Calling All Math Wizs!! Is There a Simple Progressive Tax Formula?

[ulTRAX]

Flat-tax proponents claim a flat tax would be so easy it could be done on a postcard. Of course what their real goal is, is to gut the progressive income tax.

I'm certainly no math wiz so this is beyond me... but is there a simple formula that will allow anyone to figure out their taxes in a progressive system WITHOUT pages and pages of IRS income and bracket charts?

For example.... say we take two data points... and leave out loopholes and deductions. Is there a simple formula that can accommodate both someone making $20k paying 5% tax and someone making $20 million is to paying 40%? A formula that would create values for every worker in between?

[Redleg]

1. I'm not a mathematician but it seems to me it should be pretty easy to do.

Assume that the tax rate increases at a constant rate from 5% to 40%. You are really just talking about a linear function with a slope and Y intercept that you determine ahead of time.

[theorist]

6. If we want to conserve the current system,

linearity is out of the question. It would look more like an exponential curve. Looking at the whole thing (from lowest income to the highest) it would look almost flat until you got right near the end. But if you zoom in on the flat part, it would look similar.

That's how it should be. The more you benefit from the system (and it is a great one), the more you are obligated to contribute. There are no free lunches, but your rich friend should take the tab more often.

[RoeBear]

10. Hmmmm....

"There are no free lunches, but your rich friend should take the tab more often."

Person 'A' earns $20,000 pays 5% tax = $1,000

Person 'B'earns $20 million pays 5% tax = $1 million

Sounds like person 'B' is picking up the tab quite well.

[theorist]

13. My position.

Raising a couple kids on $19,000 is much harder than doing the same with $19 million. I know that's a strawman argument. The thing is that if one had to pay 40% of that $20mil, they are still comfortable, and we actually have a chance of balancing the budget. I believe that that fortune is not wholly owned by the person who made it. When someone capitalizes on the system that all of our families have built, they should be eager to pay their share. Social contract and all....

[papau]

23. but A has 19000 where 25000 gets you food and care, while B has near 19m

left after basic food and care are taken care of -

I'd say A needs no tax, and B can pay more without much hurt.

Plus B is the fellow that requires that infrastructure and military and police to protect his assets - so lets have B pay for the defense department and 99% of the police.

[Name removed]

26. Deleted message

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[papau]

21. equivalent to a flat rate with a large standard deduction.,

but I like my version (below) better!

peace

:-)

[theorist]

2. Sure.

It's just a matter of fitting some functions to the curve you want. I don't think it would be possible to do it on a postcard. It would be a matter of putting in your income into a computer program and it would spit out your owed taxes. I personally don't find the current system too difficult. Their real complaint is that it's "too hard to avoid paying taxes". If it were all on a postcard, transparency would optional.

Also, a situation that you describe assumes that everyone is the same, but I have a feeling that a waitress with two kids and a college student (both making ~$20k) are not in the same boat. The former deserves a few more breaks than the latter.

[papau]

3. Yes - and it is not the progressive tax rates that is problem but "INCOME"

definition takes 900 pages.

The rates are no big deal.

The big deal is the attempt to make investment income - which is 90% of the total income of the rich - less taxed or not taxed. That takes 900 pages dealing with overseas corps, partnerships, allocations - the things that make accounting a 4 year professional degree at the university!

[ulTRAX]

9. one issue at a time

I'm just looking for a counter argument to the Right's appeal to simplicity.

[papau]

20. the point is that applying the rate is not complicated - plus if math

challenged, a very nice progressive scale cal be developed with a "flat tax" - meaning a single rate - that is applied after major deductions that are per person, per family, per child, and per return, and a mortgage interest deduction limited to the size of the loan remaining - but no larger than say 1 million - times a fixed assumed interest rate - say 5%.

Throw in a charity deduction of up to 10% of first 1 million of income - meaning no more than 100,000 - and an investment income deduction of up to 25% of the first 400,000 of investment income - defined as capital gains plus dividend plus interest - and all bases are covered and we have a "flat tax" that is very progressive.

