The Progressive Income Tax Is Not Progress
After my two posts about the minimum wage laws (here and here), I guess I am on a political bent. Today I want to talk about killing off the progressive income tax system and replacing it with a flat income tax.
The current progressive tax setup is grossly unfair and serve as a disincentive to move ahead. The progressive system is based on the principle that taxpayers should pay more income tax as a percentage of their income as they earn more. This has been achieved, traditionally, using progressively higher income-tax rates applied on progressively higher incomes. Canada have four marginal tax rate while the US has six. The top rate kicks in at $120,887 in Canada and $336,551 in the US.
The Government Has It Backwards
The problem with progressive income tax is the government has it backwards. It shouldn’t be the more you make the more they take. It should the be more you make, the less they take! That is how businesses work. Many ad networks will give you a progressively bigger share of income as an incentive to produce more. Imagine how their business would do if they did it backward like the government.
The problems with increasing marginal tax rates are lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation, aggregate labor supply that is lower than expected, and reduced social welfare. In short, high and increasing marginal tax rates reduce economic growth by creating strong disincentives to hard work, savings, and investment. Why would you want to make that second $100,000 if the government is going to take half of it? A flat income tax would eliminate this disincentive.
Hall-Rabushka flat-tax reform
There are a number of well-known flat-tax proposals but the most discussed is that developed by Robert E. Hall and Alvin Rabushka of the Hoover Institution. It taxes all types of income once and at one rate. In their most recent analysis of the United States, Hall-Rabushka recommended replacing the personal federal rates and the various business tax rates with a 19 percent federal tax rate for both individuals and businesses.
People against a flat tax would say 19% is not enough to fund the operations of the country but they fail to take into account the increased incentive to make more money when people know that the government won’t be taking more when you make more. Would you try to make more if you only pay 19% tax instead of 50%?
I don’t expect to see Canada or the US go to a flat income tax anytime soon. However, if you are a Canadian living in Canada, there is a way to pay a flat 17% tax on your net income - as long as that income doesn’t exceed $400,000 in a year. I’ll talk about that in a future post.
- Posted in Investing, Ramblings
- 159 comments what's your take?
Sounds interesting. I know people in Canada who would be very interested in what you have to say.
One Man. One Year. $100,000 online. To pay Uncle Sam.
Reply to this commenthttp://www.oneyeargoal.com
When are you going to get yourself an avatar? Even I have one now.
Reply to this commenti think he’s too busy to get one while trying hard to make his target
Reply to this commentExcuses, excuses.
Reply to this commentYeah a lot of excuses
Reply to this commentI have an avatars suggestion. Give us a chart of where you’re at with your goal. You can update the picture each month.
Reply to this commentI like that idea. I think he should do it.
Reply to this commentI’ll third that idea. That’s an excellent suggestion!
Reply to this commentMakes sense, but never expect politicians to do things that will make sense.
Reply to this commentwell, they always try their best, it’s just that sometimes the end product isn’t what you and I would like to see
Reply to this commentThey try their best to serve their own interests.
Reply to this commentYeah politicians dont have sense =(
Reply to this commentEven in the US, it varies from state to state. For example, all states have federal tax, but most have their own sales tax and it varies. Some states have low sales tax, some have high. Where I am from, we don’t even have sales tax, but we have what’s called a state income tax. So instead of taxing you on how much you spend, its another percentage scale of how much you make.
Reply to this commentWe have a state sales tax and a state income tax. They get you any way they can!
Reply to this commentDang, John if I didn’t know any better you seem fairly conservative for a Canadian. This is why people America stays away from the John Kerry’s of the world, because he would be the last one to say what you have just said. It makes so much sense, but there are so many stupid politicians who either are stupid or pretend to be. They truly like to believe that middle class families pay too much tax and that upper class pays too little.
Reply to this commentEverybody (who doesn’t cheat on their taxes!) pays too much tax. And, politicians largely waste tax dollars. Benjamin Franklin thought that a government that took 10% of a person’s income was considered harsh and excessive.
If you add up all the taxes Americans pay, I think (if I remember right) that it works out to be about 50% of our income going to taxes in one way or another.
Reply to this commentCanadians pay that same 50% then add 6% GST on top of that!
Reply to this commentMost Canadians don’t pay 50%…
That percentage also varies by province +/- a little. Also, don’t forget the PST
I’ve got a friend who moved to the US a few years ago and he doesn’t really notice a difference in the amount of money that disappears off his cheque once you factor in the costs of insurances.
Reply to this commentI believe John would be considered radically conservative for a Canadian
Reply to this commentI would like to hear more on your political views John. You should post more political stuff on this blog.
