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The Flat-Tax Fraud, And The Necessity Of A Truly Progressive Tax

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Herman Cain's bizarre 9-9-9 plan would replace much of the current tax code with a 9 percent individual income tax and a 9 percent sales tax. He calls it a "flat tax."

Next week Rick Perry is set to announce his own version of a flat tax. Former House majority leader Dick Armey -- now chairman of Freedom Works, a major backer of the Tea Party funded by the Koch Brothers and other portly felines (I didn't say "fat cats") -- predicts this will give Perry "a big boost." Steve Forbes, one of America's richest billionaires, who's on the board of the Freedom Works foundation, is delighted. He's been pushing the flat tax for years.

The flat tax is a fraud. It raises taxes on the poor and lowers them on the rich.

We don't know exactly what Perry will propose, but the non-partisan Tax Policy Center estimates that Cain's plan (the only one out there so far) would lower the after-tax incomes of poor households (incomes below $30,000) by 16 to 20 percent, while increasing the incomes of wealthier households (incomes above $200,000) by 5 to 22 percent, on average.

Under Cain's plan, fully 95 percent of households with more than $1 million in income would get an average tax cut of $487,300. And capital gains (a major source of income for the very rich) would be tax free.

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.

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http://robertreich.org/

Robert Reich, former U.S. Secretary of Labor and Professor of Public Policy at the University of California at Berkeley, has a new film, "Inequality for All," to be released September 27. He blogs at www.robertreich.org.

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The presentation given here is basically correct e... by David Chester on Sunday, Oct 23, 2011 at 4:33:34 AM
to discourage land ownership and investments David... by Doc McCoy on Sunday, Oct 23, 2011 at 6:10:24 AM
Please consider the FairTax per fairtax.org.It is ... by Don Hall on Sunday, Oct 23, 2011 at 8:03:53 AM
it looks appealing - but then again, at first glan... by Doc McCoy on Sunday, Oct 23, 2011 at 9:45:24 AM
Consumption taxes are the fairest taxes of any... ... by Ted Rosa on Sunday, Oct 23, 2011 at 12:20:58 PM
I'm OK with "fairness" of treating all sources of ... by Charles Storer on Sunday, Oct 23, 2011 at 12:39:36 PM
is Joel Slemrod's book "Taxing Ourselves," 4t... by JimZ on Sunday, Oct 23, 2011 at 12:51:26 PM
I'll bet you Herman Cain speaks German and he coul... by Arend Rietkerk on Sunday, Oct 23, 2011 at 1:29:54 PM
  Taxation is a government contr... by Robert Bostick on Sunday, Oct 23, 2011 at 1:54:41 PM
You just stole my thunder, Potomac Oracle. I agree... by Gabriel Donohoe on Sunday, Oct 23, 2011 at 5:37:25 PM
A voice of reason. Ther rest of you who are arguin... by Robert Tracey on Monday, Oct 24, 2011 at 4:09:14 PM
Is obviously speaking about a specific issue, a fl... by Anthony Wade on Tuesday, Oct 25, 2011 at 1:41:45 PM