With Minnesota sitting on a projected $9.25 billion surplus and the state bearing the fifth highest in the nation, 9.85 percent, it’s appropriate to consider an old proposal that is resurfacing. It’s the flat tax rate, and as the April 15th income tax filing deadline looms, the timing couldn’t be better.
The concept has been around for a while, but it attracted most attention at the Federal level, when advocated by Republican presidential candidate Steve Forbes, the son of the business magazine publisher, Malcolm Forbes, in a pair of his unsuccessful runs for the presidency. Similar to most single-issue candidates, he did not gain much traction.
However, his flat tax idea, which would have everyone paying Federal income taxes at the same rate, attracted a lot of attention before his campaigns withered and his concept died with them.
Now, more than two decades later, the idea has arisen like Lazarus and is back in play, as some 13 states have jumped on the bandwagon already with respect to their state income taxes. It’s worthy of consideration here in “Minnesotax,” too.
Further features
The uniform rate is at the heart of the proposition, but there are further features in the arrangement. While compressing the tax rate from high to low into a single middle level percentage, the proposal also would eliminate nearly all deductions, while boosting the standard exemption. That’s what most of the baker’s dozen of states have done, and a few others are contemplating.
At first blush, it seems that the proposal would disproportionately benefit wealthy taxpayers, those whose rates hover at or near the top levels. While that is true, to some extent, the proponents do not apologize for that disparity; rather, they point out that the overall impact is to lower taxes for the vast bulk of taxpayers, some 75 percent or more in the jurisdictions that have gone flat.
In Georgia, the latest state to join the flat tax crowd, about 95 percent of taxpayers will see a reduction in their taxes due to the combination of the lower, uniform rate of 5.25 percent, and one-half a percent below the current top rate of 5.75 percent. The previous state to do so, neighboring Iowa, has opted for a flat tax of 3.9 percent this winter during the legislative session.
But the reduction for most taxpayers is deceptive. While the flat rate benefits most taxpayers, its advantages are disproportional, with the tax reduction much greater for those in the top brackets. Simply put, with a flat tax most people pay lower income taxes, but the most affluent benefit the greatest.
It’s the converse of Marxian principles: Give the most to those who need it least, and the least to those who need it most.
Yet, this alone ought not deter considering it or some variant.
Minnesota matters
Minnesota’s four tax rate brackets, ranging from a low of 5.3 percent for individuals earning up to $27,230, somewhat greater for joint filing married couples, to that nearly 10 percent top level for individual incomes at or above $227,600 are among the highest in the nation. The only states with higher rates at the top levels are California, Hawaii, New York, Oregon and New Jersey, plus the District of Columbia. But some other jurisdictions exceed Minnesota’s tax burden when all taxes, fees and other revenue-raising devices are taken into account.
An additional benefit of a flat tax is simplification of the process, making it easier and less costly – and with reduced stress – for tax filing, although it probably puts a number of tax advisers, planners and preparers out of work.
But that facilitation might be offset by a drawback and it might diminish donations to organizations like religious organization, non-profits and the arts, among others, which rely on those contributions, which are encouraged by being tax deductible. However, that indulgence has been limited by federal tax law limitations imposing caps on those deductions.
One impetus for the growing crowd of flat tax states is competition among the various jurisdictions. Those with lower rates tend to attract more new individuals, as well as businesses; a factor that cannot be overlooked when taking into account in surrounding jurisdictions, like Iowa, a uniform rate was adopted this year, the 12th state to do so before Georgia jumped aboard.
[image_caption]Marshall H. Tanick[/image_caption]
With the legislative time clock running down, and Minnesota, with DFL control of the House of Representatives, along with Gov. Tim Walz, the state will not consider undertaking this type of tax rearrangement this year. But that ought not foreclose its consideration in the future.
The flat tax rate, while scorned and then ignored, remains a topic whose time may have come.
The states, as Supreme Court Justice Louis Brandeis famously observed, are “the laboratories of democracy.” It might behoove Minnesota to join the experimentation with a flat tax.
Marshall H. Tanick is an employment and Constitutional law attorney with the Twin Cities Law firm of Meyer Njus Tanick.
