Taxation, Fair, Flat, or Otherwise

There is a discussion over at Right Wing News regarding the probability of the nations tax system being overhauled in the immediate future. Barring passage of the Federalism Amendments, I do not see this happening, but it's fun to speculate. In the comments, HammerNH proposes the basic flat tax with a lower income limit:

So for example - make the bottom exemption the first $30,000 of income.
Then a fixed percentage for every subsequent dollar with no ceiling.
The percentage would be determined by the budget Congress approves.
Let's say that requires 20% this year (hypothetical - I have no idea what the real % would be).
If you make $29000, no tax.
$31000 - tax is $200
$100,000 - tax is $14,000
$1,000,000 - $194,000

The percentage is governed by the amount congress spends, but the problem here is that no one seems to be able to accurately predict either the total that will get spent, or the GDP of the country in some future year. Allocating monies to be spent over some extended time frame would also muddy the picture.

Let me think like a politician here. The national median income is $44,389/yr. If I set up a national flat tax, I make the first $40K tax-exempt, and apply a rate of 30% on everything above that, thus guaranteeing me that 51% of the suckers will approve of my taxation system and re-elect me.

The top 10% will move to some low-tax Caribbean island, and, as they said in the old country before the time of the revolution: The shortages will be divided among the peasants.

The key to a reasonable taxation system is one that the pols cannot easily game to the benefit of their supporters. I personally like the flat-tax system, as jiggery is easier to spot. We may safely assume it will be tried.

Imagine HammerNHs plan with an amendment reducing the "flat" rate if the source of your declared income is something politically correct, say, fuel ethanol production. At the same time, imagine a higher rate if your income is politically incorrect, say drinking ethanol production. If any system can be subverted, it is safe to assume it will be.

What is called the "Fair Tax" is effectively a national sales tax, ideally applied to everything at the same rate. I will predict that that idea won't survive the first congress after it is enacted, adjusting the rates to reduced levels for food, and higher levels for "sin" commodities, such as beer and cigarettes. From there, it's all down hill.

Perhaps the income floor should be 1 years income at the current federal minimum wage, multiplied by the number of people in a household for filing purposes. There are problems with this, too. Non-trivial, eh?