Massive confusion watch: The New York Times sells you the flat tax!

SATURDAY, OCTOBER 22, 2011

Why voters know squat about taxes: On Thursday morning, we were transfixed by the New York Times’ latest editorial about the very bad people of Alabama—the very bad people who aren’t like us.

For that reason, we’ve just read Thursday’s news report by Catherine Rampell—a report in which Rampell discusses Republican “flat tax” proposals.

Why do voters know so little about taxes? Why have Republican narratives and frameworks been swallowed so widely down through the years? In our view, Rampell’s attempt to explain the “flat tax” sheds light on these seminal questions.

Let’s take this in three easy pieces. To read Rampell’s piece, just click here.

Must a “flat tax” proposal be regressive: As she starts to explain how a flat tax would work, Rampell says that adoption of a flat tax “would generally make the tax system more regressive.”

In the real world, that statement is accurate. But let’s make sure we’re clear on the way this works:
RAMPELL (10/20/11): A major result of adopting a flat tax would generally make the tax system more regressive, thereby reducing the percentage for high-income earners but increasing burden on lower-income groups.

“It’s just simple basic math,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a liberal research group. “To the extent that it is revenue neutral, a flat tax implies large tax increases on middle-class people and, mirroring that, a major tax cut on wealthy people.”
Ignore the jumbled pseudo-English in that highlighted sentence. Just for clarity’s sake, let’s frisk the claim that adopting a flat tax “would generally make the tax system more regressive.”

That’s probably true for any plan any Republican would ever propose. If a Republican proposes a revenue-neutral “flat tax” plan, it will typically raise the burden on middle-class people, lower it on high earners.

But just for clarity’s sake, a “flat tax” doesn’t have to work that way. Suppose a candidate proposed a 40 percent single tax rate, with an exemption on all income under $100,000. Presumably, that would lower the tax burden on most lower- and middle-income earners, raise it on those at the top.

No Republican would ever propose that plan. But a “flat tax” doesn’t have to be regressive by its very nature. You could propose a single-rate tax which would be highly progressive.

How many Americans "pay very little or no taxes:" As she continues, Rampell begins to discuss the overall shape of the current tax system. As she does, her writing is very unclear—and it tends to favor the talking-points of pseudo-conservative disinformation machines.

Why are so many voters so disinformed about our tax system? In part, thanks to fuzzy-math writing like this:
RAMPELL (continuing directly): For some conservatives, however, the regressive nature is actually a positive result of the flat tax system. Under current policy, the wealthiest earners are paying a higher tax rate than the poorest, with some Americans paying very little or no taxes.

That fact has angered many Americans who think they are shouldering too much of the country’s tax burden. The “99 Percent” slogan of Occupy Wall Street protests, for example, has been countered with a “53 Percent” movement, referring to the fact that 53 percent of Americans pay federal income taxes (although many more pay payroll taxes).
You can defend that passage as “technically accurate.” We think it’s very poorly crafted.

In her second paragraph, Rampell specifies that she is talking about “federal income taxes.” But as she starts, she paints a fuzzier, sweeping picture, in which the wealthiest earners are paying a higher tax rate than the poorest, “with some Americans paying very little or no taxes.”

That is a very murky portrait. It echoes right-wing claims which are designed to make people think, incorrectly, that higher earners and middle-class earners are being hugely ripped off.

Is it true that “some Americans pay very little or no taxes?” Actually yes, it is. Six-month-old babies don’t pay any taxes, to cite one striking example. But even second-graders have started to pay taxes in the form of state and local sales taxes. And if we look at the overall American tax system, the overall system is much less progressive than one might suppose or have heard. That is to say, if we factor in all taxes, including state and local taxes, the overall burden on high earners doesn’t differ by a huge amount from the burden on those in the middle.

Most American voters don’t know such things. We can think of two major reasons:

First, journalists like Rampell write fuzzy-math crap like this. Second, the liberal world has never really tried to explain these matters to the public. If you have a conservative or centrist friend who doesn’t understand the overall tax burden, would you know where to send your friend to see these matters explained?

Of course you wouldn’t! That location pretty much doesn’t exist. And to the extent that such data exist, you don’t know where to find them. In recent decades, plutocrat disinformation has been constant—and we liberals have slept in the woods, enjoying our nearly-wet dreams about how much smarter we are.

Does a “flat tax” make things simpler: Over the past several decades, several basic scams have driven the pseudo-conservative “flat tax” movement. As she continues, Rampell swallows one basic scam whole.

A “flat tax” would make the tax system simpler, Rampell parrots:
RAMPELL (continuing directly): The effects of these various proposals aside, replacing today’s labyrinthine tax system with a flat tax does have the virtue of simplicity. Americans would spend less time, and endure fewer headaches, figuring out how much they owe the government.

“Simplicity is good, but that’s not all you want,” said Roberton Williams, a senior fellow at the Tax Policy Center. “If all you want is simplicity, you could just tax everybody $10,000. That would be easy and simple. But most people wouldn’t think that’s fair.”
Would a “flat tax” make things simpler? Would Americans “spend less time, and endure fewer headaches, figuring out how much they owe?” This is one of the basic claims at the heart of the flat tax movement.

