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Or, 99 divided by 53

(NOTE: This was originally published, in a slightly different form, at my old blog on October 11, 2011.) 

The “flat tax” has been getting a lot of traction over these last few election cycles, mainly among people who don’t know what they’re talking about. Call it barstool economics: the idea that one simple plan can fix everything that’s wrong with the economy, plans which always appeal to “regular guys” on barstools holding forth on what’s wrong with this country, because simplicity seems fair and the current tax code does not. As it turns out, they’re right about the last part, but that’s mainly because there are a ton of corporate loopholes in it, which, as billionaire Warren Buffett has become notorious/beloved for pointing out, means that quite a lot of wealthy folks don’t pay as much as the middle class.

At the same time, those Occupy Wall Street protesters, no longer occupying just Wall Street but spread out across the
country, have taken on economic inequality in the American system, which also means tax revolt. They characterize themselves as the 99 percent of us who don’t share in the wealth they help create. The right has countered with their own effective strategy, dubbing themselves 53 percenters, so named because they label themselves as the 53 percent of Americans who actually pay income taxes, supposedly subsidizing the 47 percent who don’t.

And so it goes. It’s a political trick, developed over the past thirty years, that might as well be trademarked by the Lee Atwaters and Karl Roves of the world:

1. Scream that the other side is committing something horrible, in this case class warfare.
2. While the media looks the other way, engage in actual class warfare.
3. When the media looks back, pretend to be disgusted that both sides engage in class warfare.

The 4th step comes when Americans get worn down by the constant fighting and long for an idea, an easy to understand idea, which will clear up their confusion. Hence, the flat tax.

Here’s why it’s bullshit.

Americans mostly pay three kinds of taxes. The 9-9-9 plan affects all three. First:

1. The income tax. This is the rich man’s tax, which it’s why it’s the only one you ever hear about. When the rich bitch about taxes, they’re complaining about the income tax, because, as they love to point out, 47 percent of Americans don’t pay it. That’s because those people make less than $50,000 a year. And there’s a good reason they don’t pay income tax: they can’t afford to. Turns out not taxing the poor is a good idea for two reasons — because it makes them even poorer (the moral argument) and because they can’t come up with it (the practical argument). Before the great crash of ’08, the percentage of Americans who didn’t pay income tax was actually more like 40%; it’s jumped to 47 simply because the economy is that bad.

The underlying secret to understanding this is: It costs more money to be poor. It is more expensive to be poor. The person making $50K a year, even if they’re lucky enough to be an individual taxpayer taking care of themselves alone, will probably spend most of that fifty thousand over the course of the year. Mortgage/rent, gas, food, medical, different forms of insurance, you name it. If they have a family to support, forget it. They get to make maybe one or two big purchases a year, and get to save almost nothing. And they’re still lucky, because 80 percent of the people who don’t pay income tax actually make even less than that — $30,000.

Why do they catch such an awesome break? Because of the Earned Income Tax Credit. Depending on whom you ask, it was developed in the 1970s to either take money from the deserving wealthy and hand it to the lazy poor, or to give the lazy poor an incentive to keep slaving away so that they won’t rise up and murder the middle class in their beds. Either way, it is the very definition of a socialist wealth-redistribution system.

And yet, some Republicans have actually endorsed it. Conservatives like President Gerald Ford, who first signed the bill into law. Or Ronald Reagan, George H.W. Bush, and his son Dubya, all of whom raised and expanded the EITC faithfully while in office, whether or not they raised taxes elsewhere. The biggest windfall you can get under the EITC comes to you if you have 3 or more children and make $16,449 a year. That’s raising three kids, feeding at least four people, and keeping a home on $1,370 a month. Good times.

Many flat tax plans abolish the income tax. Right now, your employer pays about 8 percent federal tax on you as an employee, for Social Security and Medicare. So that’s not too big a change for him. Except that, unlike in the current system, he wouldn’t get to deduct the wage he pays you. And he can’t raise prices if he wants to stay competitive. So that 9 percent? That comes out of your salary.

In addition, flat tax plans also do away with the EITC. But wait! Why would they need to take the trouble to abolish both, if each is part of the same system already? Read on.

