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Scott Burns' Articles -- Recent and Archived

A Flat Tax, with bumps and potholes

070128_photo.jpgWe already have a flat tax. It just has bumps and potholes.

The fact that neither political party will acknowledge this is one of the reasons both parties are a useless disservice to the voting public.

Instead, both parties have a vested interest in the theatrical possibilities created by the idea of graduated tax rates. Notice that I said "the idea" of graduated tax rates. It should not be confused with reality.

Democrats argue that taxes on the rich should be raised because others need the money. This wins votes from the legions of voters who aren't rich.

Republicans argue, with great piety, that high taxes crush incentives and should be reduced. Only then will The American Way See a New Dawn.

Politicians talk this way because they talk about only one tax. They talk about the federal income tax, which offers graduated rates from 10 to 35 percent.

Politicians never talk about what real people experience, the true maze of taxes and government benefits. If someone put them all together, we could see what our actual tax burden was. We could see who pays at the highest, or lowest, rates. Discussions of tax policy wouldn't be a waste of time.

Well, someone did it.

In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that our all-in marginal tax rate is pushing 40 percent.

Yes, you read that right, 40 percent.

Earlier studies by the Congressional Budget Office showed lower figures. But those studies failed to include state income taxes, sales taxes, and the offsetting benefits of major government programs. This research incorporates all those factors and shows our real tax burden.

It's 40 percent, give or take a bit.

That's not our average tax rate. It is what most workers will pay on each additional dollar of income when all taxes--- federal income, employment, state income, sales taxes, and the major benefit programs--- are considered. Worse, the researchers found that it is about the same on a life-cycle basis, meaning that future Social Security and Medicare benefits won't offset the burden of current taxes.

If this seems improbable to you, consider how easy it is to hit 40 percent. Just be self-employed (15.3 percent) and earn enough (anything over a taxable $31,850 single, $63,700 joint, or $42,650 head of household in 2007) to hit the 25 percent tax rate.

And there you are, paying 40.3 percent on each additional dollar of income. (Some readers will say that most people are employees, not self-employed, and the employer pays half of the employment tax, but that's just window dressing to make the tax go down easier.)

What we really have is a bumpy flat tax. As a consequence, a 30-year old couple earning only $20,000 a year has a marginal tax rate of 42.5 percent, while a 45-year old couple earning $500,000 pays at 43.2 percent. At all ages and income levels in between, the marginal tax rate ranges from a low of 24.4 percent for a 30-year old couple earning $50,000 a year to a high of 47.7 percent for a 60-year old couple earning $150,000 a year.

Crazy.

The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3 percent, the median tax rate is 41.8 percent, and the standard deviation of all those rates is 5.3 percentage points. Basically, we all pay at about 40 percent, plus or minus 5.3 percentage points.

That's not a big range, particularly when you notice that it covers an income rise of 2,500 percent.

We have a de facto flat tax, with bumps and potholes (see table below).
The Tax Rate We Really Pay---The De Facto Flat Tax
This table shows the all-tax marginal tax rate for couples, as calculated by Kotlikoff and Rapson
Age $20,000 $30,000 $50,000 $75,000 $100,000 $150,000 $200,000 $300,000 $500,000

30

42.5%

42.3%

24.4%

36.9%

37.0%

45.9%

36.8%

43.9%

44.0%

45

41.7%

41.8%

35.8%

36.1%

36.1%

45.1%

35.9%

40.9%

43.2%

60

32.0%

36.3%

36.5%

45.5%

45.5%

47.7%

43.2%

45.8%

45.0%

Source: http://econ.bu.edu/kotlikoff , "Does It Pay, At the Margin, To Work and Save?"
So I have a modest proposal: Ask your congressman or senator if he has a clue about this. If he doesn't, regardless of party, he shouldn't be in office. Vote accordingly.