Reply to this commentNo! I don’t mind the odd post but I thought this was a “How To Make Money Online” blog.
Reply to this commentLearning how to pay less tax helps you keep the more of the money you make.
Reply to this commentAgreed, I’ll listen to your financially driven political views
Even if I will likely disagree with some of them 
Reply to this commentBy taxing the rich more it’s like the government is encouraging them to somehow hide their money illegally. A flat tax system would make it so everyone is paying their dues the same.
Reply to this commentUhh you don’t enforce tax collection with appeasement. You deal with ‘hiding money illegally’ with prosecution and penalty.
Reply to this commentProsecutions and penalties are easier to enforce when you have a simpler tax code with far fewer loopholes.
Reply to this commentThe rich don’t have to hide their money illegally. There are tons of legal ways to hide their money. I think I’ll do a post about it.
Reply to this commentJohn please do!
Reply to this commentThat’s exactly why I don’t care about a 50% tax on the more affluent. None of them end up paying anywhere near 50%.
Reply to this commentBut won’t a flat rate tax make the gap between the rich and the poor even bigger?
Reply to this commentI think a national sales tax would have that effect.
But, a flat rate tax would actually help the poor. It will make it easier for employers to hire people, as there would (hopefully!) be less red tape and “hidden” taxes and so on associated with hiring people. The wealthy could invest their money into productive use, rather than tax shelters and other schemes designed to reduce their (current) income taxes. All the loopholes that the wealthy use to reduce their tax rates would be gone. So, they’ll actually end up paying the full flat rate rather than getting their taxes reduced to the point where they pay less taxes than people with lower incomes.
And, then there is the money that will be saved by not having to pay tax professionals to figure out all the tax rules.
Reply to this commentWhy can’t the poor invest a greater portion of their income ‘into productive use’ beyond just putting food on the table?
Reply to this commentI never said they couldn’t.
Reply to this commentObviously you’ve never been poor. Although I agree that many ‘poor people’ still find the money to smoke and drink, those who are truly unable to make ends meet can barely feed themselves much less invest in the market!
Reply to this commentYes, over the long term it would become much bigger. And over the long term, it will result in lower economic growth. The U.S. has already reached this point. That’s why we are dependent upon other countries to send the U.S. their most talented people. We do not have the social infrastructure to replenish the talent we require to run this country. This is all due to lack of investment in the social welfare and education of Americans. But hey, some people don’t care about that gap. They want more earings.
Reply to this commentGo back to economics school dude, your comments on all these posts are counter-intuitive
Reply to this commentthis “talent” disconnect you speak of is simply do to the American education system catering to the old Industrial economy while recent RAPID developments (summarized most eloquently by the Internet) have rapidly revolutionized the economy with the education system slowly filling this disconnect.
There are many more social factors that account for this gap than what you’re accrediting from lingering discrimination to tracking in the education system to unupdated Reganomics policies.
But the biggest contributor to the GAP is the DISCONNECT of the people that come out of highschool with the revolutionized economy.
Reply to this commentYou’re right in that tax should be flat, but it should be a flat federal income tax. Problem solved.
Reply to this commentGlad you figured it out for the rest of us.
Reply to this commentHave fun passing that through Quebec…
Reply to this commentSomeone makes money and gets taxed (income tax). They buy property and get taxed (sales tax). The buy stuff to fill that property and get taxed (sales tax). They are charged yearly because they own that property (property/school tax). When they bough that property and that stuff, the seller had to pay tax on the sales (income tax). When our property owner dies, the money he leaves to someone is taxed (inheritance tax).
It’s too much. I say a straight property tax with breaks for low income families or persons who inherited property is a very good solution.
Or you can come to Pennsylvania, where we don’t tax clothing or groceries.
Reply to this commentI don’t agree with you on property taxes. Property taxes are an assault on private ownership of property. With property taxes, you never truly own your property; you own it only so long as you can afford to pay the property taxes on it. That amounts to the government owning your property and merely renting it out to you.
Reply to this commentWithout property taxes, a person who buys a huge piece of land, lives off energy from the sun and wind and grows their own food would not support the country at all. I bet they would still expect emergency service, fire and police protection though.
Reply to this commentThat can be resolved with user fees, not taxes.
The country serves to support its citizens, not the other way around. It does need some level of income in order to do the things that citizens expect, but it does not need to be through property taxes.
Reply to this commentWhat a red herring. The richest people make the bulk of their income through capital gains! Capital gains in the U.S. are taxed at a flat rate of 15%. So the rich already have a flat tax at a rate lower than the lowest income wage earners. Duh!
