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Recursion

(56,582 posts)
Mon Sep 28, 2015, 08:20 AM Sep 2015

Trump's tax formula: how a flat marginal rate produces a progressive effective rate.

This new announcement from Trump scares me because I think it's an idea that would be crazily popular.

Let's take a literal "flat tax". In that situation, everyone pays literally 10% (or whatever) of their income in taxes.

Nobody other than Steve Forbes is literally for that.

What most Republicans are proposing is a flat tax with a high exemption.

Trump was vacant on specifics (quelle surprise), but the idea is this:

Set a relatively high marginal tax rate (for argument, say 36%).

Exempt all income up to something close to the median national income.

If required, impose a surtax a few standard deviations beyond that (Trump has been on record in favor of that).

But what intrigues me here is how this produces a progressive effective tax rate.

Half of the country pays 0 income tax (Trump is essentially turning Romney's "47%" argument on its head, and saying that's how it should be).

People who make more than the median income are not taxed on every dollar they make, but on every dollar they make above the median income.

So for the poorest half of the country the tax rate is zero (or even negative; I doubt Trump could undo the EITC). Once you are in the richest half of the country, the tax rate rises from 0.000000001% at $50,000 to nearly 36% as you make money that approaches infinity (keep in mind Trump is on record supporting taxing capital gains like other income).

As I keep saying, we underestimate Trump at our own peril.

26 replies = new reply since forum marked as read
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Trump's tax formula: how a flat marginal rate produces a progressive effective rate. (Original Post) Recursion Sep 2015 OP
Underestimate at our own peril Kilgore Sep 2015 #1
If this idea is so good (and maybe it is) . . . . . Stinky The Clown Sep 2015 #2
It's not "good"; it's horrible policy. It's "attractive" (nt) Recursion Sep 2015 #6
I'm not suggesting it be adopted literally. Didn't think I needed to actually say that. Stinky The Clown Sep 2015 #13
No I mean that's fair Recursion Sep 2015 #14
This would probably be a big tax increase for families making Ilsa Sep 2015 #3
Yup, it would, as stated. Recursion Sep 2015 #7
Not sure that's the case Kilgore Sep 2015 #10
Trump will be a real threat if Gman Sep 2015 #4
But it's not a good idea. Ilsa Sep 2015 #8
His plan is not 36%. In fact it's not even announced yet Gman Sep 2015 #9
Just making clear: 36% was something I pulled out of my ass Recursion Sep 2015 #20
But the rate any flat tax is set at will be vital to both how much it raises, and how it's seen muriel_volestrangler Sep 2015 #25
Incorrect Kilgore Sep 2015 #12
Problems PSPS Sep 2015 #5
It is progressive as its simplification causes progressivity. 1939 Sep 2015 #11
an interesting idea and definitely bbgrunt Sep 2015 #15
Dear GOD. HughBeaumont Sep 2015 #16
No, FFS, we're not "falling for it". I'm demonstrating the effectiveness of the rhetoric around it. Recursion Sep 2015 #17
Not you, specifically. Some on this thread and other threads regarding the subject. HughBeaumont Sep 2015 #18
Thank you for clarifying that you are not endorsing Ilsa Sep 2015 #23
This. n/t lumberjack_jeff Sep 2015 #22
You're suggesting that Trump, queen of the hotel, would get rid of depreciation deductions? lumberjack_jeff Sep 2015 #19
Yup. I am. He's stated he's for it before (nt) Recursion Sep 2015 #21
I suspect there is a catch, but I like the dialog it will create Amishman Sep 2015 #24
Now the policy has been announced, we find it's not flat, but it is a huge tax cut for the rich muriel_volestrangler Sep 2015 #26

Kilgore

(1,733 posts)
1. Underestimate at our own peril
Mon Sep 28, 2015, 08:27 AM
Sep 2015

You are right.

I just ran the numbers for our family, and from a money in the pocket standpoint, we pay way less under Trumps proposed plan.

Definitely can see how this would have mass appeal.