On the web:

Why do you favor the flat tax? ------------------------------------------------------------------------------------------------

Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.
Published Jan 27 2007, 06:00 PM by scottb
Filed under: ,

Comments

 

ABModerator03 said:

Interesting info- but I don't see capital gains at 15%. Have they been left out? If so, why?
January 27, 2007 10:55 PM
 

ABModerator03 said:

Mr. Burns:

In your article on U.S tax "diparity", you site a study, give no particulars. Where's the study...where's the proof?

What expertise do you have the qualifies you to write on financial matters?

John

From Scott Burns:

Here's the link to the column as it appears on my website: http://assetbuilder.com/?p=923. At the bottom of the column you will find a link to Kotlikoff's website, where the paper is available as a free PDF download. You can read my qualifications/bio here.  
January 28, 2007 7:39 AM
 

ABModerator03 said:

You wrote:

If this seems improbable to you, consider how easy it is to hit 40 percent. Just be self-employed (15.3 percent) and earn enough (anything over a taxable $31,850 single, $63,700 joint, or $42,650 head of household in 2007) to hit the 25 percent tax rate.

***

For the joint return mentioned above, the 63,700 is after accounting for deductions, personal exemptions, retirement contributions, and the employees part of healthcare insurance. The actual income is probably an additional 30,000 and higher than 63,700. At that level, one reaches the cutoff for Social Security taking 12.4% off the marginal tax rate. Thus, most of those filing joint returns do not face the marginal rate you claim.

Patrick

From Scott Burns:

You're right about the $63,700 being after deductions and exemptions setting the actual earned income up toward the $84,600 wage base maximum for 2007. That doesn't, however, mean that most households will escape the high rates because the higher you go on the household income scale the greater the odds that the income comes from two earners, both of whom earn well below the wage base maximum.

According to the Social Security Trustees annual report, about 93 percent of all workers earn less than the wage base maximum.
January 28, 2007 9:17 AM
 

ABModerator03 said:

Your article on flat tax was interesting although I think right for the wrong reasons: it doesn't really make too much sense to count social security/ medicare contributions as a tax since these contributions are in consideration of specific benefits an individual receives when they retire. Someone making 1$M/yr is going to get the same benefit as someone earning 100K.

On the other hand, the AMT is very much a flat tax. As this kicks in for increasing numbers of middle class and many affluent, it is a leveler - disallowing most of the very complex deductions in favor of accross the board flat tax rates.

It could be argued that the tax code is anti-progressive: many tax deductions 'phase out' at moderate to higher income levels. I don't have the exact figures but at about 110K of income to 160K or so, filers face steep marginal rates as the most popular deductions phase out. Somehow, congress didn't want to appear to be giving breaks to rich people, but it is completely unfair to tax the upper middle at effective rates higher than the top ones.

We'd be better off just giving everyone the deductions while adjusting the top bracket tax rates accordingly; or having none of the deductions at all. Sincerely, Dinos

From Scott Burns:

Many argue that the employment tax should not be considered because it is paid in consideration of future benefits. Those benefits, however, can be changed or reduced in a variety of ways. About 20 percent of all SS recipients, for instance, are now paying some amount of income tax on their benefits.

In addition, when the marginal tax rates are analyzed on a life-cycle basis that incorporates the value of expected benefits, the study found that same result--- essentially flat tax rates.
January 28, 2007 10:12 AM
 

ABModerator03 said:

I agree that we "pretty much have a flat tax" compared to the 1970's.

I'd also agree that the Ozarks Mountains are pretty much flat compared to the Himalayas. But, I wouldn't say that the Ozarks are just a bunch of bumps and potholes.

Back in the 70's federal marginal rates ranged from about 10% to 90%; now they range from about 15% to 54%. The really peculiar thing about marginal rates is that the highest rates don't apply to the super-rich. Bill Gates and Warren Buffet cap out at 35% on ordinary income and 15% on qualified dividends and LTCG.

You are no doubt aware that AMT and various phase-outs affect marginal rates. But, I wonder whether you're aware that a Form 1040 filer can have a 54% marginal rate.

