A Progressive “Flat Tax”

This entry is part 10 of 13 in the series Political Reforms

The health of society depends on equality and opportunity for all. Effective government depends on adequate funding. The quality of the food and water supply depends on government regulation. Today, all three of those propositions are in peril. The solution for all of them may reside in a progressive tax that is free of loopholes.

Originally published 2007

The Aristocrats are Back

The United States was founded under the ideals of equality and opportunity. Politicians still talk about them, as though they still exist. They’re not completely gone, but as John Bogle writes in the The Battle for the Soul of Capitalism, the concentration of wealth has reached unprecedented proportions, while the difference between executive pay and that of basic workers has never been greater.

It was a good run, though. For most of the last 200 years, America was the land of the freedom and opportunity. But those opportunities are vanishing rapidly, as more an more wealth gets concentrated in fewer and fewer hands. It took them a couple of hundred years, but the aristocracy is back. They’re called the “capitalists” now — the money owners, investors, and lenders that finance business, and reap huge rewards for doing so.

Sure, they assume the “risk”. But all they’re risking is their money — and the prospect that, should they lose it, they might actually have to work for a living. They’ve got everyone so convinced that their money is so valuable that they have a right to an extraordinarily handsome reward in return for their “risk”. But they’re not risking life and limb in a mine, and they’re not spending every hour of the day working to eke out a living.

The reality is that the aristocrats are back, and they’re pretty much in charge. In the Voting Advice System pages, I write about a plan to make money irrelevant to the election process. But until that plan is implemented, money controls politics, and that means that the 90,000 lobbyists who infest the country effectively run the show. Consider these facts:

  • Lobbyists write 90% of the legislation that congress votes on.
  • There are more than 90 lobbyists for every representative we elect.
  • Lobbyists are highly paid. If we conservatively a lobbyist’s salary at $200,000 a year, that means that big business is spending $18,000,000,000, or $18 trillion dollars a year on lobbyists. Corporations don’t spend money on things unless they pay a significant return. So how much of your money do you think they’re getting for their investment?

What About Loopholes?

It’s the rich who favor loopholes. The idea seemed like a good one at the time, but it was sold on false pretenses. The idea was that loopholes would enourage charitable donations and socially progressive activities like installing solar panels on your home or driving an electric car. Without loopholes, their proponents cry, how will these things be accomplished?

Astonishingly, it is the very people who otherwise claim that a “free market, unimpeded by government” will solve every problem. Except when it comes to loopholes. Suddenly, loopholes are necessary for social progress, according to them. (It is also important to note that a monopoly is not a free market, and that the aristocracy are rapidly cornering the market on the money supply.)

Well, it did seem like a good idea. And it seemed to work for a while. But David Cay Johnston writes about the long list of Perfectly Legal tax dodges that have effectively starved the government to the point that the FDA would be essentially non-existent without corporate funding — and is effectively powerless with it. In short, neither the FDA nor the EPA are working in the interests of consumers. Instead, they’re generally working in the interests of corporations. Sadly, those two interests do not align. Consider the following:

  • In 2004, the San Francisco Public Utilities Commission and many municipal water districts decided to add a completely untested chemical compound to the water supply (chloramine — a combination of ammonia and chloramine). Chloramine is known to kill fish. Yet the EPA has done nothing, despite the fact that it was brought to their attention, and despite recorded evidence of harm to people, as well.
  • The FDA has allowed a long list of harmful ingredients to be introduced into the food supply, despite evidence of the harm they cause, including bovine growth hormone, agricultural antibiotics, and high fructose corn syrup, as well as trans fats and the partially hydrogenated oils that contain them.
  • The FDA has approved virtually untested drugs — merely taking the company’s word for it that they did the appropriate testing.