I repeat. The rich already have a flat tax rate.
John, you need to do a lot more research to get a clue, seriously. It’s not funny at all.
Flat taxes penalize the lowest earners since the bulk of their income goes to living expenses, they’re taxed at a proportionately higher rate because they have to spend most of their money on living expenses while wealthier people do not. The rich have the luxury of saving and investing a greater portion of their income.
I often hear the argument that flat taxes allow the rich to invest and grow the economy further. Well low income earners do the same. They invest in things too. I also resent the classist statement you made which assumes that people who work harder earn more money. That’s simply a false assumption.
How do you explain high GDP growth rates of highly taxed nations such as in Scandinavia?
Reply to this commentA lot of us here are webpreneurs that make money off our capital gains. Are we rich?
You are correct in recognizing capital gains as one of the components of the growing stratification of income, but incorrect in rounding all investment holders into the “wealthy” class.
But to say that I’m only taxed 15% on my capital gains is amusing. I assure you the government is taking “a little” more than that.
Reply to this commentI think you need to pull out the tax code and start with basic definitions.
Reply to this comment“The richest people make the bulk of their income through capital gains!” In case you didn’t know, Capital gain is not classed as income for the tax act, and it’s not flat. Furthermore, if you are in the business of buying and selling real estate, you are no longer qualify for the capital gain exceptions.
Reply to this commentWhen I say income, I’m speaking in the generic sense. Thank you for reinforcing my point. You are right, capital gains are not treated as income. So for all the rich people who make the bulk of their money through capital gains, they get the flat tax rate of 15% in the U.S.
Note to John: Capital gains on real estate are taxed at the capital gains rate of 15% in the U.S.
Reply to this commentI won’t even begin to mention all the tax deferral mechanisms that exist. Unless you have investment capital, you probably don’t know they exist. As I read the comments above. I see a bunch of young guys who want to be rich, yet most probably never will be. All the while feeling good about giving people with much more money than they will ever have a nice big tax break, so they can all collectively make it up with their own contributions. I guess some guys like the feel of bending over and taking it hard.
Reply to this commentAh but the dream of making it big keep people motivated! No one ever wants to hear about a tax increase because ‘What if I become rich someday?’ As you mentioned only about 1% ever get there. Are you one Marc?
Reply to this commentI’m anticipating the July 2007 income report
Reply to this commentI’ve been advocating a flat tax for the past 10 years. It used to be that people like me were considered to be the “lunatic fringe”, the “gestapo right wingers”. I’m poor by all monetary standards and for the life of me I can’t get how the hell the tax system in place now can be considered fair.
Reply to this commentIt’s not fair at all as it is, but introducing a flat tax would n’t help you if you’re low income. If you are low income why in hell would you want a flat tax? Probably because it sounds so simple and fair. Trust me, it isn’t.
Reply to this commentYes. There are so many things need to done and considered. This post and comments simply illustrate how rich and ruling elites keep us in dark while they are ripping this beautiful planet off of every thing it can offer.
“The warnings about global warming have been extremely clear for a long time. We are facing a global climate crisis. It is deepening. We are entering a period of consequences.” ~
Reply to this commentAl Gore
What I would really like to see them get rid of is tax on savings….
Reply to this commentI passed on your minimum wages rant because 200 year of use as a working solution proved you as wrong.
Progressive taxes is a little bit harder to defend as its not fully working , because the more people make the less taxes they pay as they hire “expert” who will make them legal in not paying there share of taxes.
The problem with taxes is that’s its money used to make the country work and people see that as an expanse when in fact its a contribution to a working system.
When the government cant pay on it’s own for something due to taxes evasion ( aka people not paying there share or paying any taxes ) they don’t wait for the next budget they go on borrowing money at insane rates that any sane people would refuse to pay for borrowing money.
I have a bigger problem with how the money is managed and the fact that we are signing a blank check to people who are there for only four years our return on investment should be what we look for not how much money we spend on taxes and the fact that no one look at lowering interest rate on our borrowing is insane.
The more money people make the more services , energy and system they consume and use. The really rich people never pay there share anyway they have Swiss or Caiman bank account and are doing taxes evasion on millions and they have good lawyers to defend them self from paying for years.
I am more for removing direct control over money from politician and make foundation that take care of things , example like roads , health care , military and that offer real ROI and clear description of what they do with the funds.
Put simply How much was spent on the hospital in your region , how much was paid for it ? How much military did you buy this year and at what price ? What road where built repaired and at what cost ?
You don’t save money by trying to save on taxes , you save by getting things that last longer are bought for doing the job now and at price that save million due to buying in bulk.