Consider the following base case for a family of four:

Taxable interest $15k

Qualified dividends 30k

Business income 35k

LTCG 140k

Other income 5k

Total Income $225.0k

Adjustments

 ½ SE Tax (2.5)k

Individual 401(k) (11.0)k

AGI $211.5k

Std Deduction (10.0)k

Exemptions (6.4)k

Taxable Income $195.1k

Tax Table Tax $25,112

AMT -0-

SE Tax $4,945

Total Tax $30,057

Tax calculations are from TurboTax 2005. Now, consider the effect of a $10,000 increase in self-employment income.

Taxable interest $15k

Qualified dividends 30k

Business income 45k

LTCG 140k

Other income 5k

Total Income $235k

Adjustments

 ½ SE Tax (3.2)k

Individual 401(k) (11)k

AGI $220.8k

Std Deduction (10)k

Exemptions (6.3)k

Taxable income $204.5k

Tax Table Tax $27,464

AMT 1,588

SE Tax $6,358

Total Tax $35,410

Total taxes thus increase by $5,353 on a $10,000 increase in self-employment income. THAT'S A 54% MARGINAL INCOME TAX RATE, without any state income taxes! That's a pretty damn big "bump"!

For a $10k increase in taxable interest, the marginal tax rate is 43%. For a $10k increase in qualified dividends, the marginal rate is 33% (despite what you've read about the 15% rate on qualified dividends). If you doubt these calculations, I challenge you to check it out on TurboTax 2005.

(An honest appraisal of the Social Security/Medicare system would value the expected present value of future old age and other welfare benefits for this individual's marginal SE taxes as approaching zero.)

I think your article should have highlighted such cases in the real world as well as the really absurd cases at lower income levels, and should have included the following quote from the Abstract of the Kotlikoff-Rapson paper:

"… the patterns by age and income of marginal net tax rates on earnings, marginal net tax rates on saving, and tax-arbitrage opportunities can be summarized with one word — bizarre."

Another useful quote would be "the US fiscal system provides most households with very strong reasons to limit their labor supply and saving." The hypothetical individual's case outlined above could easily be a 55-year-old who, after a life-long habit of saving and investing, has learned that the federal government is the majority partner in his own business. This hypothetical individual may not complain overmuch about his average tax rate, but the marginal rate will likely influence his decision to work.

Bob

From Scott Burns:

I understand your point about the Ozarks vs. the Himalayas. I think the similarities in tax rates, however, are more important than the differences--- and all are urging us to work less, not more.
January 28, 2007 2:32 PM
 

ABModerator03 said:

Scott,

First, I am not a statistician. I remember that six standard deviations account for about 97% of a normal population and that + or - two standard deviations are used as process control limits.

If that is true then your statement that "Basically, we all pay about 40 percent plus or minus 5.3 percentage points." may not be quite accurate. As you stated in the paragraph preceeding some may pay a marginal tax rate of 24.4% and some 47.7%. Not exactly within plus or minus 5.3%.

I read your column regularly and feel I learn much from it.

Ed

From Scott Burns:

One standard deviation accounts for 67 percent of a normal distribution. That's a majority and that's what I am referencing. Adding another standard deviation would account for about 97 percent of the sample, as I recall, which would make the 24.4 percent figure a 4 SD outlier.   What I was trying to point out is that most people fit in that plus or minus one SD--- so we have a kind of flat but highly irrational tax system.
January 28, 2007 5:04 PM
 

ABModerator03 said:

Scott, did you look at how this study was conducted or did you just swallow the results without hesitation? I suggest that this is just more liberal propaganda to make us beleive that rich people, of which I am not by the way, may no higher a percentage of their income in taxes as poor people. I would be shocked if someone earning $20,000 pays 42% of his next earned dollar in taxes. Point me to the study and I suspect that I could prove that this group decided what they wanted the outcome to be and then made sure that their study came out that way.