Although loopholes seemed like a good idea, the stark reality is that they have created a tax code that is too complex for any single individual to read, much less understand. They’ve produced an entire industry of tax lawyers, tax accounts, and tax shelters — none of which provide any value to society. As John Bogle points out, that industry is now effectively two thirds of the economy. In consequence, those making the most are paying the least in taxes. In many cases, they pay nothing at all. As a result, they have effectively destroyed government’s ability to do its job, and have deprived citizens of the protection that government can provide.

The Progressive “Flat Tax”

The idea of a flat tax seems like a good idea. With a 10 percent flat tax, government income would certainly go up. But there are two problems with it:

  • It is unfairly regressive, in that 10% means a lot more to someone making $10,000 than it does to someone making $10 million. In the lower brackets, in fact, it can mean having to choose between eating or having a place to live.
  • At ten percent, the 2% of the population who have already accumulated 90% of the countries wealth will just keep continuing to do so. A totally “flat” tax won’t even begin to make a dent in that trend. So we have to build some “progressive” movement into the tax structure.

The idea of a progressive tax is to take more from the people and companies who make more. The idea of a flat tax is to keep things simple and free of loopholes. Combining those two ideas, we can use powers of 10 to define the tax brackets, as shown with round numbers in the following table:

DifferenceTax RateUp to…Bracket TaxTotal Tax
+23%$1 m$27,000$27,900
+36%$10 m$540 k$568 k
+410%$100 m$9 m$9.5 m
+515%$1 b$135 m$145 m
+621%$10 b$1.9 b$2 b
+728%$100 b$25 b$27 b
+836%$1 t$324 b$350 b
+945%$10 t$4 t$4.4 t
+1055%$100 t$50 t$53.9 t

Something of this sort should work, and leave enough money left over for charitable donations and social investment. The thing to do next is to find out the numbers of people and corporations who reported incomes in each range, figure out how much was collected in taxes, and compare that to how much would be collected with this system — and then adjust the system until it seems reasonable. It’s a process that can be easily done with a spreadsheet, once the basic information has been gathered. In fact, here’s a spreadsheet that does the job. It only needs to be filled in with current tax information.

Evaluating the Numbers

Looking at the numbers, they seem pretty small at the low end. They also seem pretty darn large at the high end. But remember that these are taxes on profits, for a corporation (after all expenses have been paid). For individuals, they’re a tax on income.

There is a case to be made for treating people and corporations the same, so that both are taxed before expenses, or both taxed afterwards. After all, corporations have fought for the right to “free speech” in court, arguing that they must be treated the same as people. Under that banner, they are free to fill the airwaves with advertisements that brainwash people into thinking drugs and fast foods are good for them, and they’re free to lobby and contribute to political campaigns. So why shouldn’t they be treated the same when it comes to taxes?

But the truth is that corporations and people are different — a fact that the law sadly neglects, all too often — a situation that is discussed at length in the discussion of “corporate personhood” at ReclaimDemocracy.org. But the more important consideration here is that if a trillion-dollar corporation suddenly had to pay 36% of it’s income in taxes, a lot of people would be thrown out of work. So things need to be done in the least disruptive manner possible.

Inflation Adjustments

Inflation is the enemy of a progressive tax system, because it keeps moving people into higher tax brackets. Over time, taxation becomes more onerous, and the pressure for loopholes mounts.

For example, two hundred years ago, a worker might have made a few pennies a day. Today, that same worker might make twenty thousand dollars. No one is making pennies a day, so any tax bracket based on that level of income would have zero members.

When enough inflation occurs over a long enough period of time, the tax rate goes up, even when your relative standard of living hasn’t. So you’re paying the same percentage of your salary for bread, but now you’re supposed to pay more in taxes, as well? It’s no wonder that loophole schemes are easily sold to a gullible public, in times like that.

To solve that problem, the tax bracket boundaries should be adjusted to account for inflation. Doing it once every ten years should be sufficient. Ideally inflation should be calculated separately for each bracket, to ensure that the basic foodstuffs and housing that take up most of a household budget aren’t treated the same as the discretionary purchases that figure into the spending of the wealthy.