At its heart, this claim is a con. Rampell doesn’t seem to know.

Our federal tax code is of course extremely complex. It runs to truckloads of pages. But as anyone but a Times economics reporter can grasp, this complexity isn’t mainly caused by the fact that the tax code employs six different income tax rates. (At present, this ranges from a 10 percent tax rate on taxable income below $8500 to a 35 percent rate on taxable income above $379,151.)

Some complexity is created by the use of multiple tax rates, of course. But the application of those rates can be shown in a single chart! And duh. Once a tax-payer knows his taxable income, he can simply look at another chart to see how much he owes. He doesn’t have to do the multi-part computation himself. For the most part, Americans don’t “endure headaches figuring out how much they owe the government” because of those six different tax rates.

The real complexity in the tax code doesn’t come from the multiple rates. The real complexity comes from the endless deductions and exemptions which define the taxpayer’s taxable income. In itself, switching to a single tax rate wouldn’t affect that vast complexity. The complexity lies in the endless deductions, not in the multiple rates.

Plutocrats pimping the “flat tax” idea have always encouraged this point of confusion. Rampell swallows it whole in this passage, encouraging the bogus idea that a “flat tax” proposal automatically eliminates the tax code’s vast complexity.

In conclusion:

Why do voters understand our tax system so poorly? Over the past three or four decades, three players have been involved here:

Pseudo-conservative think tanks have run powerful disinformation machines, creating massive confusion. In response, liberals have tended to sleep in the woods, offering little attempt at clarification. We tell the public they’re slobbering racists. After that, we rest.

The third player here is the national press corps. Rampell is an economics writer for our biggest “liberal” newspaper.

Must we tell you more?

For connoisseurs of confusion only: Rampell’s murky writing continues as she discusses Steve Forbes. If you’re a connoisseur of murk and confusion, go ahead—keep reading. Enjoy.

14 comments:

  1. I have often argued that there should be a law of economics to the effect and explaining why the tax code always gets more complicated. The reason is obvious and simple; complications reduce your taxes, and it's always easier to reduce taxes than raise them. I propose a simple thought experiment. Next time you do your income tax, measure the amount of time you spend on things that save you tax dollars, as opposed to things that cost you tax dollars. What I think you will find is that the bulk of the time you spend doing taxes results from things like tracking down receipts, calculating tax bases, figuring out deductions, all things that save you money. The most expensive thing you do when you prepare taxes, is the thing that's simplest, and quickest, transfer your income amount from your W-2 to your 1040.

    People say they want tax simplification, but what they really want, even what a wild-eyed liberal such as myself wants, is to pay less in taxes.

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  2. Justifying a flat tax on the basis of simplicity doesn’t wash. Allowances have to be made for human capital earnings V investment earnings, current consumption v future consumption, inheritance taxes, foreign earnings v domestic earnings, foreign investment v domestic investment, etc.
    The graduated flat tax is not innately simpler, and could allow for just as much income inequality as the current system. Entire volumes have been written about the potential variations and complexity of the flat tax.
    Throwing out the current tax code and implementing a new one will not throw the tax accountants and tax lawyers out of work. On the contrary, it will give them a windfall of new business. Rest assured the rich will have a hand in drafting any new tax code.
    As soon as you change laws that prevent the rich from getting richer and the expense of the poor, the rich will start changing them back. Constant vigilance is the answer, not simplification, and our media are not vigilant.
    We need to spend less time watching football and baseball games, and more time watching our elected officials.
    Meanwhile, back at the ranch, the leaders of the Arizona Legislature are recalling lawmakers for an emergency session to review and make recommendations to the independent redistricting committee. I can’t imagine why. Gotta go.

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  3. Nice clear explanation, Bob.

    I would add that the phrase "more regressive" is spin. It can fool people into thinking that a flat tax is regressive. A flat tax with a fixed exclusion is a progressive tax structure, because higher incomes pay larger percentages of income. The various Republican proposals are properly described as "less progressive" than the current scale. Calling a progressive tax structure "more regressive" is like calling the number 3 "more negative" than the number 4.

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  4. a couple of things:

    1. the various versions of the flat tax that have been proposed are all regressive, since none of them contained a floor income.

    2. as i understood steve forbes' version, taxes start at dollar one, and there are no exemptions, duductions, preferences, etc., simply a flat rate on your gross income, in total. with that as the definition, preparing your tax return does become simple: what's your gross income? multiply it by this. this is your tax liability.

    poor and middle-class get shafted, wealthy people make out like the proverbial fat rat. you make the unsupported assumption that all of the current Internal Revenue Code remains the same, except for the tax rate schedule. granted, ms. rampell was less than clear on that, but that's been part of the basis of the whole "a flat tax will simplify everything" mantra.

