the 2008 data, it looks like the 30th percentile level was just under $17,500. So it’s probably just over that today. I’d set the upper bound at the 90th quintile so over half of adults are paying the standard rate. Above that level, I’d then go for higher rates of 30-40% to cover most of the top 10% of earners, and 40-50% which would only affect about the top 1 or 2%.
So, as an example: each person, income up to $12,500 tax free, then 10% on the next $5,000, then 20% on everything between $17,501 and $80,000. Then 33.3% on everything between $80,000 and about $200,000 with 40% for income over that.
Pigsy’s Janitor would pay 10% of his income, and his millionaire resident would pay about 37.5% (but is pretty unusual). Someone on about $100,000 (still in the top 10% of earners) would pay under 20%
Note – I’m using numbers that are a bit about the same as UK income tax alone, out of recognition of the US sensibilities about tax. They are probably still shockingly high to some. My data is from
http://en.wikipedia.org/wiki/Personal_i ... ted_States and includes all Americans over 15 in 2008, so include some minors and all retirees who would have lower income than working-age people.
Now, I agree with you that there needs to be a big cull of allowances and deductibles and loopholes, which those on higher incomes are more likely to be able to exploit.