Mike

From Scott Burns:

Not so. Kotlikoff is a primo researcher who I know very well, having written one book with him and working on a second. On a recent visit he said he's long had a problem: That the Democrats think he is a Republican and the Republicans think he is a Democrat. In fact, he tells it like it is. If you read the column you will see that the analysis includes both taxes and government benefits. As a consequence, a lower income household can suffer a very high marginal tax rate because additional income can cause them to lose benefits (such as the earned income tax credit) AND pay higher taxes, hence the high marginal tax rates.His examination shows that across a very broad spectrum of income we have an essentially flat tax system. At the very farthest extremes, we have perversely opposite effects. The lowest income households face the highest marginal tax rates because they lose benefits as well as pay higher taxes. The highest income household substitute capital income for labor income and enjoy lower tax rates.

To me, dealing with the far extremes is a waste of energy. What I see is exactly what Warren Buffett observed--- that his secretary pays taxes at a higher rate than he does.

  

Scott, I think that you pretty much proved my point.   Losing benefits is not a tax increase.     It is a loss of benefits...period.   The net effect may be the same but if he calls that an increased tax then he does that to further his agenda that taxes are flat despite the graduated tax tables.   Hence his desired solution no doubt would be to a) let poor people keep their benefits even as they move out of poverty, or b) make the tax tables even MORE graduated.     Both of these approaches are ultra-liberal.

I understand taxes thoroughly.   The bottom line is that, as far as income taxes go, he's just flat-out wrong.   Other taxes, such as taxes on gasoline, etc., are not graduated at all, and they could even be regressive as a percentage of a poor person's income.   But income taxes are graduated.     There is no getting around that.

  

From Scott Burns:

Believe what you want, but know that it is what you want to believe, not what is true. Kotlikoff is NOT an ultra liberal. He is a serious and well respected academic with a deep interest in fiscal policy. You'll understand where he's coming from if you read our book, "The Coming Generational Storm" (MIT Press, 2004). It deals with these issues in depth and poses fiscal solutions for government and investment solutions for individuals. The book sold 50,000 copies in the U.S., has been translated into five languages and was endorsed by five Nobel laureates.
January 28, 2007 6:42 PM
 

ABModerator03 said:

The proponents of the Fair Tax suggest that the rate is somewhere around 23% but I have read several other studies that suggest that rate would be much greater, closer to 50%. The other studies pointed out that Fair Tax plan counts government purchases(even from other government agencies) which surely won't pay sales tax. How is the rate caluculated and is there any chance that the rate is too low.

  

From Scott Burns:

Like most things, there are a variety of opinions on this. As a practical matter, the federal government costs about 20 percent of GDP to support. So the fair tax, which incorporates ALL federal taxes, should be close to that figure. Exactly where it is depends on which transactions are included and which are excluded.
January 29, 2007 12:47 AM
 

ABModerator03 said:

Friend,

Do you know of a website where I might take a look at this study?

Peace,

Tom

From Scott Burns:

It's available as a PDF download on Kotlikoff's website. The link to his website can be found at the bottom of my column at: http://assetbuilder.com/?p=923
January 29, 2007 5:40 AM
 

ABModerator03 said:

scott, hi -- i followed your article in the globe with interest.   can you explain how: -the 30 year old couple earning $20,000 pays a marginal tax rate of 42.5% compared to -the 30 year old couple earning $50,000 paying a marginal tax rate of only 24.4 %? thanks, all else makes sense. Jeanne

From Scott Burns:

Kotlikoff includes all taxes and government benefit programs such as the Earned Income Tax Credit. Households with very low incomes have very high effective marginal tax rates because increases in income mean they lose benefits as well as pay more in taxes. The effect is really extreme at the lowest income levels where loss of Medicaid benefits raises the effective marginal tax rate still more.
January 29, 2007 5:44 AM
 

ABModerator03 said:

Mr Burns:

Your article on the marginal rate of individuals published today has an error in it. A 30 year old couple making $30,000 a year does not have a 42.5% rate. You say that in one part of your article and in another you say that a 30 year old couple earning $50,000 a year has a marginal rate of 24.4%. Does the tax rate go down from $30,000 to $50,000? In fact a couple would have to hit the $80,600 mark before their marginal rates get up to 42.5%. Perhaps you should have pointed that out somewhere in your article. Actually even the $80,600 mark is slightly too low, if we are going to include the SSN for both the employer and employee as the employee's tax then you should include in your income the tax paid on behalf of the employee as income. You might also have pointed out that a couple with only one wage earner in it maxes out on social security at around 70,000 or so. So for this couple they never never reach the 42.5%. I generally like your articles but I feel that this one should be recalled.

Sincerely, Jim

From Scott Burns:

The figures cited came from the Kotlikoff paper which you can access and read if you go to his website. What you apparently didn't see or absorb in the column is that his calculations include all taxes and also adjust for government benefit programs. As a consequence, the effective marginal tax rate of lower income households can be quite high because they lose benefits like the earned income tax credit, etc. Indeed the highest effective marginal tax rates apply to the very lowest income earners due to loss of Medicaid coverage, etc.

You are correct in your observation only if you limit your analysis to two taxes, the employment tax and the income tax. The wage base maximum for Social Security is $84,600 this year, as I recall. About 93 percent of all earners earn less than this amount.

I missed the governmental benefits part. Probably because almost most of your article talked about taxes. In your example the couple making 20,000 a year would be in the 10% marginal tax bracket. I still say that it is deceiving to imply that their marginal rate is 42.5%.

If you add a $1,000 to their income their federal tax goes from $313 to $413.

By the way the max social security amount is now $97,500. From Scott Burns:

Thanks for reminding me that my recall isn't always accurate!

What a low (or high) income household experiences when you add $1,000 of earned income is what counts. If you add $1,000 but lose $150 to employment taxes and also lose $300 of government benefits, your effective marginal tax rate is 45 percent because your net gain in income is only $550. That's not deception. It's what happened to your bank account.
January 29, 2007 6:18 AM
 

ABModerator03 said:

Hi Scott, I read your article in today's Daily Breeze in California. Why are the percentages different for different age groups. I thought the taxes were based on income alone. Another question. I am retired and have started to withdraw from my IRA since I reached the magic age of 70 1/2. How do I get at least 6% on my money to live off while maintaining my principal, safely. Thanks Jerry

From Scott Burns:

What you pay in taxes depends on more than income. It depends on:---- whether your work or not ---- your marital status ---- whether you can itemize deductions ---- where you live (state) ---- whether you have children at home ---- whether your other sources of income cause your Social Security benefits to be taxed.
January 29, 2007 10:03 AM
 

ABModerator03 said:

Scott,

I am an admirer of Kotlikoff's software. And if I was starting fresh, having not invested 100's of hours just trying to understand my own position, I would buy the software in a minute. It is very valuable providing surprising insights.

So the numbers I believe. We are talking wages and benefits and related taxes. But for some reason Kotlikoff doesn't include capital gains. Why doesn't he include capital gains?. (I searched the PDF and found no reference to capital gain taxes). Without knowing why I have to put his work in a temporary storage area called "ideological" thinking or maybe "flat tax propaganda".

Cheers

David

  

From Scott Burns:

Don't be so cynical! The title of the paper tells the story: "Does It Pay, At the Margin, To Work and Save?" What he's measuring is the marginal tax rate on labor income, which wouldn't include capital gains income. The paper also examines the marginal tax rate on savings but it is done separately.

I focused on labor income because that's the kind of income that most people have.
January 29, 2007 11:23 AM
 

ABModerator03 said:

Mr. Burns,

If we already effectively have a flat tax, why doesn't Congress officially adopt it and let individuals and businesses re-direct to constructive purposes all the money that we are currently paying to tax accountants?