Stinky The Clown

(67,819 posts)
2. If this idea is so good (and maybe it is) . . . . .
Mon Sep 28, 2015, 08:33 AM
Sep 2015

. . . . . then why won't a Democrat adopt the same thing?

The fact is, a good idea is a good idea on its own merits, the source of the idea notwithstanding.

Stinky The Clown

(67,819 posts)
13. I'm not suggesting it be adopted literally. Didn't think I needed to actually say that.
Mon Sep 28, 2015, 09:48 AM
Sep 2015

But whatever. I haven't read anything about it save what you posted in your OP.

Adjust the numbers to make it work.

Ilsa

(61,698 posts)
3. This would probably be a big tax increase for families making
Mon Sep 28, 2015, 08:45 AM
Sep 2015

even $80,000 a year, which is by no means, rich. In Texas, that would be a couple that are both school teachers.

Recursion

(56,582 posts)
7. Yup, it would, as stated.
Mon Sep 28, 2015, 08:51 AM
Sep 2015

Trump's supporters for the most part are at about 1/4th that income level. And he knows it.

Kilgore

(1,733 posts)
10. Not sure that's the case
Mon Sep 28, 2015, 09:11 AM
Sep 2015

The first $50k would be tax free and the remainder would be subject to tax. The unknown is how fast the rate reaches the top rate.

I can see this having mass appeal if the brackets above median progress slowly

Ilsa

(61,698 posts)
8. But it's not a good idea.
Mon Sep 28, 2015, 08:54 AM
Sep 2015

It hits middle class hard at 36% over median income. We're talking about couples where each is a teacher, mechanic, plumber, welder, etc, seeing their taxes go up, not down.

Gman

(24,780 posts)
9. His plan is not 36%. In fact it's not even announced yet
Mon Sep 28, 2015, 08:59 AM
Sep 2015

But 36% as an example above is about what I pay anyway.

The flat tax is a good idea because it will effectively raise taxes on the rich across the board.

Recursion

(56,582 posts)
20. Just making clear: 36% was something I pulled out of my ass
Mon Sep 28, 2015, 01:43 PM
Sep 2015

To just have a number to work with.

muriel_volestrangler

(101,367 posts)
25. But the rate any flat tax is set at will be vital to both how much it raises, and how it's seen
Mon Sep 28, 2015, 02:58 PM
Sep 2015

as is the size of the threshold before you begin paying. If the rate doesn't equal the current top rate, then it cannot raise enough money without savage cuts which they'd have to justify. And since some people see their marginal rate of tax as more important than the actual total amount they pay, there will be some who are above the threshold who see it as bad anyway. But even if you set it so that the current top rate payers pay the same as they do now, those just below will pay less than now, so the amount raised will be something less. That would, in practice, be enough less that hoooge spending cuts would still be needed.

How you would argue against a flat tax depends on the rate and threshold, but there are always good arguments against it.

Kilgore

(1,733 posts)
12. Incorrect
Mon Sep 28, 2015, 09:15 AM
Sep 2015

We do not know what the brackets will be above the median.

I can see the appeal, my family would pay zero under this plan.

Do not underestimate Trump.

PSPS

(13,615 posts)
5. Problems
Mon Sep 28, 2015, 08:49 AM
Sep 2015

1. "Set a relatively high marginal tax rate (for argument, say 36%)." That's a low top rate by historical standards. The top marginal rate should be at least 70% like it used to be.

2. Most people pay little federal income tax today. The biggest hit for them is the FICA (payroll) tax. That's what funds Social Security. These "flat tax" proposals don't affect that unless their sole purpose is to destroy Social Security.

The fact is that this idea, like every "flat tax" plan, it is merely a ruse to lower the taxes paid by the already-getting-a-free-ride under-taxed billionaires with a side benefit of lowering federal revenue to "drown (the federal government) in the bathtub."

1939

(1,683 posts)
11. It is progressive as its simplification causes progressivity.
Mon Sep 28, 2015, 09:12 AM
Sep 2015

1. Payroll taxes are a whole different discussion.

2. Elimination of special treatment for dividends and capital gains, elimination of loopholes and writeoffs, and the beginning of the 36% at above the median income cause progressiveness which fades out at "infinity".

