Negative Income Tax & Flat Tax - Another Look

Many people probably have seen or heard the news that due to the current tax climate Phil Mickelson is reviewing his options and even considering a move out of state.

What is he complaining about?  He is complaining that 62-63% of his income is being taken in various forms of taxes - income, social security, disability, unemployment and more.

"If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate is 62, 63 percent," Mickelson had said. "So I've got to make some decisions on what I'm going to do."  Phil Mickelson regrets airing opinion on taxes

Some would say hey he just has to pay his fair share and if that happens to be 60% then so be it.  The guy making 15k per year could never afford to live if 60% of his salary was wiped out in combined taxes.  Those that make 20 million annually well in reality that would leave them a fair amount of money to spend.

More then I'll make in a 10 year period.  However, what incentive does this person have to continue to earn 20 million if a majority of his earning will be taken in taxes.

Even the lower wage earner is actually being hit with a fair amount of taxes.  There is the ~7.6% for social security and medicare.  Then you have to throw the unemployment and disability taxes on top of that that amount to ~6%.  That is covered by the employer but, think of what happens when your self employed which is where Phil Mickelson falls.

Yes there are caps on how much income is figured in for social security and the like but, even the low wage earners are being hit.  Everyone forgets about that.  Lower wage earners generally will get most of their federal income tax back, and also much of the state tax if it is present.  But, they do not escape taxes all together.

Something interesting happened back in November in the state of California.  We had two competing tax propositions on the ballot.  They both claimed to be upping taxes to help fund the schools that have had their budgets slashed over the last few years due to the great recession.   One proposal was going to up the income tax on the wealthy, and add a 1/4¢ to the sales tax.  This money was to help the K-12 and college systems restore some funding.

The alternate proposal claimed to be sending the money directly to the school districts and was going to increase the income tax on everyone though still heavier on the wealthy.  Which do you think passed?

The one that effect the wealthy passed while the other went down in flames with about 75% of the people voting against it.  In reality the other did not pass by all that much.  A slight majority at 55%.

Why should any one be surprised?   People always vote in their self interest.  NO one really want to pay more in income tax.  But, they did not have a problem hitting the other guy deemed to be making a high income to pay "his fair share".

All this hardly promotes people to want to go out and make a gob of money.  And sadly if you can play a tax adviser $10,000 to save 80-90k in taxes who would not do it?   But, those folks in the middle get hurt the worst in all this.   They can't afford the high cost attorney or tax consultant, so they suffer.

This is where the idea of a flat tax comes in.  You make things predicable and fair.  However, some say that the poor will end up paying taxes they may not have paid before under the current system.  It is for this that a flat exemption be provided in many peoples cases.  Much like the standard deduction.  Even Milton Friedman has an idea of a negative income tax.  It's like the flat tax though those that make little or nothing get actually get money back. Much like the earned income credit currently out there. (see the video below for an explanation)

One way or the another a simplification of the system is very much in order.  And for a flat income tax to work you need it to cover all your income.  Investment and any other.  If you earn $5 on money in the bank that has to be in the pot.  If you win some money at a casino that has to be in the pot.  If you earn 30k because you sweat day in and day out at the car wash that has to be in the pot.  If you make some money off of a rental property that has to be in the pot.  ALL INCOME HAS TO BE INCLUDED FOR THIS TO WORK.

One of the big things many get concerned about is that any change in the tax system not make the poor poorer and the rich richer and also that it maintain a more or less similar flow in tax revenue.   For it does not good in many peoples minds to lower over all tax collection by say 1 trillion when the current budget is not reduced in any meaningful way.  Spending at the Federal level has to be considered.

Now some would say that as the income tax rates are lowered and the system cleaned up you may well find more people in the pool of taxable workers and in the end you get the similar amounts of tax revenue.

But, as Friedman mentions all the way back in 1968 you have to be careful to not decentivize those on welfare from attempting to earn some money.  For some of them earning a small amount of money would reduce the welfare amount and thus the $50 or $100 would cause them to come out with less.  Granted this is 1968 money and minimum wage back in the day was $1.60 so you can see how that works out.

We have to keep these things in mind when we work to reduce peoples dependence on welfare, food stamps and the like.  They system needs to be such that we incentivize people to get out and work and not just stay at home and have more kids just to get more money.


Buaidh - NO - Bas