Flat Taxes: Not as Fair as They Sound

There’s been a lot of talk on both sides of the aisle about fair taxes of late. While many on the right want to reduce taxes, as always, some few have proposed other systems. Both sides have made mentions of a flat tax. While some on the left have made mention of increasing taxes for the wealthy. But just what would produce a fair taxation system? Some would argue, and I use to do so, that a simple flat percentage tax across the board would work. Others say an elimination of income tax, replacing it with just a standard sales tax would be more fair. I argue that neither are fair at all, and both place more of a burden on the poor than on the wealthy than they appear to at first glance. Let’s examine them, and see why.

Let’s examine the flat income tax first. To do this, let’s look at some simple mathematics. Let’s start by assuming a low flat income tax of 20%. We’ll look at three different incomes: an individual who makes $1160 per month (40 hours at the current minimum wage, which comes to $13,920 per year), another who makes $4000 per month ($48,000), and the last who makes $50,000 per month ($600,000 per year). If they all paid a flat income tax of 20%, we’d see the first individual paying $232 per month in taxes, with only $928 to pay all bills and live on. This is barely enough to just pay rent at the HUD set one-bedroom FMR, which is $783 per month. That would leave this individual with only $145 per month. But let’s assume they’re able to find a room for let for only $300 per month. That still leaves them only $628 per month for bills, food, and other expenses. Now let’s say utilities, including phone bill, come to $200 per month. They’re down to $428. Food, let’s limit them to $200 per month (which is also the maximum EBT allowance for one person). That knocks them down to $228 for expenses. Transportation to and from work, let’s say costs them only $100 per month. Now they’re down to $128. Any other expenses whatsoever, be it clothing, cleaning supplies, whatever, and they’re basically down to nothing. So this individual is working a full time job, and will be barely scraping by every month. If anything they own breaks, tough, they can’t replace it. They don’t even own a car, because there’s really nowhere for it in that budget.

The person with the slightly higher salary is going to be shelling out $800 per month in taxes, leaving them $3200. Let’s bump their rent to $1500, utilities to $500, food to $500, and transportation to $500 to allow for car insurance and maintenance. They live in a much nice place, eat significantly better, and have their own car. They also have $200 a month for other expenses. Not much, but they’re definitely doing better.

Finally, the rich person. That 20% tax comes to $1000. Let’s give them an exorbitant rent/mortgage of $10k, $1k in utilities, $1k in food, $1k for transportation (they have a REALLY nice car). Their house is a mansion, they live VERY comfortably, eat well, and have $36,000 per month for other expenses and luxuries. That tax really didn’t impact them AT ALL, while the poor individual and the middle class individual are both living paycheck to paycheck. They don’t have to worry if they can replace anything that breaks or wears down, don’t have to worry about emergency expenses, and can pretty much entertain themselves however they like.

Just from that short analysis, it’s pretty easy to see that a flat income tax really isn’t all that just. For it to be low enough that the poor and middle class can still survive, the rich won’t be effected by it at all – even though it’s the same percentage of their incomes, the expenses just don’t scale the same, so the person with a bigger income will simply have more left over, enough so that they just don’t notice the tax (unless they’re just plain greedy).

There’s another flaw in the flat income tax. Many who propose it also want to do away with capital gains and inheritance taxes. Which leaves the wealthy a HUGE loophole. Below certain levels in the corporate structure, compensation will pretty much always be in the form of an hourly or annual salary. In other words, income. But above a certain level, many executives will take their compensation in the form of stocks and bonds. Investments which return dividends classified as capital gains rather than income. Which means that if capital gains taxes are eliminated in favor of a flat income tax, many wealthy people will be paying NO TAX AT ALL (nevermind that many already are due to other existing loopholes).

Let’s look at elimination of the income tax and replacing it with a sales tax. Okay, so that poor guy gets $232 back, the middle guy $800, and the rich guy $1000. Let’s set the sales tax to a low 10% (it would have to be higher than that if it were to replace an income tax). So, given the same food budget, the poor individual is now paying $20 per month in tax. Let’s say they spend all of $320 they have left for expenses (the previous $128 plus the $232 back minus the $20 from food tax), which would mean $32 of it would be tax. So, if utilities were included (meaning they’d pay $20 there) they only paid $72 in taxes. They’re better off than under the flat tax, but how much of their income was tax? A little division, and we see that’s 6.05% of their income.

The middle person will have paid $50 from utilities tax, and $50 from food tax. But with that $800 back, they had $1k for monthly expenses, so I’ll make the assumption here that they’re putting $500 away per month for savings, and spending $500 on various things, so that’s another $50 in tax, bringing them to a monthly tax of $150, which comes to 3.75% of their income.

Finally, the rich person: Utilities and food tax comes to $200 for them. But they also have $37,000 per month for their spending money. I’m going to say they spend a whopping $10,000 of that, so their tax there is $1,000, included in the $10k (and leaving them $27,000 for investments and savings). The percentage of their income they’ve paid in tax, even spending more per month on non-necessities as the other two individuals make put together? 2.4 percent – less than either of the other individuals! In fact, for them to pay as large a percentage of their income in sales tax as the poor person does, they’d have to spend $30,250 per month, which would still leave them $6,750 for savings and investments.

The flat sales tax proposal is atrocious, and very clearly places the disproportionate burden of tax on the poor person. In reality, were we to rely solely on sales tax for governmental income, we would have to jack it up to 20-30%, which means the poor person would be paying even more of their income towards taxes (again, it doesn’t scale – they’d also be getting less for what they spent, meaning they might not even be able to get by – 30% of that $760 that was affected by sales tax would be $228, or 19.1% of their income, which would mean they’d actually only get about $128 out of their spending money), and the rich person wouldn’t have to spend all that much more to be paying the same proportion of their income in sales tax – $31,833 per month, still leaving them quite a significant amount for savings and investments. The poor person stays hopelessly poor, and the rich person still has the opportunity to easily become wealthier. To really put that in perspective – they rich person would essentially be able to buy a new car every month, and would need to do so, in order to pay an equivalent amount in sales tax.

So, no, flat taxes are not even remotely fair as a method of taxation. They leave the poor people with no room to breathe, and the rich as essentially unaffected. The only fair tax is one that scales with income – lower percentages for those that have less wiggle room in their monthly budget to begin, and higher for those who can afford to do without significant portions of their money and not even notice it, were they not so greedy that they feel they must have more, more, more. Honestly, how the heck does one even spend $30k in one month? Or more? Why the hell would one even need that much money? Simply: they don’t. It’s just their greed that makes them think they do.

But if flat taxes aren't in our best interest, why are so many convinced they are, and why is there a push for them by so many right now? Well, the wealthy don't get that way by being generous. So many of them are spending a lot of money so that they can keep as much as their wealth as they can. This means media misinformation campaigns to convince the general populous that tax systems which effectively allow the rich to pay less are in the peoples' best interest. They aren't. Don't fall for it. It's time we not just ask them to pay their fair share, but that we ensure they do so.