Granted the top rate should be around 40% to get the required revenue - but it works as "simple". I would also include a 1% tax on net worth in excess of 10 million per year - again "simple"

[SharonAnn]

22. It would be simple if you taxed ALL income and didn't have all

these loopholes so that there is a lot of income (by various categories) that gets preferential tax treatment.

Just tax all income. Income is a benefit we gain from the protections and stability and law enforcement of our government. The more income we get, the more the government contributed.

Just pay up!

Instead, they want the worker to pay all the taxes because income from capital is somehow sacred and so is income to corporations.

"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration."

Abraham Lincoln

[Warpy]

4. Simple formulas are for simpletons

and that's what got the progressive tax structure into trouble. In order to keep it simple, they tied the percentage of tax one paid to the dollar amount of one's income. That worked well for a while, when inflation was low. As infaltion hit a peak in the 70s due to the oil shocks, people saw their pay rising more slowly than the cost of living, but the percentage of tax they paid on it rising quickly.

Likely a progressive income tax formula that would work would be based on the median wage to be figured yearly in times of low inflation or slow deflation, quarterly when things were changing more rapidly.

A sales tax is regressive in nature and always hits people who spend most of their income a whole lot harder than it does those who earn enough to save, invest, or just plain hoard. Even if we exempted the necessities of life like food, clothing, healthcare, and primary residence, just think of what it would do to the sale of new cars. Just tack on an extra 22% to the price (minimun for a national sales tax) and see what happens.

I suppose there are other schemes out there to consider, but remember, a progressive income tax that largely exempted working people and socked it to the rich worked very well for all of us, giving us a government that served us well plus a solid social safety net. What killed it was trying to make it simple.

[BRLIB]

5. The exponential, which is actually built into even cheap

calculators. With a couple of fit constants, it would work just fine.
You could even set up an online site just like you can do for unit conversions.

[BRLIB]

7. And there are no 'brackets', the output is a continuous function

[ulTRAX]

8. cheap calculators

I thought about the idea of ultra-cheap calculators with the values preprogrammed for each tax year... but I'm wondering about a simple formula that can be done without special calculators or resorting to web pages.

[rurallib]

11. someone on Kos

had a thread about an alternative that had an added fee to financial transactions that simply did away with taxes. This would hit the rich the hardest, but the fee was real low. Something like .03% figured into the transaction would replace current revenue.
Some professor figured it out and seems highly feasible.

[On the Road]

12. No Income Tax Could Ever Be Done on a Postcard

even if it were a flat tax.

Think about it. How hard is looking up your tax in the tax table? That's not where the difficulty is. It's in the data -- defining what income is and what deductions to income should be.

The simplest tax would eliminate deductions for charitable deductions, mortgage interest, large medical expenses, state taxes, IRAs, and many other things. But there are reasons for those deductions and eliminating them would have a very bad effect on many people.

And even income is not as simple as it appears. Do you count gambling winnings, alimony, money market interest, gifts in kind, inheritances, social security income, wages earned overseas, and a hundred other things? You need rules to govern each situation.

The tax code used to be smaller and it was abused. Rich people bought 6-to-1 tax shelter investments that lost money but gave a $6,000 deduction for each $1,000 invested. Along with many other loopholes, that was eliminated, even though it complexified the tax code. New loopholes emerged, and those had to be dealt with.

If you have a farm, a small business, or rental property, calculating income takes a lot of numbers and some very specific guidance on how to use them (depreciation periods, deductibility of specific expenses like skyboxes, what year to recognize revenue and expenses, etc).

Without complicated controls, it would be easy to play the system just as it used to be before all those rules were instituted. The result is that the rich would pay a significantly SMALLER percentage than the poor. And that's exactly the idea -- they just don't want to say it.

