The "Flat Tax" Fraud

Today's New York Times:

A Bad Movie - "Plan 999 From Outer Space"

According to the latest New York Times/CBS News poll, nearly 70 percent of Americans say that Congressional Republicans’ policies favor the rich and that they oppose lowering taxes for large corporations. Two-thirds polled say that wealth should be distributed more evenly; a similar share wants to increase taxes on millionaires, not cut them. In a previous Times/CBS poll from August, a majority of Americans also wanted to use tax increases to close the deficit, rather than rely only on spending cuts.

Flying in the face of public opinion,  most of the  GOP's Clown Car of Presidential aspirants are currently pushing - in some or another variation  - so-called "flat tax" proposals that cut taxes on the rich and raise taxes on the middle-class and working poor. 

The most notable is Herman Cain's catchy "999" plan, not to be confused with the price of a pizza.  Rick Perry is also floating a flat tax proposal.  Even Mitt Romney - once a critic of flat tax proposals - is backing off and will probably do a double-Mitt 180' turn on the issue, as he's done on every other policy of consequence.  (Apparently for Romney's supporters, his floppiness has become a feature, not a flaw - holding out the hope to any "moderate" Republican voters that he doesn't really believe all of the crazy stuff he's saying to pander to the GOP's increasingly crackpot base.)

As an antidote to this flurry of GOP tax proposals, Robert Reich explains exactly why the Flat Tax falls flat.  And why we  need more progressive rates at the elite levels of upper income, not less:

The details of flat-tax proposals vary, of course. But all of them end up benefiting the rich more than the poor for one simple reason: Today’s tax code is still at least moderately progressive. The rich usually pay a higher percent of their incomes in income taxes than do the poor. A flat tax would eliminate that slight progressivity.

Nowadays most low-income households pay no federal income tax at all – a fact that sends many regressives into spasms of indignation. They conveniently ignore the fact that poor households pay a much larger share of their incomes in payroll taxes, sales taxes, and property taxes (directly, if they own their homes; indirectly, if they rent) than do people with high incomes.

Flat-taxers pretend a flat tax is good public policy, for two reasons.

First, they say, it would simplify paying taxes. Baloney. Flat-tax proposals don’t eliminate popular deductions. (I’ll be surprised if Perry’s plan eliminates the popular mortgage-interest deduction, for example.) So most tax payers would still have to fill out lots of forms.

Second, they say a flat tax is fairer than the current system because, in Cain’s words, a flat tax “treats everyone the same.”

The truth is the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).

For example, no one pays any income taxes on the first $20,000 or so of their income (the exact amount depends on whether the person is married and eligible for tax credits like the Earned Income Tax Credit of the Family Tax Credit.)

People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.

So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion peoples’ incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.

Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They’d only have to pay the 39 percent rate on $1,000 – the portion of their incomes over $250,000.
Get it? We already have a flat tax – flat within each bracket.

The real problem is the top brackets are set too low relative to where the money is. The top-most bracket starts at $375,000 a year. People with incomes higher than that pay 35 percent – again, only on that portion of their incomes exceeding $375,000.

This is absurd. It means a professional who’s making, say, $380,000 a year pays the same income-tax rate as a plutocrat pulling in $2 billion or $20 billion.

Our current flat tax at the top is treating the nation’s professional class exactly the same as it treats super-rich plutocrats. My doctor pays the same rate as Steve Forbes.

Actually, it’s worse than that because the plutocrats get most of their income in the form of capital gains, which are taxed at only 15 percent. That’s why America’s 400 richest people – who earned an average of $300 million last year, and who have more wealth than the bottom 150 million Americans put together – now pay at a 17 percent rate (according to the IRS).

The Republicans’ push for a flat tax masks what’s really going on.

Remember: The top 1 percent is now raking in over 20 percent of the nation’s total income and owns over 35 percent of the nation’s wealth. Under almost anyone’s view of fairness, these are grotesque portions. They’re especially large relative to what they were as recently as thirty years ago, when the top 1 percent raked in under 10 percent. And these huge portions at the top continue to increase.

Meanwhile, the top tax bracket is now 35 percent — the lowest it’s been in three decades. Between the end of World War II and 1980 it never fell below 70 percent.

Simple fairness requires three things: More tax brackets at the top, higher rates in each bracket, and the treatment of all sources of income (capital gains included) exactly the same.

Not only fairness demands it, but also fiscal prudence. A truly progressive tax would bring in tens of billions of dollars a year from the people at the top who are in the best position to afford it.

Regressives are pushing the flat tax as a smokescreen. They’d rather not have anyone talk about the unfairness and fiscal absurdity of the current system.

Rather than merely oppose the flat tax, sensible people should push for a truly progressive tax – starting with a top rate of 70 percent on that portion of anyone’s income exceeding $5 million, from whatever source.