Phasing It In

The progressive flat tax can be phased in over a ten year period, so that businesses have time to adjust. It can institute one of the lower brackets in odd years, and one of the higher brackets in even years (to “even things out”). That way, the drop in revenues from a lower bracket one year will be offset the following year by a gain in revenues from a higher bracket.

Since the number of people in each bracket undoubtedly follows a bell curve, the brackets should be instituted in the order that affects the largest number of people, in such a way that the overall income gain stays positive. The exact order depends on how things look when you “work the numbers”, but I suspect it will look something like this:

  1. Year one: Institute the tax on those making $1 m to $10 m (net gain)
  2. Year two: Institute the tax on those making $10 k to $100 k (net loss)
  3. Year three: Institute the tax on those making $10m to $100 m (net gain)
  4. Year four: Institute the tax on those making $100k to $1m (net loss)

Those who don’t fall into one of the “easy” brackets instituted under this system will need to follow the same procedure they’re using now, winding their way through labyrinth that is the tax code, until their bracket is activated.

In the higher brackets, of course, those percentages are going to be felt hard. After all, in many cases they’re effectively paying nothing at all. And suddenly they have to pay 40 or 50% of their income. That will be a difficult adjustment to make. So perhaps anything over 10% should be phased in over a period of time. So it could start at 10%, say, and increase by 10% per year until the percentage required by that bracket is reached. A system like that would help to make things work. Again, the details depend on the numbers, so that the system stays revenue positive during the transition, slowly increasing until it reaches truly progressive levels.

The Problem of “Capital Flight”

Phasing in such a system over time should make it easier for people and companies to make the transition, but that strategy has a couple of problems as well. The first is the time that corporations and wealthy individuals will have in which to lobby to change the laws before they take effect. So instead of fighting the battle once, the battle will have to be fought continually over a ten or 15-year period.

The other, more serious problem, is that of “capital flight”. As the progressive system is instituted, corporations will have ever more powerful incentives to take their business offshore — something that is already happening at an alarming rate.

The solution to that problem rests in a worldwide progressive movement. We know what has to happen, because we’ve already seen this scenario played out in miniature. In the early days of the industrial revolution, each state made its own laws regarding corporations. Corporations naturally moved to the states that gave them the freest hand, and the “robber barons” were born. We may admire the Vanderbilt’s mansion and Carnegie’s libraries, but they were built on a foundation of enforced labor and “shanty towns”, where employees had no say in the policies that governed their lives.

That situation finally changed in the 1920’s, when a progressive movement created federal standards that applied to all corporations, everywhere in the country. That situation held for most of the next 80 years, until advancements in communications and transportation technologies made it possible for corporations to move from country to country in search of the most favorable treatment.

In short, we’ve seen this situation before. As we begin to “do the right thing” here, businesses will begin looking for places to go. But we have two recourses. One is to make sure that any dollar made here is taxed here. The other is to collaborate with governments around the world on policies that make sense — policies that balance the interests of corporations with those of citizens, for the overall betterment of society.

Social Value Component

Finally, every corporation should be assessed against other corporations in the same industry with respect to their “social value”. It will take a lot of work to get that done, but a corporation that is producing energy-efficient cars that are safer to drive is providing a lot more value than one that’s building gas guzzlers. Similarly a company that keeps experimenting to find new and better ways to do things, or one that provides child care for its employees displays more of a social consciousness than one that doesn’t.

There is no reason that such policies differences can’t be given more favorable tax treatment (or less favorable), by dropping the companies into higher or lower tax brackets depending on how the rank compared to their competition. (The competition could even be global, for that matter, thereby encouraging companies to follow the best practices in the world, such as the standard 6 weeks of vacation in Europe, or France’s 35-hour work week, which most businesses implement by taking a day off every third week or so.)



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