[StatGirl]

14. Yep.

First of all, the others are right. Calculating the actual tax is the easiest part of filling out a tax return. It's figuring out what's taxable that's hard. Are the flat-taxers willing to give up mortgage deductions, property tax deductions, charitable deductions, special rates for capital gains, losses carried forward, and all those yummy goodies?

That being said, yes, there's a formula. It goes like this:

Add up your total income for the year.

Subtract $17,500.

Calculate 40% of what's left, if it's greater than 0.

Voila -- 5% for the guy making $20k and 40% for the guy making $20M.

The amount subtracted could be easily adjusted for the number of people in the household, and differential amounts could be applied for adults, children, wage-earners, etc. This could even be used to give tax rebates to people with negative taxable income.

[DjTj]

15. The flat tax can do what you want...

...with any two data points.

With yours in particular, the rate is about 40.035% and the cutoff is $17,502.19

So you take your income, you subtract $17,502.19 and you tax that amount at 40.035%

The person making $20k pays $1,000.
The person making $20 million pays $1 million.

Of course, the person making $50,000 has to pay $13,010.51, which is like 26% tax, so maybe that wouldn't be that fair...

[ulTRAX]

19. in your example

In your example why is the progressivity of tax rates so front-loaded so at $50k the tax rate is already up to 26%? It the plot line on a linear or logarithmic scale?

[papau]

24. the Clinton researched (and Oren Hatch approved) flat tax had deductions

of around 7500 per adult, half that per kid, the mortgage interest and charity deduction, and a per return deduction of 20,000

and that was 1994!

Forbes and the GOP tried to sell the rate as 17% -

but that hid a major cut in gov spending that was required to get to 17%

I believe the real required rate was more like 33%.

[MikeDuffy]

16. Progressive tax calculation is not difficult now given "Taxable Income"

The long tax tables are mostly to make the tax calculation a
simple table lookup (which reduces error), not because the
calculation is so difficult.  As an example take the tax
calculation for a Single category in 2003.  To calculate the
tax yourself, you can use Schedule X (see
http://www.irs.gov/formspubs/article/0,,id=109877,00.html):

    If TAXABLE INCOME   |           The TAX Is
   
Is Over   But Not Over  This Amount   Plus This %  Of the
Excess over

$0        $7,000        $0.00         10%          $0.00 
$7,000    $28,400       $700.00       15%          $7,000 
$28,400   $68,800       $3,910.00     25%          $28,400 
$68,800   $143,500      $14,010.00    28%          $68,800 
$143,500  $311,950      $34,926.00    33%          $143,500 
$311,950  --            $90,514.50    35%          $311,950 

A mathematical formula for the above (but not easier) is:

TAX = 10%(min(max(0, TI), $7,000))
    + 15%(min(max(0, TI - $7,000), $21,400))
    + 25%(min(max(0, TI - $28,400), $40,400))
    + 28%(min(max(0, TI - $68,800), $74,700))
    + 33%(min(max(0, TI - $143,500), $168,450))
    + 35%(max(0, TI - $311,950))

[Mr.Green93]

17. 90% over 75k, and 2.5% of net worth per year.

[orpupilofnature57]

18. First time i have heard progressive used in proper context.

no word for political belief.

[Selatius]

25. Not sure if this is workable

The tax brackets:

17%
27%
37%
47%
57%

This is based on ranking people's incomes from the lowest to the highest:

Bottom 20% pay 0%
Everyone in the middle pays 17%
Top 90% up to but not including 95% pay 27%
Top 95% up to but not including 99% pay 37%
Top 99% up to but not including 99.9% pay 47%
Top .1% pay 57%

The rule is you only pay taxes on the portion of income that qualifies you for a particular tax bracket. If I made $58,000, the portion that qualifies me for the bottom 20% is untaxed. Everything else earned after that amount is taxed at 17%.

You guys can fool around with it if you want. It's just something to stoke conversation.

However, I do recommend this:

http://www.lcurve.org/