Taxes should be a lot simple , you make X amount you pay x amount , that’s it no taxes evasion or deduction or subvention to the brother of an elected government member who charge 100 time the usual cost of the good sold. You also get an ROI report on what you paid for telling you what your taxes bought.
We would kill the robber who steal 100$ from us but our own government steal thousand each year from us and we say nothing. And we think only good thing o rich people who steal million in taxes evasion.
Sharing tips on how not to pay your amount owed to the government is stealing me and shooting yourself in the foot , I have to pay more next time to compensate and you have to pay more because the government borrowed to do what was needed.
That’s my take.
Reply to this commentWow good essay jaja
Reply to this commentMinimum wage laws have only been around for 111 years worldwide, and only 69 years in the U.S.–not 200 years anywhere.
Reply to this commentYour probably right , I mixed the trade Union who set there minimum wage with laws passed by Country. Not that it really matter passed the 100 year mark … I don’t see why you needed to mention and amplify that the U.S was late to adopt it , they tend to be when its for regular citizen …
Reply to this commentI mentioned it just for accuracy’s sake.
Reply to this commentEvery time I hear about a flat tax rate I then hear things like:
Reply to this comment“but there should be some breaks for the poor”
“also some businesses who dontate”
etc etc. Eventually you end up with just as many loopholes as the current system.
I don’t know about this one. Yes, in theory a tax deduction, or lack of tax increase, would be a great incentive for people to work harder and make the big bucks but it’s not that easy. Not all have the entrepreneurial ability to pop their heads just above the next tax bracket. Whether your taxed more or not, the more money you make, the more money you have. That is incentive for you.
Reply to this commentOf course they do. Certain people are not more special than others, we are all born helpless, circumstances might help shape us but essentially anyone can do whatever they want. Changing the education system would help a little also though.
Simon
Reply to this commentWow, you could have whole blog posts with some of these comments. I wanted to say great post, but now I feel more inspired by the size of the comments, I think I should make a controversial post.
Simon
Reply to this commentPart of being a Great American is paying taxes. By not paying taxes or devising other methods, you are essentially saying you are an evil doer. John Chow, please be a good American and do not solicit the public to avoid paying taxes.
The Wolf
Reply to this commentAlways A Great American
It’s a good thing he lives in Canada then, eh? I get your point though.
Reply to this commentRemember the Boston Tea Party? Being a Great American means a disdain for taxes. Remember that Benjamin Franklin thought that a 10% tax was too harsh; nowadays, Americans pay a whole lot more than that!
Reply to this commentTime for everyone to dump their SUVs in the harbour then?
Reply to this commentNah. Maybe we could look at tarring and feathering some of the politicians that can’t reign in their spending habits though.
As a side note, it’s nice to see that so many people here are able to disagree without resorting to name-calling and mud-slinging that most online political discussions tend to degrade into.
Either that, or JC is deleting those comments before I’ve seen them!
Reply to this commentIn my experience, people around here tend to be quite civil. John’s always tossing out controversial link/comment bait, so we take all discussions with a grain of salt.
Reply to this commentThat’s a good little Socialist.
Reply to this commentI would cry if John ever became a good American. Canada rules!
Reply to this commentWTF, its everyones duty to avoid having to pay unnecessary taxes, its your responsibility to yourself and your family. Tax evasion is illigal and I’m sure John Chow doesn’t condone it, but avoiding it is a must.
Simon
Reply to this commentwow!!!
I like your blog jhon…
http://meetflorida.blogspot.com
Reply to this commentI would like to think that the way the tax works is just OK. Other ways how would it be “the richer you are the richer you can become” and “the poor you are even more poor you should become”.
It does not sound fair to me that one person that earns lets say $2 million /year pays the same tax rate as someone that earns $100k year, it just would not make sense (at least to me).
Now John, you are evil enough…but don’t be greedy and selfish too. I like you so far, but I am not sure i would be happy to read again such selfish/greedy non sense posts.
Reply to this commentThe thing is that if it was say 20%, the 100K person would pay 20K in taxes while the 2M person would pay 400K. That’s not really unreasonable. While they’re not being taxed at a higher rate, they’re still paying 20 times more tax than the 100K person. Everyone still pays a proportional share.
Reply to this commentSorry, can’t agree with anything on this post. People who describe progressive income tax as “people who earn more pay more” just miss something obvious.
Even if there’s a flat, eg. 30% tax; a person who earns $10,000 will pay $3,000, while a person earning $20,000 will pay $6,000. Even under a flat tax system the rich will pay more than the poor.
That’s how it is, has always been, and should be. Someone who struggles to survive just can’t be ripped the same amount as a multimillionaire. How much more those who afford should pay - or progressive the taxing system should be - depend on a number of things, like government spending.
