Tuesday, October 25, 2011

The Flat Tax and the Loophole Manufacturing Industry

Republican Presidential candidate Rick Perry is releasing his economic plan today, which includes the option of a 20% voluntary flat tax.

Perry is another Texas idiot who is simply not qualified to be President. He is one of the worst of the contenders.

However, this does not mean that a flat tax would be a bad idea.

Personally, I would like this option. At tax time, I choose the simplest option available. My goal is to minimize the time I spend filling out taxes. A 20% flat tax would make it easy. I may pay more, but the higher amount will be more than made up for in time saved and reduced stress.

This points to way in which our current hyper-complex tax code is actually built by the rich for the rich.

These deductions that they write into the code are substantially available only to somebody with the resources to hunt them down and take advantage of them, and for whom it would be profitable to do so. Those of us who do not have a tax consultant staff are likely missing opportunities every year to take deductions we qualify for. We are also losing out on opportunities to do things in such a way that we can qualify for those deductions. The vast majority of us simply do not know all of the tax implications of the options we have each year.

A second way in which the hyper-complex tax code serves the rich can be found by asking, "How did those deductions get written into the tax code anyway?"

They were put there by people who had the resources to lobby politicians for the deductions - special interest groups. These are the activities that go on behind the scenes and beneath the radar of regular voters like you and me. We don't notice them - but the special interest group with the campaign contributions and other resources the candidate might draw on sure know about them.

From the point of view of the special interest group, loophole purchasing is just another business investment. For example, they invest, say, $5 million in lobbyists, public relations, and campaign contributions to manufacture a new tax loophole that, according to the accountants, has a $50 million payoff. That is an excellent investment opportunity – a company or organization would be foolish to pass it up.

However, you and I do not have the resources to invest in loophole manufacturing. So, the loopholes tend, by and large, to serve the interests of those who can afford to have them built.

A third expense comes from the opportunities lost when companies invest in the manufacture of legal loopholes rather than productive goods and services. The $5 million that my hypothetical special interest group invested in loophole manufacturing above could have invested that money someplace else – product development, updating infrastructure, employee education.

We waste untold billions of potential research and development dollars every year in the loophole manufacturing industry. If we closed that industry down, we would free all of that economic potential to pursue other, more productive options.

Furthermore, the loophole manufacturing industry corrupts our political system. A lot of loophole manufacturing involves simply buying and selling political favors. The loophole manufacturer (politician, regulator) sells his product to the highest bidder, who pays for it by providing the manufacturer with something of value in return. Our political system would be a lot cleaner if the loophole manufacturing industry did not exist.

A fourth cost is found in all of the costs associated with filling our taxes and trying to figure out in advance what it is that we owe - and what options exist for minimizing those costs. These resources, like the resources spent in loophole manufacturing itself, could have gone into something a lot more productive or enjoyable - something that actually had value to the agent rather than handing around (or trying to prevent the handing around) the wealth already created.

One problem is that, a simple flat tax would benefit the rich at the expense of the middle class and working poor. However, this problem is easily fixed. Let households deduct the first $40,000 or so. This would take us toward the principle that the first dollars for public welfare be the dollars that fulfill the fewest and weakest desires. Include interest income and capital gains as income.

That would be it.

(1) How much money did you make last year?

(2) Subtract $40,000 from line (1).

(3) Multiply (2) by 0.2.

(4) How much was withheld from your paycheck last year?

(5) Subtract (4) from (3)

(6) If (5) is a positive number, send in that amount. If (5) is a negative number, you qualify for a refund of that amount.

Sign and date here:

Period

End of story.

15 comments:

Peter Hurford said...

Does line (6) mean the government is gauranteeing everyone an income of $40,000 regardless of what they do? Do you find that desirable/moral/fair?

Rob said...

He states: "Let households deduct the first $40,000 or so"

I'm pretty sure he means the first $40 of income wouldn't be taxed.

Kristopher said...

line 2 should have a caveat about not allowing negative numbers.
otherwise the government would give me a thousand dollars just becuase i make less than 40k a year (i ran the numbers using 35k as an example). plus whatever they deducted throughout the year. and if the person had no income they would recieve 8 thousand dollars a year. unless you meant to do that i would only allow positive integers at step 2

@ peter nowhere does it say that
@ rob yeah i think thats what he means too, that only people making over 40k a year would pay income tax

i think what you want is called a marginal flat tax

Alonzo Fyfe said...

Okay, if you insist.

(3) If (2) is greater than 0, then multiply (2) by 0.2.

mmissinglink said...

Why not just a true flat tax on all earnings and income? No loopholes and no deductions for the privileged and wealthiest tax payers. It is impossible for me to imagine that the use of a true flat tax wouldn't lower the tax burden on the middle class and working poor - not to mention the cost savings of the tax payer in the elimination of 99% of the costs associated with writing, printing, distributing, checking, enforcing, etc, etc, etc the current tax code system and its outrageous mountain of forms and documents.