Will

  

From Scott Burns:

Good question. They should be called to provide the answer.
January 29, 2007 12:49 PM
 

ABModerator03 said:

Scott,

I'm sure a thousand people have already written you -

The article on the 'de facto flat tax' implied that Social security was withheld from first dollar to last dollar of wages..

Actually, the Social Security withholding stops at $97,500 of income so the 6.2 (employee rate) or 12.4 (self employed) drops out of the 'flat tax' rate at that point.

Medicare continues to infinity...

Yet another way the government taxes us low- and middle- income folks and gives a benefit to the wealthy.

Carla

  

From Scott Burns:

You made the inference that Social Security was taken out of all wages, it was not implied. There is a difference.

That said, the major reason marginal tax rates on labor are so strikingly level across a wide band of income relates to exactly what you point out--- that the employment tax for incomes under the $97,500 wage base maximum does much to raise effective tax rates on middle income households.
January 29, 2007 3:13 PM
 

ABModerator03 said:

More illuminating than means and standard deviation would be a distribution of the tax rate versus income. Is this information available? I bet it would show more than a few bumps or potholes.

  

From Scott Burns:

You'll find a table with that information--- marginal tax rates by age and income--- on my website at the bottom of the column. It's at this link:

http://assetbuilder.com/?p=923

I often include tables in my columns but many papers delete them because they are difficult to compose for print editions. You can find an archive of my columns here at www.scottburns.com.
January 29, 2007 8:38 PM
 

ABModerator03 said:

Hello Scott,

Two of us read your article in this past Sunday's Boston Globe and neither one of us understood it.....neither one of us is a dummy. Your opening hypothesis was interesting but the "proof" if you will was not clear. Would you mind explaining in a nutshell.

Roxann

  

From Scott Burns:

The basic idea was to figure out what workers at different income levels truly pay in taxes if they increase their income by $1. Economists call that the marginal tax rate. The study shows that when you consider taxes beyond the income tax---- like the employment tax, state income taxes, sales taxes, and the possible loss of government benefits as income increases, the aggregate tax rate is about 40 percent and is remarkably level.

The people facing the highest marginal tax rates are those trying to climb out of the lowest income levels because they not only pay taxes but they lose benefits such as Medicaid eligibility and the earned income tax credit.

The real bottom line is that our tax system if a botched up travesty, filled with perverse incentives and wildly more burdensome at all levels of income than politicians of both parties want us to believe.
January 30, 2007 7:03 AM
 

ABModerator03 said:

You had taken a nice little, and welcome might I add, break from pushing the flat tax idea that is so close to your heart. I have one comment or two and a question. You say that "Democrats argue that taxes on the rich should be raised because others (Republicans would call them slackers who can't earn money themselves) need the money. This wins legions of voters who aren't rich". I know the so called Death Tax (more realistically termed the inheritance tax) is not part of the income tax structure per say but the fact that Republicans have nearly managed to sell elimination of it using scare tactics and clever terminology (like calling it a death tax) shows just how inventive and devious the rich can be. They think hard work means figuring out ever more clever ways to take money from people who do actual work. Second you call the fact that a person working for someone else only pays half of the employment tax "window dressing". By terming it that way what you are actually saying is that without that second half of the employment tax the employer would gladly give that money to the employee. I don't think so. The rich being what are, basically insatiable when it comes to having more money, would pocket all of the savings from not paying the tax. Now for the question. Early on in your column you say that a self employed couple hits that magic 40% tax level just by paying 15.3% employment tax and earning $63,700 on a joint return paying an incremental 25% tax. Further on you talk about two couples, one earning only $20,000 and one earning $500,000 and say that both have an incremental tax rate of about 43%. I know most of your readers are much more astute than I am and probably already have this figured out but could you explain how that couple earning $20,000 could possible be paying a 40% plus incremental tax rate on the next dollar earned over $20,000? Bottom line on this tax question is that flat tax, present tax structure or something else the rich will continue to find ways to come out way ahead financially than people doing actual hands on work. And with the growing "me first", lying, cheating and stealing is OK to get ahead mentality that trend will only accelerate. Oh and with the growing population that just means more "marks" for the rich to harvest from.