If government spending increases, they’ll have to increase taxes. And as there are some people who simple can’t afford to pay more, the system has to be made more progressive.
Just my two cents, don’t flame me
Reply to this commentNo flame here. A flat tax doesn’t mean that the rich and poor pay the same dollar value, simply the same percentage.
Reply to this commentdammit… i hate it when web forms lose my novels.
in summary: chow is right, those that disagree are wrong.
dont be stupid
Reply to this commentI agree with one tax: 19% or 16% for both individuals and businesses. This way we can’t talk about illegal money.
Reply to this commenthttp://clfootball.blogspot.com
The Progressive Tax is OK, how is it set up can be discussed.
Reply to this commentJohn lets imagine yourself just finishing school without any dollar in pocket.
with this what you say you would be getting high TAX right from the start and so you wouldnt have money to reinvest. so makeing money would by much more difficult for you.
Since you have this money now it is easy to say what you say.
Once you have money that you even do not need than you prefer free time and spending money more so there is not much development.
So I see everything balanced. There is plenty of teories in Micro economics and planty of graphs showing how it would be if.
World doesnt want rich to become even richer but poor become not poor.
Good point
Reply to this commentThe Hall-Rabushka flat-tax reform doesn’t tax the first $5,000 of income (it goes up with inflation).
Reply to this commentHow generous:)
Reply to this commentThe biggest problem with most tax reform proposals is that they are designed to be revenue neutral. What most countries really need is a smaller, more efficient government.
A small example: When Bush took office in 2001 the U.S. federal budget was $1.8 trillion. This year it’s $2.8 trillion. That’s more than 55% more in just 7 years time.
Not that this is likely to happen but here’s a bit more food for thought: The total amount of income taxes collected by the U.S. government this year is about $1 trillion. If the U.S. government would cut spending to the levels of 2001 they could totally abolish the income tax.
Reply to this commentIt’s also important to note that the increased spending isn’t just because of the war in Iraq and also having troops in Afghanistan. Even without the military spending, Bush has expanded the federal budget by a significant amount. I don’t recall the exact figures, but it’s still an astounding increase, especially considering Bush calls himself a “conservative.” I don’t see a lot of conservation of funds.
Reply to this comment1.8 trillion - 1 trillion = - 800 billion
By my math, they’d still be 800 billion in the hole even with income taxes still in place. you must be using the “new” math that I never learned
Reply to this commentHow is it unfair that the rich pay more? The poor are hit a lot harder by a 10% income tax than the rich are by 35%. After a certan point even a 50% or higher tax has no effect on you other than what luxury items you can afford.
I don’t see this benifiting the poor either. Their rich bosses can allready pay them more but they don’t because it would man less money out of their own pockets.
Reply to this commentWe shouldn’t assume that all bosses are rich. Small businesses employ a good portion of people, and I bet there are many business owners that take home less pay than some of their employees.
Reply to this commentNo kidding. Generally employees don’t see (or care) that the person who came up with an idea, took the risk to develop it and built it with their time should benefit from the resulting success.
Could an employer pay their employees more? In most cases they could; however, in a free market economy you pay a person based on the market conditions.
If the employee isn’t happy and wants to make as much as the business owner, let them take the initiative and start their own business - with all the risks that come with it.
Reply to this commentJohn
Another top post.
Disincentives to work = silly.
In Aus rich people have corporations and get taxed at 30%. And that’s considered a saving. We pay way too much tax
Lucky the government agrees and has been giving us tax cuts every year for about 5 years w00t w00t
Reply to this commentLooking forward to your 17% tax on net income post
Reply to this commentI completely disagree with you on this one, John - especially your thought that people should be taxed more if they earn less as an incentive to make more money.
What about the single parent who struggles by as a cleaner or shop assistant? Are you honestly saying we should tax them more than a banker earning over $200,000 per year?
Many people would love to be able to make more money. Unfortunately, due to their circumstances this is not always possible.
Your article this time is extremely short sighted and is typical of the thoughts I would expect to hear from someone making a high income but who is not willing to consider the positions of others.
- Martin Reed
Reply to this commentEaxactly. The tax burden on low income families is still more than on higher income, even with the progressive tax. That is because if you take $5000 away from someone who makes $20k a year it hurts more than if you take $15 away from someone who make $100k.
Reply to this commentPeople who make $20,000 per year do not pay 25% tax. People who make $20,000 per year probably pay no tax and also receive a plethora of free government programs to help them day-to-day. If you don’t want to feel bad for the rich, how about the middle class? Same high t