U.S. Personal Income Taxes 2

Over the next few postings, I'd like to consider the advantages and disadvantages of a few different potential income tax strategies.

The first one I'll write about is a flat tax. As you read in my first posting about U.S. personal income taxes, a flat tax of less than 12.7% would result in at least as much income tax revenue for the U.S. government as the current tax code.

Advantages of a flat tax over existing tax laws include the following:

• simple and easily understood


• everyone pays same percentage of their income


• tax can be accurately withheld from both earned and unearned income


• income tax can be collected when income is distributed (no free loans to individuals who underpay their taxes and pay rest when file, no free loans to government by people who overpay their taxes and get refund when file)


• potentially no individual tax forms to file and thus most individual tax documentation, preparation time and expenses may be eliminated


• reduced tax calculation errors (both unintentional and fraud)


• reduced costs for Internal Revenue Service (IRS): tax form publication, tax education, tax collection, and tax enforcement

Some disadvantages of a flat tax:

• reduced work for individual tax preparation businesses (accounting, filing, publishing, etc.)

Some differences:

• does not subsidize desired societal behaviors with special-interest tax incentives


• higher taxes than currently for people with low incomes


• higher taxes than currently for people who take advantage of special-interest tax laws


• lower taxes than currently for people with middle and high incomes who don't take advantage of special-interest tax laws

I'm particularly concerned about higher taxes for people with low incomes, so the next posting will look at multiple tax rates.

U.S. Personal Income Taxes 1

What if U.S. personal income taxes were perfectly fair, and everyone paid the same percentage, with no special-interest credits, adjustments, or deductions, and the same tax rate for every type of income? How much would each of us pay?

That calculation should be easy, right? Just take the total of all personal income taxes and divide by the total of all personal income. Unfortunately, this was more difficult to discover than I thought it would be. I couldn't find IRS reporting of total income. The closest reported statistic was adjusted gross income (AGI), which already includes more than a dozen special-interest income reductions.

Naively using IRS tax statistics based on AGI and individual income tax revenue, I calculated 13.8% for both 2007 and 2006 tax years.

Using other IRS tax statistics based only on positive AGI, the rates were 12.7% for 2007 and 12.6% for 2006. A lower overall rate is likely due to eliminating the effect of reducing the AGI denominator with negative AGI tax returns that do not contribute to income tax revenue.

If we were to use total income rather than AGI, the rate would thus be lower than 12.7%. Note that this also excludes all of the people who do not file an income tax return. Including them would lower the rate even further.

So, if everyone paid the same percentage of their income in federal income taxes, the rate would be below 12.7%!

Of course, this considers neither the societal preferences that those with lower/higher incomes not only pay lower/higher taxes, but also pay lower/higher tax rates, nor the myriad of special-interest tax laws that subsidize various encouraged societal behaviors.

IRS tax statistics: http://www.irs.gov/taxstats/index.html