Craig

From Scott Burns:

The marginal tax rates at each income level, as stated in the column, were computed by considered a variety of taxes AND government benefits. For a $20,000 household the marginal tax rate can be over 40 percent because they also lose government benefits as their income increases, e.g. Medicaid at the very lowest incomes or the earned income tax credit for the working poor.
January 30, 2007 4:35 PM
 

ABModerator03 said:

To avoid reaching the wrong conclusion from this data it is important to remember that there is a big difference between marginal tax rate and overall tax rate. A couple earning $20k, paying no income tax, and receiving a net of $1000 in government benefits would be paying a 40% marginal rate if earning one more dollar resulted in 40 cents lost benefits. So their marginal rate is high while their overall tax rate is -5%.

Don

From Scott Burns:

True. Examining marginal rates is a way to see whether people have any incentive to earn more. One of the things the study makes clear, for instance, is that while low earners may have a negative average tax rate, their marginal tax rate can be as high as 100 percent as they earn enough additional income to loss, say, Medicaid coverage.
January 31, 2007 9:13 AM
 

ABModerator03 said:

Scott -

This premise was provocative. However, the article left me with an uneasy feeling of disconnection between the marginal tax rates shown in the table provided and some of the specific tax changes relevant to your typical readers. An example of this would be the FICA tax ceiling and the phase out of various tax deductions at higher income levels. Also, without understanding the underlying assumptions of the study, it was difficult to rationalize some of the tax differences across age brackets at a common income level.

I don't have the time to read through all 73 pages of the original paper however In perusing the paper, most of Kotlikoff's focus appears to be on marginal tax rates for people with a gross income of $0-$50,000 year. Little information was provided at the inflection points of the curve for the graphs for incomes of $50,000 or above which are more relevant to your audience. Perhaps that information is provided in the text of the document in which case this would have made a more relevant and interesting article for your audience.

Perhaps you can do a follow-up article which better addresses the study in the context of the interests of your readers and with an explanation of the key drivers where there are changes. I suppose this flies in the face of your original premise that the rates are all essentially the same. However, I was more interested in better understanding the tradeoffs in nominal marginal tax rates, social security and related federal tax deductions.

Best Regards,

David B

  

From Scott Burns:

The study is evenhanded about incomes and ages. If it actually did emphasize incomes of $50,000 and under, it would still be putting emphasis on about 50 percent of all households. The important part of this that makes it non-intuitive is that the study also includes the loss of government benefits when additional income is earned as well as multiple taxes.
January 31, 2007 9:21 AM
 

ABModerator03 said:

Mr. Burns, you make an interesting point in today's column ("We already have a flat tax"). But thanks to a misinterpretation of the standard deviation, the point is exaggerated.

You wrote, "Basically, we all pay at about 40 percent, plus or minus 5.3 percentage points." In fact, about two-thirds of us pay about 40%, plus or minus 5.3.

If you really want to talk about most of us (e.g., 95%), then you need to stretch two standard deviations on either side of the mean. In other words, the more accurate statement is that "Basically, we all pay at about 40 percent plus or minus 10.6 percentage points."

Thus, the correct interval is about 29% to 51%, not 35% to 45%, so the "bumps and potholes" are larger than you make them out to be.

