Another thought on tax: Experience

I think experience matters more than theory. Why sit around and talk about how well something will work when we have experience so we can see how they work? Experience reveals the unintended consequences that may not be considered in stylized discussions of idealized scenarios.

The trick, however, is recognizing where we have experience. Sometimes such experiences hide in plain sight.

There has been much debate a flat and simple tax code for at least 20 years, if not more.

But, one thought that I didn’t include in my previous thoughts on taxes was that we already have a flat tax model at work and it has been there for quite some time: Social Security and Medicare tax.

Below is the entire Social Security and Medicare “tax code” from the Social Security Administration’s website.

For 2012, the maximum taxable earnings amount for Social Security (OASDI) taxes is $110,100. There is no limitation on taxable earnings for Medicare’s Hospital Insurance (HI) taxes.

Employee/Employer

  • The Social Security tax rate for employees is 4.2 percent through the end of the year
  • The Social Security tax rate for employers is 6.2 percent
  • The Medicare tax rate is 1.45 percent for employees and employers

Self-Employment

  • The Social Security tax rate for self-employed is 10.4 percent through the end of the year. The Medicare tax rate is 2.9 percent for self-employed.

That’s pretty simple. Over the decades, somehow, Social Security and Medicare have managed to resist the ‘fairness’ urges that have made the income tax code a complex behemoth.

While we hear some squawking from folks to make this flat tax more progressive, that so far hasn’t risen above the extraneous noise level because I believe most people view it (perhaps incorrectly) as something they will directly benefit from, so they feel it’s fair to pay their share.

You do not have to file a Social Security/Medicare tax return. The total taxes collected through Social Security are about half of the Federal income tax.

If you’re opposed to a simpler income tax code, you should at least consider that the Social Security/Medicare is a relatively flat tax that seems to do its job without creating an inefficient compliance bureaucracy.

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2 thoughts on “Another thought on tax: Experience

  1. Hi Seth –

    I support a very simple tax structure at both state and federal levels. As you know, that which we tax, we get less of and that which we subsidize, we get more of. Unfortunately, taxes on income (that is, productivity), whether they be flat or progressive, punish productivity. I don’t think that should be our goal. Now, at certain low rates of taxation, this disincentive has relatively little effect. Unfortunately, at the cumulative rates (federal, state, social security, Medicare, sales, etc.) currently imposed on producers coupled with “entitlements” we provide for the non-producers, too many people CHOOSE to produce LESS than is required to support themselves while we have a shrinking pool of producers who carry the load.

    What I propose – but will never sell politically because of Tocqueville’s (or was if Franklin’s) prediction – is a fixed tax where each household pays an identical tax for the head of the household (regardless of income) plus smaller additional amounts for each dependent. This should be coupled with severely curtailing government spending on entitlement programs and limiting welfare/entitlement to a true safety net, i.e. those UNABLE (not simply unwilling) to provide for themselves get enough to survive, but not so much that they become “too comfortable” and have little incentive to work.

    This would encourage productivity and discourage sloth. It would also remove the incentive – and sometimes the necessity – for both parents to work and thus keep more parents in the house to (hopefully) contribute to better child rearing. It would also serve as a brake on parents (or parent) to have more children than they can really afford.

    Such a tax would also serve as a limit to government spending. Just as most working families do with their family budget, with EVERY citizen having equal financial responsibility for our nation’s expenditures, people will carefully consider and scrutinize the things government spends OUR money on.

    It would also take power away from the federal government and place it back at the local level with citizens. Politicians would not be able to bribe or be bribed by constituents and cronies, using the tax code to reward certain segments with deductions and credits.

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