Posted by Cameron @ 9:39 pm on October 29th 2011

The story of B

Weirdly, I’m going to start with math. So hold on. Who remembers high school algebra? The slope of a line has a pretty simple little formula: Y = M*X + B. In this, M is the slope of the line and B is the spot where the line crosses the vertical (y) axis. Think about a line that is very simple: y=x this means that when y=1, x=1 and when y=2, x=2 which is going to make a line that goes out at a 45 degree angle equally in both the vertical and horizontal directions. The spot where it’s going to cross the y axis is 0 because there’s no alteration of B. Since B is zero and since y=x and when x=0, y=0 so the spot where the line crosses the y axis is 0. Now picture the new equation y=x+1. In this when y=1, x=2 and when y=2 x =3. The spot where this crosses the y axis is 1. The whole line is moved up a spot from the y=x line. It’s not very complicated but that little number has a lot of power in shaping the line. Remember this for a few minutes.

As the GOP primary season ramps up, the idea of a flat tax is getting tossed around. A flat tax seems like a simple enough idea where everybody pays the same rate of tax independently of income. Those that earn more will pay more in dollars but not percent of income.

It’s put forth as a simplification of the extremely convoluted system that we currently operate under. As a bit of a primer, the current system has a tiers where higher rates are paid on earnings above various thresholds. It’s always bugged me when people complain about being in a higher tax bracket. They aren’t really. Only the income above that bracket is in the higher tax bracket. For instance, consider a system with two brackets. The first is for money under $30,000 with a 10% rate and the second is for money above $30.000 at a 20% rate. If you earn $40,000, you’ll pay 10% on the first $30,000 and 20% on the last $10,000 for a total of $5,000. What this doesn’t mean is that if you earn $30,001 you’ll pay 20% on the entire amount. You’ll only be paying that higher marginal rate on that single dollar.

If the system was only as complicated as these tiers of variable rates, it would fill no more than a few paragraphs. The real complexity of the tax codes come in the numerous exceptions and write-offs and credits and all the other fruits of labor of the lobbyists who’ve succeeded in carving out niches of benefits for their clients.

So a flat tax is commonly suggested as a solution to this tax code bloat by folks with a more economically conservative bent. There are some reasonable objections to be made to such a cut and dry system though. Because of their more limited means, the poor will pay a higher percentage of their operating budgets in taxes than the wealthy. It’s a compelling argument to tilting the tax code so that those who earn the least pay less in real percentile terms. The way this is currently accomplished is with a combination of tax credits and low rates for the first portion of income.

The thing is, this could be accomplished with a flat tax remarkably easily. If the goal is something simple yet still somewhat beneficial to the poor, a simple straight line system with zero allowed exemptions or credits could be wonderful. I might be willing to allow some write-offs, but let’s assume that are none in the following example with a a tax code written like this in its entirety:

All income earned per person in excess of $20,000 per year shall be taxed at a rate of 20%.

So let’s do some math: somebody making straight minimum wage would earn $15,080 per year and would pay nothing in taxes for a rate of 0%. Somebody making $30,000 would pay $2,000 (20% of the amount above the threshold which is $10,000) for a rate of 6.6%. Somebody making 60,000 would pay $6,000 in taxes for a rate of 10%. Somebody making $1,020,000 per year would pay $200.000 in taxes for just shy of a 20% rate.

So there you go, a progressively tiered rate system built into a flat income tax system. Best of both worlds, no?

The cool thing is that $20,000 could be anything we want. If you hark back to the math at the beginning, you’ll recall that B has some power. That starting point of the income tax is nothing more than B. If B is zero, everybody pays 20% which is what is often understood to be the classic flat tax system. But if that value is moved it up to just $8,000, the system would be set up to that those earning the minimum wage pay just about half the rate of everybody else (in a graduated change, as we saw above). If it were made $50,000, it would be a a system where very few paid taxes higher than single digits.

The question of the value of B and at what angle the line should move upward at are policy questions. A flat tax can be as nearly as distorted and as unfair as our current system, but it’s a bit of a misnomer to represent a flat line as always y=mx as opponents of a flat tax generally do. There is a B, and B matters.

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