It was Benjamin Franklin who famously wrote, “In this world, there is nothing certain except death and taxes.” He wrote that in 1789, when our federal government was brand new. Ever since then, in every political year candidates seem to mull over Franklin’s wisdom and try to assuage the inevitability of one or the other – usually focusing on taxes. For federal office seekers, the target is most often the federal income tax.
As part of my “Quantitative Reasoning” course at Augusta University, I teach students the fundamentals of the federal income tax system, and walk them through the path that starts with Gross Income and ends with Taxable Income, with small detours covering exemptions and deductions. Most students are familiar with the “standard deduction” and, figuring that for many of them the need to use the other alternative – itemized deductions – is well into their future, I don’t dwell on that. We do spend a considerable part of a lesson, though, talking about the next step: going from Taxable Income to Tax Liability. Tax Liability is the amount of taxes you actually pay; in a political year, that’s where most politicians focus as well. I’ll limit my discussion here as I do in class: with single taxpayers with an uncomplicated tax situation. For married taxpayers, one just ramps the figures up proportionally.
The 2015 tax tables aren’t out yet, so we use the 2014 tables in class. They show that there are presently seven tax brackets, starting with 10% for those whose Taxable Income (that is, after subtracting their standard deduction and exemptions) is $9,075 or less, and going up to a 39.6% bracket for more wealthy taxpayers – but emphasizing that every bracket above that 10% only applies to that portion of a taxpayer’s income above a certain level. The 39.6% bracket, for example, only applies to that portion of income above $406,751 – an amount unimaginably high for my students. Virtually all of them who work, even those who work full-time while going to school – rarely exceed the $36,900 level; for them, the top rate is 15%, and only for their income (if any) over $9075.
A “flat tax” sounds nice, but what would that do? I heard at the last Republican debate a proposal that would just tax everybody at that 15% rate – a “flat” rate. All of your income, not just that portion of Taxable Income that exceeds $9075 but essentially all of it, would be subject to the flat rate. If government spending stays the same (another very complicated issue – and worth an entire column on its own) then every dollar tax reduction to one person must be made up by a tax increase to another. Doing the math to decide what flat rate would be needed is something not widely advertised, but it would likely be around 22%, not 15%. So who would pay less under such a flat tax? The answer is pretty easy to figure: those whose current tax bill is higher than 22% of their entire Taxable Income. So who would pay more under that flat rate? That answer is pretty easy, too: everybody else.
Taxes are complicated, or else there wouldn’t be a need for CPA’s doing your taxes, or for H&R Block, or even for TurboTax. But the concept is pretty straightforward. Rich people pay a higher portion of their income than do others, and the richer they are, the higher that portion. Changing that would have very predictable results. The next time you hear a politician talking about what she or he would do to “simplify” our tax system, make sure you ask the question I wish had been asked at that debate: under your flat tax plan, who would pay less of their income to the federal government than they do now, and who would pay more?