3. Look at what the "true tax rate" today is for the 50%, 40%, 30%, 20%, 10%, 5%, and 1% incomes. This will improve progressiveness over what we have today.

4. Quite possibly, we could have a much more simplified tax form and cause bankruptcy for H&R Block.

bbgrunt

(5,281 posts)
15. an interesting idea and definitely
Mon Sep 28, 2015, 10:03 AM
Sep 2015

progressive as stated. Eliminating tax exemptions and various problems including unrealized capital gains vs. realized capital gains and other deductions, however, might be more problematic than apparent at first glance. The definition of income itself is fraught with ad hoc applications and complexities. There seem to always be ways to dodge income tax by taking compensation in ways not defined as income for tax purposes.

Secondly, of course, the devil is always in the details and the necessary political wrangling to specify exact numbers and categories--and these will always be subject to the winds of change.

I love progressive marginal rate schedules, but they cause a lot of problems including,(but not limited to) increased incentives to hide income for those at the higher marginal rates.

Of course it doesn't do anything to alleviate the regressiveness of the social security tax, but on the whole, the idea is definitely appealing.

Recursion

(56,582 posts)
17. No, FFS, we're not "falling for it". I'm demonstrating the effectiveness of the rhetoric around it.
Mon Sep 28, 2015, 11:01 AM
Sep 2015

And this, my friends, is fucking dangerous.

Ilsa

(61,698 posts)
23. Thank you for clarifying that you are not endorsing
Mon Sep 28, 2015, 02:37 PM
Sep 2015

Trump’s flim-flam tax proposal. You are right: his rhetoric is dangerous.

 

lumberjack_jeff

(33,224 posts)
19. You're suggesting that Trump, queen of the hotel, would get rid of depreciation deductions?
Mon Sep 28, 2015, 01:41 PM
Sep 2015

Get rid of business investment deductions? Business travel? Meals? Get rid of all the other deductions associated with being a businessman?

Are you also forgetting that every working person making less than 50k a year pays at least 15.3% of their income in federal taxes? Are you also forgetting that the working poor effectively have a negative federal income tax rate?

It doesn't make it progressive, it locks in the regressivity.

You're a pretty smart person. Sometimes I wonder if you really believe in the bait with which you troll.

Amishman

(5,559 posts)
24. I suspect there is a catch, but I like the dialog it will create
Mon Sep 28, 2015, 02:56 PM
Sep 2015

Hopefully it puts tax reform as a leading issue and shifting the tax burden towards the rich as a centerpiece of the conversation.

I can also see why the republican establishment is scared shitless of Trump.

muriel_volestrangler

(101,367 posts)
26. Now the policy has been announced, we find it's not flat, but it is a huge tax cut for the rich
Tue Sep 29, 2015, 09:34 AM
Sep 2015


Trump's campaign also claimed that the tax plan would cost nothing. CTJ's analysis suggests that's false, concluding that the plan would cost a whopping $10.8 trillion in its first decade. For context, the Congressional Budget Office estimates that individual and corporate income taxes will bring in $25.5 trillion from 2016 to 2025; Trump is thus proposing slashing income tax revenue by more than 40 percent. That's high even compared with some of his White House rivals' plans. The right-leaning Tax Foundation estimates that Bush's tax plan would cost $3.6 trillion over 10 years on a static basis, and that Marco Rubio's would cost $414 billion a year, or $4.1 billion over 10. Both cost less than half as much as Trump's plan. Rand Paul, however, managed to top Trump with a plan costing $15 trillion, per CTJ.

http://www.vox.com/2015/9/28/9411243/donald-trump-tax-rich

So, this is a massive tax cut aimed at the rich (the top 1% gain by 10.3% of their income, compared with 5.1% for the middle 20%, and even less for those earning less than that), and it forces massive spending cuts, which will affect the non-rich. Plus he wants to abolish the estate tax.

Trump's message is "I want money - screw you, poor people!". This is fairly easy to argue against.

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