Feb
7
2009

# T = rI – B

About twenty years ago, I came up with a crazy formula to fix the whole tax and benefit situation in one fell swoop.

The formula is a riff on the flat tax idea. Flat taxes are popular with people who earn a great deal of money because they have a veneer of fairness. The veneer hides messy details like the fact that rich people get much of their income from capital gains (which is taxed at a lower rate) and the fact that less rich people pay relatively more in payroll taxes (because there is a ceiling) and poor people pay relatively more in sales tax (because they spend more of their income).

So here’s the deal, Rich People. You can have your flat income tax but in return we redefine the word income to mean “money that comes in”. Dividends? Income. Capital gains? Income. Your tax shelter company’s profits? Income. If someone dies and leaves you a ton of money? Income.

No other taxes. No payroll tax. No property taxes. No sales tax. No deductions either.

Then we’ll create a flat benefit to go with our flat taxes.

Get rid of all the complex benefits (food stamps, medicaid, social security, unemployment benefit, government pensions) and replace them with a flat benefit. Everyone gets the same benefit.

So to calculate your tax liability, you add up all your income (I) and multiply it by the current tax rate (r) and subtract the current level of benefit (B).

T = rI – B

If the number is positive, that’s how much tax you owe. If it’s negative, the government mails you a check.

In all the years of defending my crazy idea, I have heard only two convincing arguments against it.

1. Rich people pay much more in taxes and would pay much less under a flat tax.
2. What about all those housewives who would suddenly get a big chunk of B when they previously got nothing.

I still don’t have a good answer for the housewife objection but I just got a big helping hand with the other one.

I had always suspected that rich people don’t actually pay those marginal rates but never got around to doing the research to know for sure. Lucky for me, the IRS has just published numbers for 2006.

The income of the 400 wealthiest Americans swelled in 2006, soaring nearly 23 percent from the previous year, to an average of \$263 million, according to data released Thursday by the Internal Revenue Service. Since 1996, this group has nearly doubled its share of all income earned in the United States.

The top 400 paid just more than \$18 billion in federal income taxes in 2006, or an average of \$45 million, on a record \$105 billion in total income — the lowest effective tax rate in the 15 years since the agency began releasing such data.

That comes out to 17%.