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Argument: Flat tax with exemptions has progressive effects on poor

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Supporting quotations

"Class warfare and the progressive income tax". Wirkman Netizen. 28 Oct. 2008 - "you say, a flat tax is not a progressive tax! And there you would be wrong. A flat tax with one exception — the personal exemptions for the taxpaying individual, spouse, and dependents — amounts to a de facto progressive tax. Say I clear a mere $20,000 per year, and my friend makes ten grand less, the personal exemption is set at $9,000, and the flat tax is ten percent."

[...]You see that the flat tax, as normally construed, is actually a progressive-rate income tax. But it has one big difference from the current progressive tax: The rate of progressivity can only be influenced by the exemption, not by the arbitrary fiddling with the rates at income levels. It is progressive at a simple predictable mathematical rate.[...]It is, surely, the most Congress can be trusted with. Politicians’ only control would be over the exemption.[...]The trouble with this is that it does encourage class warfare, of the poor against everybody else. And this may be too much. It would surely be an impediment to any potential abolition of the tax.[...]That is why my mother supported the flat tax without any exemptions. Interestingly, I have heard Libertarian Presidential Candidate Bob Barr take the same tack. Everybody should pay at the same rate."

Edwin R. A. Seligman. "Progressive taxation in theory and practice". American Economic Association. 1894 - This may come as a surprise: I am in favor of a progressive tax. Now, before you burn me at the stake or rush to the mailbox to mail me my Communist membership packet, allow me to explain.

I support the FairTax bill, which would eliminate payroll and income taxes, and replace them with a flat rate national sales tax (about 23% inclusive). “But wait!” you say. “How is it progressive if it is flat?” Well, it is only applied to what you spend above and beyond the basic necessities of life. So if you are very poor and can only afford the basics, you pay no taxes. How it works is that at the beginning of each month, the head of each household will receive a “prebate” check “preimbursing” him or her for the estimated amount of tax dollars they would pay on the basic necessities of life for their household. If you only spend what you need to get by, your tax amount will equal your prebate amount and you will pay no net taxes. Now, as you start to look at people who spend more and more of their discretionary income on non-essentials, their total inclusive tax rate starts at zero, and starts to slowly increase, the more they buy. The more you buy, beyond the basic necessities of life, the greater the effective sales tax you pay up to a maximum percentage of the actual sales tax (if you want to get picky, there is essentially a horizontal asymptote on the graph which is at the set tax rate, so you’ll just get really really close to it if you spend a lot… say 22.99999%).

"Flat Tax: What Would It Do For Ireland?". Business and Finance Magazine. 5 May 2005 - Misplaced Notion Of Progressivity

Despite the overwhelming evidence of the benefits of flat rate taxation, an ages-old myth tarnishes the idea - this is the argument of "progressivity". This myth suggests that since flat rate taxation removes marginally progressive tax rates, the benefits of such reforms will disproportionately fall on to the rich, increasing relative income inequality. The leading "egalitarians" of this world, for example German Chancellor Gerhard Schroeder and Sweden's Prime Minister Goran Persson subscribe to this idea.

Yet, this myth is easy to disprove. As long as progressivity refers to the situation whereby the rich pay a greater share of their income in taxes than the poor and the middle class, flat rate tax - coupled with a basic zero-tax deduction - achieves exactly that. The figure below shows the average tax rates paid by each income group under various scenarios. Scenario one: 25% flat tax rate, Eur20,000 standard personal deduction; scenario two: 25% tax rate and Eur30,000 standard deduction; and Scenario three: 20% tax rate and Eur20,000 standard deduction. We compare these three scenarios with the status quo (as defined in the Budget 2005) where the standard deduction is Eur2,850, the first marginal tax rate of 20% applies on all income up to Eur30,000 and the second marginal tax rate is 42%.

We truncate the payable tax schedule at Eur100,000 so as to reflect the actual distribution of taxes under the current system with exemptions and tax incentives. In addition, we adjust the tax rates for average deductions claimed by relative income groups.

As shown in the figures below, the status quo places the main burden of taxation on the individual earners with income between Eur30,000 and Eur60,000. Under all three alternative flat tax scenarios, the greatest marginal gain for each extra euro earned in new income accrues to the individuals with income between Eur15,000 and Eur50,000, while leaving the low income individuals (earning less than Eur20,000 to Eur25,000) with zero tax liability. In fact, the most dramatic reduction in the taxation burden for the poor and the middle-class occurs when the standard deduction rises to Eur30,000, i.e. under the scenario two.

This is precisely the effect of progressivity that should be supported by the social justice advocates having the poor at the centre of their agenda. Even before factoring in the effects of growth, savings and higher personal investments in human capital expected under the flat tax, the poor and the middle class stand to gain proportionately more than the rich.

"How a Flat Tax Can Be Middle-Class Friendly". 18 July 1995 - A properly structured flat tax system -- embodying one rate for all types of income, eliminates complexity and loopholes, and removes the burden of a second bite of taxation from savings and investments -- represents the fairest kind of tax system for all Americans, particularly lower- and middle-class Americans.

Two flat-tax proposals are before Congress: Dick Armey's in the House and my own Senate bill, S.488. Your suggestion that the progressive tax rates in Mr. Gephardt's bill "stand in bold contrast to the flat-tax plan" of Mr. Armey is wrong. The claim of bias toward the wealthy is even less true applied to my proposal, which uses capped deductions for home mortgages (interest on up to $100,000 of borrowing) and charitable giving ($2,500) for a rate structure that is middle-class friendly.

Because the Armey proposal and my own bill retain large personal-income exemptions, they provide for progressive effective tax rates. Because both do away with the loopholes, credits and deductions that allow more than half of all personal income in the United States to escape taxation, the established rates will apply equally to all taxpayers.

The Armey proposal uses a 17 percent rate and, for a family of four, exempts the first $36,800 of income. The resulting effective rates are progressive: a family earning $50,000 pays 4.5 percent; one earning $100,000, nearly 11 percent, and one earning $200,000, 14 percent.

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