Wouldn't a true flat tax On all earnings and income level the playing field for all tax payers so that the middle class isn't burdened with a disproportionate amount as we are currently?

anton kozlik said...

What is not considered as this debate continues is that those who manufacture or take advantage of loopholes, DO SO BEFORE THE FACT. They style and plan their lives and make decisions accordingly. The lower middle class and lower class do not -- can not -- plan their lives according to their tax implications. And, of course, they do not enjoy an identical scope.

In attempts to counsel these people on how they too could take advantage of some of the loopholes I constantly ran into the "fear factor" as they didn't believe they qualifed for the "deductions" and preferred to "pay the tax rather than go to jail!" I eventually gave up.

Anonymous said...

I like your flat tax, It sounds fair to low income and easy enough to avoid hiring a CPA for another expense. A couple years ago I ran into a tax situation and tried to figure out what I owed. I kept being referred to a publication so I went to the IRS office for a copy. I was told they didn't issue a copy of that publication so I wrote my senator. He sent me a copy which was so large it was box sized and so complicated I couldn't understand it once I had it. There is no way anyone can accurately and honestly fill out a tax return today. We need to get back to basics. The complicated tax codes of today are for the very rich who can afford tax experts to do their taxes.

Ryan said...

Alonzo,

If a $5 million investment in lobbying has a $50 million payoff, the company now has much more money to invest in "product development, updating infrastructure, employee education." The question then becomes: will the company use the new money for that purpose?

Alonzo Fyfe said...

No. They have $50 million to invest on the same type of activity that got them the first $50 million - political manipulation.

Kristopher said...

my understanding of flat tax is that it means 2 things

1. everyone pays the same percentage

2. there are no other rules or deductions (besides that the first 40k doesn't count)

when speaking of a flat tax people love it only for reason beneifits of number 2. but that doesn't adress the issue of whether we should have a graduated tax system with no possible deductions (2 without 1).

furthermore deductions are a more flexible way to regulate an industry.

some things like poisoning everyone requires non-flexible regulations. But when people want to discourage or encourage a company from doing something beyond it's illegality (such as being more energy efficeint than average or higher than average safety ratings) deductions are a way to give praise (the deduction) or condemnation (lack of deduction i.e. higher taxes) to a company.

without deductions in our tax system it would be more difficult for government to reward or condemn companies based on their actions until they crossed the line of legality.

for simplicity's sake you could make all deductions end after 5 years so that congress would have to constantly evaluate whether the deduction was serving the interest of the poeple or the company, or both. and that would keep the tax code from getting too large. it would also increase the lobbying costs perhaps making lobbying less profitable since they would have to do it constantly for the same regulation.

Skye said...
This comment has been removed by the author.
Ryan said...

Alonzo,

Perhaps I'm missing something obvious, but I don't follow. Why must the new $50m be invested in further political manipulation if it is simply the result of a loophole in the tax code? Or were you cynically asserting that companies merely choose to do so rather than invest in their product, employees, and infrastructure?

Poetrix said...

Ryan, I'm not Alonzo, but I'll answer that from my perspective: I don't think it's cynical, just realistic: if companies don't see the value in investing the initial amount in their employees/infrastructure, why would they change? They made a 1000% profit on that initial investment: the "smart" thing to do would be to reinvest in the same kind of plan for a similar return.

Ryan said...

Poetrix,

That depends on precisely where the money does go. If the entire $50m is spent on the people who managed to create the loophole, all for the purpose of creating new ones, then the money never is invested in the company in any way. If only the lobbyists benefit in some endless cycle, then there is little to no incentive for the company to have invested in them in the first place. It would have been better to invest the original $5m in the business.

However, if a portion of that money goes to top executives at the expense of other employees, infrastructure, and product development, the problem is actually greed, not the loopholes themselves. Good businesses would distribute the money more wisely, e.g. allocating another $10m to lobbying, $5m to executives, and $35m to infrastructure.

The question becomes: is the money better off in the hands of the government or the business? If you think that businesses more often invest their loophole returns poorly (one way or another), you will probably say that the money is better off in the government's hands. This is what I called the cynical perspective, though I mean no offense by it and believe that cynicism and realism often go hand-in-hand. I just want to point out that another perspective might favor loopholes because it believes that businesses spend their own money more effectively than the government does.

I don't know which perspective is more accurate because I don't have the data necessary to determine that. It is possible that the businesses large enough to actually create loopholes are far less likely than smaller ones to spend wisely/morally, in which case Alonzo's point happens to be accurate. But noting this would provide some nuance.

Alonzo Fyfe said...

It is also important to recognize that this $50 million did not appear out of thin air. The company that makes a political investment got this money out of the pockets of others. Those others, in turn, are poorer by $50 million (actually, more than $50 million because these types of transfers have a cost).

And when one company makes a return on a political investment, other companies are then encouraged to pursue the same route to economic growth.

Then, finally, to add another concern, even the company that does nothing needs to get involved in these political games because, otherwise, that company will be drained dry paying for the programs of other companies investing in political wealth transfers.