[Robert Reich] Why U.S. needs progressive tax

The so-called “flat tax” is all the rage among Republican presidential hopefuls. Herman Cain was the first. Now, Rick Perry and Newt Gingrich have come up with their own flat-tax proposals.

The flat tax is a fraud. It raises taxes on the poor and lowers them on the rich.

The nonpartisan Tax Policy Center estimates that Cain’s flat-tax plan (the only one that’s been set out in any detail) would lower the after-tax incomes of poor households (incomes below $30,000) by 16 percent to 20 percent.

Meanwhile, 95 percent of households with more than $1 million of income would get an average tax cut of $487,300. And capital gains (a major source of income for the very rich) would be tax-free.

All flat-tax proposals benefit the rich more than the poor for one simple reason: Today’s tax code is still at least moderately progressive. The rich usually pay a higher percent of their incomes in income taxes than do the poor. A flat tax would eliminate that slight progressivity.

Nowadays most low-income households pay no federal income tax at all ― a fact that sends many regressives into spasms of indignation. They conveniently ignore the fact that poor households pay a much larger share of their incomes in payroll taxes, sales taxes and property taxes (directly, if they own their homes; indirectly, if they rent) than do people with high incomes.

Flat-taxers pretend a flat tax is good public policy, for two reasons.

First, they say, it would simplify paying taxes. Baloney. Flat-tax proposals don’t eliminate all deductions. People with families will still be able to deduct their dependents while single people will pay a higher rate, businesses will deduct their expenses, and, in most plans, people with homes will still be able to deduct interest on their mortgages.

That means most taxpayers would still have lots of paperwork.

Second, proponents of a flat tax say it’s fairer than the current system because, in Cain’s words, a flat tax “treats everyone the same.”

The truth is, the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions and credits, of course).

For example, no one pays any income taxes on the first $20,000 or so of their income. People in higher brackets pay a higher rate only on the portion of their income that hits that bracket ― not on their entire incomes.

So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion of people’s incomes that exceeds $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.

Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small-business owners with incomes of $251,000 a year would have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They’d only have to pay the 39 percent rate on $1,000 ― the portion of their incomes over $250,000.

Get it? We already have a flat tax ― flat within each bracket.

The real problem is the top brackets are set too low relative to where the money is. The top-most bracket starts at $375,000 a year. People with incomes higher than that pay 35 percent ― again, only on that portion of their incomes exceeding $375,000.

This means a doctor who’s making, say, $380,000 a year pays the same income-tax rate as a plutocrat pulling in $2 billion or $20 billion.

Actually, it’s worse than that because the plutocrats get most of their income in the form of capital gains, which are taxed at only 15 percent. That’s why America’s 400 richest people ― who earned an average of $300 million last year, and who have more wealth than the bottom 150 million Americans put together ― now pay at a 17 percent rate (according to the IRS).

The Republicans’ push for a flat tax masks what’s really going on.

Remember: The top 1 percent is now raking in over 20 percent of the nation’s total income and owns over 35 percent of the nation’s wealth. Under almost anyone’s view of fairness, these are grotesque portions. They’re especially large relative to what they were as recently as 30 years ago, when the top 1 percent raked in under 10 percent ― and paid a top marginal tax rate of more than 70 percent. And these huge portions at the top continue to increase.

Simple fairness requires three things: More tax brackets at the top, higher rates in each of those top brackets, and the treatment of all sources of income (capital gains included) exactly the same.

Not only fairness demands it, but also fiscal prudence. A truly progressive tax would bring in tens of billions of dollars a year from the people at the top who are in the best position to afford it.

Regressives are pushing the flat tax as a smokescreen. They’d rather not have anyone talk about the unfairness and fiscal absurdity of the current system.

Rather than merely oppose the flat tax, sensible people should push for a truly progressive tax ― starting with a top rate of 70 percent on that portion of anyone’s income exceeding $5 million, from whatever source.

By Robert Reich

Robert Reich, former U.S. secretary of labor, is professor of public policy at the University of California at Berkeley and the author of “Aftershock: The Next Economy and America’s Future.” He blogs at www.robertreich.org. ― Ed.

(Tribune Media Services)