From Scott Burns:

I understand. My point was to show that the distribution of marginal tax rates was relatively narrow. It would not have been had the SD been, say, 10 percent or 15 percent. But at an SD of 5 percent against an average of 40 percent, we ALL pay taxes in a relatively narrow (and flat) band of marginal rates.
January 31, 2007 5:37 PM
 

ABModerator03 said:

Scott, It seems like leaving out capital gains taxes paints an overly rosey picture of the equity in tax rates for all Americans. The reality is that people holding 99% of our nations wealth, do not pay even close to 40% in taxes, which means the burden of the taxes fall directly to the middle class. I'd love to see the shift in percentage of taxes paid for our nations top 1% of earners, and the amount of taxes they would pay, if taxed at the same 40% rate as the rest of us. I have a feeling our nations education, healthcare and social services would be looking pretty good with that revenue coming. Not included is also the number of tax evaders who the IRS doesn't even attempt to go after. The loopholes again shift the burden straight to the middle class. I read above that you don't like to discuss the upper boundries, however, in this case I think the upper boundries tell a compelling story of how our 40% tax rate could be substantially lower if those folks were paying an equal percentage taxes for their income/capital gains taxes.

Thanks,

Leslie

From Scott Burns:

The study examines marginal tax rates on labor and capital, but it does it separately. Those at the high end of the income scale often have choices about how they realize their income and many choose to do it in capital gains rather than labor income. That's why, as one reader pointed out, Warren Buffett pays taxes at a lower rate than his secretary.

The importance of the NBER study, however, is that it shows how much most Americans pay in taxes on their labor income, that the rate is remarkably level, and that graduated tax rates are a work of political fiction.

Some would use this as fodder for raising tax rates for high income earners. I think that's missing the point: If most workers are facing marginal tax rates of 40 percent or so, most workers are paying taxes at too high a rate.
January 31, 2007 9:48 PM
 

ABModerator03 said:

Scott, Have read different points of view on the actual rate(23%) and how it's obtained. Isn't this considered inclusive vs. exclusive, which would make the effective rate much higher? Wouldn't the effective rate be 30%. So if someone buys a $150,000 house they would pay $195,000. Don't think this type of system would sit well with consumers. This is also in addition to state & local sales tax so where I live the effective rate would be 40% on most items. There are also many questions on whether or not the 23%(30% effective) rate is adequate, some believe it will have to be closer to 36%(57% effective) which no one will pay, that would be 67% with state added. The proposal sounds inticing but is it really feasible?

  

From Scott Burns:

A flat tax won't be feasible until we stop paying attention to the politicians who frame the questions in terms of envy or special gain. That may be never.

Both parties, which purport to work against each other, have consistently managed to increase the commitments and obligations of government far beyond the formal bookkeeping. Remember, the unfunded liabilities of the U.S. government are now greater than the net worth of the entire private sector.

It can be argued that most other countries are in far worse shape but other countries don't have a currency that is used throughout the world.
February 4, 2007 11:49 AM
 

ABModerator03 said:

[...] was an interesting article over on Scott Burns page that argues we are paying an effective flat tax on our incomes. This is a [...]
April 23, 2007 10:55 PM

About scottb

Scott Burns has covered the changing world of personal finance and investments for nearly 40 years. Today, he ranks as one of the five most widely read personal finance writers in the country. Scott began his career as a newspaper columnist at the Boston Herald in 1977 where he was also the financial editor. Nationally syndicated in 1981 and now distributed by Universal Press, the column appears in newspapers from Boston to Seattle. In 1985 he joined the staff of the Dallas Morning News where his column quickly became one of the most widely read features in the paper. He left the Dallas Morning News in 2006 to become one of the founders of AssetBuilder and its Chief Investment Strategist. Burns is a graduate of Massachusetts Institute of Technology (1962). He has written four books, including "The Coming Generational Storm" (MIT Press, 2004) coauthored with economist Laurence J. Kotlikoff. His fourth book, also coauthored with Kotlikoff, will be published this spring by Simon & Schuster. "Spend Til' the End" uses consumption smoothing to demonstrate the errors of conventional financial planning. His business experience includes working as a staffer for a major consulting company and service as a director and audit chairman of a NASDAQ listed manufacturing company. He and his wife divide their time between Dallas and Santa Fe, New Mexico.
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