    3. one item not mentioned, by ms. rampell or yourself: the federal government has no control over state tax law. my guess is that va (and every other state) is still going to be levying state taxes, of varying kinds. so add those to the flat federal rate. the wealthy will still make out, because they spend less, as a % of their gross income, on goods/services subject to sales/use taxes, than the poor to middle-class do. that would go for a federal sales tax as well.

    the bottom line: anytime a republican proposes changes to the federal tax code, you can rightly assume it won't benefit you, unless you're wealthy.

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  5. the various versions of the flat tax that have been proposed are all regressive, since none of them contained a floor income.

    The flat tax proposals I have seen generally include a tax break of some sort for low income earners. It would be hard to take the proposal seriously, to the extent that we do, if it didn't. We can't ask poor people to pay a 30% tax on food, for example.

    Whether or not, a flat tax is regressive can be really complicated issue. It depends on to whom the burden is imposed. Does the purchaser end up paying the entire? Or is the merchant required to lower his prices to meet demand, thereby absorbing some or all of the tax? Do we apply the tax to the sale of financial assets like stocks or bonds? It seems to be assumed that we won't, but I don't know why we couldn't. That would certainly redistribute the tax burden.

    Taxes are complicated, and by no means is it the case that all the complications are in the Tax Code.

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  6. Just read Friedman's Sunday column. What a breathless, clueless weenie. I'd call him a shill for any CEO that's willing to take him out lunch, but I can't prove that. So, I'll just call him a hack. Can you see his new, breathless, thigh-rubbing new book and its cloyingly insipid title: "Head in the Cloud" ??

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  7. I'm "liberal". Or "progressive". Or whatever.

    I run a small business. I make less than $100,000 per year. Could the left suggest a fix to the tax code so that I don't have to pay $2,500 a year to an accountant?

    I tried doing it on my own...until I got audited.

    Thanks!!!

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  8. cpinva, as I recall, all the Republican flat tax proposals included a floor income. They are more proporly called "Marginal Flat Tax" plans. Wikipedia says:

    Marginal flat tax
    When deductions are allowed a 'flat tax' is a progressive tax with the special characteristic that above the maximum deduction, the rate on all further income is constant. Thus it is said to be marginally flat above that point.


    IIRC all the proposals have included a floor income. E.g., in 2005 Senator Sam Brownback, proposed for Washington, D.C one flat rate of 15% on all earned income with an exemption of $30,000 per family and $25,000 for singles. In 1996 Steve Forbes supported a flat tax of 17%, keeping the first $33,000 of income exempt.

    As you correctly note, a flat tax with an exemption at the bottom would help the very rich. However, it would also help the lower middle class (assuming no other changes.) Under the Forbes proposal, anyone earning less than $33,000 would pay zero income tax instead of a fairly small income tax. And, there would be a range above #33,000 where the Forbes Plan would impose tax, but less than under current law.

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  9. It's also interesting that there's all this focus on federal income tax completely out of the context of other taxes. Why don't these papers ever publish information on the average percent of income that goes to all taxes at all levels? It would be more enlightening. For example, I doubt people would celebrate a $2000 cut in their federal income tax if it were accompanied by a $3000 increase in their federal payroll tax.

    Also I think we don't really know how to talk about taxes correctly on the left. The idea is that people earn, through the sheer up-standing nature of their hard work, paper money. The conversation forgets that it's the federal government that prints the money in order to allow us to have a complex, moneyed economy, but money itself isn't worth the paper it's printed on without the backing of the federal government.

    In other words, the only way we can make $30,000 a year is because the dollar was fiated into existence and then backed by the federal government. That's why it gets on my nerves when I hear people say, "The government is confiscating MYYYYYYYY money," when in fact the dollars have the government's, not your, name printed on it, were created by the government, and no one would care about these sheets of paper if it weren't for the federal government. The federal government doesn't even need to tax people as it could just print more money, but that would cause lots of inflation so taxation basically keeps money's value stable.

    That's not to say that we shouldn't question what the government does with money. It's just that maybe it would be valuable to get people to stop thinking of money as an end in itself and instead to start thinking in terms of real wealth again, to start asking questions like "how is it fair that a small group of people get mega-huge yachts while I can't pay my doctor's bills?"

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  10. Loren Steffy, the business writer for the Houston Chronicle made these same points on 10/23. He especially points out the complexity issue. I'd never seen that discussed before.

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  11. Re: The complications of deductions. Only about 25-30% of taxpayers itemize deductions on their income tax returns, and they are in the upper branches. For most people, their income taxes are not complicated at all. Yet we have this media created image of people sweating over their returns up until the last minute.
    Taxes are only complicated because the more money you make, the more deductions you want. And if you have enough money, you can get those deductions written into the code.

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  12. Yes, the simplicity claim of the flat tax is a lie and a ruse and needs to be exposed. What I also want to see explained is what it *is* important to have multiple tax brackets; I want it explained that not every income dollar is created equal. Secondly, I want it explained why we want to discourage outrageous incomes and marginal consumption that it produces. Finally, I want it explained why having low marginal tax rates encourages profit taking at the expense of business investment. Does anyone ever wonder if those executive salaries might be better spent investing into the business.

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  13. "what it *is* important" should say "why it *is* important"...

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