Now, then. If only there were some way to make these 47% deadbeats pay their fair share of the tax bill! Maybe a system where it was taken from them a little at a time, maybe every two weeks or so. We could call it…

2. The payroll tax. This is the poor man’s tax. The rich don’t talk about this, because they mostly don’t pay it. Americans only pay this on earned income, and then only up to $107,000. After that, for all intents and purposes, nothing. This is the key. There are no deductions for this — you earn, you pay. Up to that amount. Our $50K Average Joe pays on all of it — he gets some of it back at tax time thanks to the EITC, which is the “no income tax” the rich complain about, but he still pays fully into Social Security, Medicare, and unemployment. Someone making $500,000 a year, on the other hand, by defintion pays on only one-fifth of his salary. A billionaire, who gets most of his money from investments, pays almost nothing.

See? The flat tax giveth, and it taketh away. No income tax means a break for the nation’s top earners, but a big increase on tax for the poor, because the EITC is gone. Now Mr. 50K has to come up with a big chunk of money at tax time, usually proposed at 9 or 10 percent of his salary: $4,500 – $5,000 in one lump sum. And remember, he’s one of the lucky ones.

Finally, there’s the tax we all pay, at least in theory:

3. The sales tax. This is a tax on consumption. It is state and local, not federal, which is why there’s always a city council meeting every time someone wants to raise it a penny to pay teacher’s salaries or to build an airport. It’s fairly straightforward — and also more expensive for the poor, who again have to spend most of their income. If a millionaire goes completely insane and spends half a million dollars every year on himself, he still only pays half of his income on sales tax. Average 50K Joe, again, pays on almost if not all his income. And he also pays a much larger share of local and state taxes.

When you add up sales and payroll taxes, as well as excise taxes on gasoline and property taxes and the like, the bottom half of the country pays, on average, about 25 percent of their income in taxes. (The lowest quintile — the poorest 20 percent of us — pay about 16%.) The 53 percenters who are supposedly footing the bill for the rest of us pay a slightly higher percent of their income in taxes: 28 percent.

Flat tax plans are a lot like sales taxes, except that if there’s a federal flat tax, that means the state and local governments still have to come up with their tax revenue. So the flat tax gets added to what you’re already paying. An additional 9-10 percent. Remember that gallon of gas that used to be $1.80, and then jumped up to $3.50? It’s now about $3.85. Enjoy.

This also might be a good time to mention how the rich often avoid paying sales taxes. There’s a loophole for every product.

35% of the nation’s budget is spent on Medicare, unemployment insurance, and welfare, and 36% of the nation’s tax revenue comes from that demonized 47 percent making 50K or less a year. The Average Joes and Janes. And everyone pays into, and gets back, the portion of the budget reserved for Social Security. So no one is subsidizing us. We’re subsidizing ourselves.

But wait. We forgot something.

4. The capital gains tax. And the estate tax. The US Census, who collects and harbors all these stats, defines “income” as “[money] received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc.” This is the biggest, dirtiest secret about taxes: income and wealth are not always the same thing. They are for me, and probably you, and probably most everyone you’ve ever known, including your boss. But not for the 1 percent. Remember them? The ones those dirty hippie protesters keep whining about?

The mega-rich in this country are actually the real problem — the 0.1 percent, if you will. They make, at bottom, $1.6 million a year, but are worth considerably more than that, and most of their wealth comes from what they’ve inherited and/or from the investments they make. The estate tax, which taxes inheritances, was rebranded by George W. Bush, in a spectacular display of disingenuousness, as the “death tax.” Then it was gutted. The capital gains tax rate, under conservative icon Ronald Reagan, stood at — guess what? 28 percent. That magic number. Bill Clinton reduced it to 20%, possibly as a way of offsetting the income tax hike he instituted on the highest percentile. George W. Bush reduced it to 15%. And there it has stayed.

Oh, and there are ways around these taxes, too.

Flat tax plans, and I know this will shock you, never touch capital gains, estates, or any other sort of accumulated wealth. In fact, capital gains taxes, now at a rock-bottom 15 percent, would disappear entirely.

The bottom 99 percent of Americans — you know, the smelly hippie protesters — make 79.8% of the income in this country, and pay 78.4% of the taxes. But they arguably do 99 percent of the work. And they only control 15 percent of the wealth, while owning 95 percent of the nation’s debt.

And those are just individual taxes, not corporate ones. The nation’s biggest corporations pay about 9 percent in taxes. When they pay at all.

And this is why they’re in the streets.