Is this a case study in how to make an argument without providing any sort of rationale as to why? Or is it simply that the author is aware that his “trickle down” voodoo economic nonsense is gonna play about as well here as a fox at a chicken convention?
“It’s the converse of Marxist principles”
What’s interesting is that when Russia gave up communism, one of the first things they did was to implement a 13% flat tax, at the recommendation of Milton Friedman who was advising them on free market principles.
What’s instructive is that the democrats still refuse to budge on the idea. It’s a matter of “principle” to them too.
Yeah, and Russia has become the biggest oligarchic kleptocracy in modern history. Funny how Friedman always seems to be involved when that happens, huh? It’s almost like that’s the natural evolution of lassiez faire capitalism, and the reason conservatives can never point to a stable, functional example of their preferred utopia.
Should the price of a gallon of gas or a loaf of bread be tied to the level of your income too? Why should the cost of government be any different? What’s with you people and your embrace of the Manifesto? The Russians rejected it, you should too.
DT, do you think all those tax laws are written for the poor people that don’t have deductions, depreciation schedules, capital gains, dividends, partnerships, Trusts, depletion allowances, 429 plans, IRA’s, Roth IRA’s, 401K’s, Keogh’s, business deductions, etc. etc. etc. So you are saying all those not so wealthy people are the ones benefiting from all the loop holes? Will the flat tax end all those loop holes, never!
Think of taxation as insurance. Those who have the most to lose from an unstable government should pay the most for ensuring stability.
No, thank you, and Mr. Tanick helpfully provides us with the primary reason to avoid this tax policy. In an era when the top few percentage points of income are already accruing wealth in unprecedented amounts, even Mr. Tanick has to admit that the bulk of the benefits would go to the people who absolutely do not need any more benefits from a tax code that already leans heavily in their direction.
If anything, we ought to take the tax code in the other direction, as suggested by former Governor Mark Dayton when he was in office – raise the taxes on the most affluent. Yes, this prompts hysteria and much clutching of pearls among Republicans, but in terms of raising revenue, it would be much more efficient. A $100 lowering of my retiree tax bill is not going to dramatically affect my lifestyle, and if doing so means my affluent neighbor sees his tax bill decrease by $5,000, I’ll be even less happy. It’s the antithesis of that old-fashioned term “equitable.”
“raise the taxes on the most affluent” And eliminate them for the least. MN taxes income (unlike the Feds) beginning with dollar one, a grossly unfair burden on our hardest-working.
So, if your tax bill goes down $100 (from what $1,000 to $900) and your neighbor’s goes down $5,000 (from what $10,000 to $5,000) you weren’t bothered when you paid 1,000 to his/her 10,000?
So many writers incorrectly attribute ‘from each according to their ability to Karl Marx.
To each according to need is a less objectionable attribution to Marx, though I’d argue Jesus was down with that idea a couple earlier.
The manifesto cribbed from each according to ability from the father of capitalism, Smith, who said much the same thing in the wealth of nations – the cost of the state should be borne proportionally to the benefit each person receives from the state’s protection, which is to say in proportion to the income they receive.
A flat tax is unjust, and incorrectly associating progressive taxation with Marx doesn’t change that. Marx thought the state should confiscate all the means of production. He would have thought a slightly higher tax rate on multimillionares than on service workers was milktoast.
also if ‘everyone’ sees decreased taxes that is obviously less tax revenue total. so it’s not just the larger tax break for the wealthy, its also loss of services and supports for the rest of us. which, obviously, is the point.
Yes, proportionally is the key word!
“… and incorrectly associating progressive taxation with Marx”
It’s the 2nd plank in the Manifesto (“2. A heavy progressive or graduated income tax”) second only to “the abolition of private property,” the theory the left uses to impose a death tax because the state has an inherent right to it. So there’s that.
I thought conservatives didn’t believe in generational wealth and those rich folks got that way through hard work? If that is true, and that everyone should start with a level playing field, why not have the estate tax be 100%? I actually wouldn’t advocate for that but like on so many things conservative rhetoric doesn’t align with their actions. They want to socialize the risk while privatizing the rewards.
My preferred primary tax method is a contract tax. It would be simple and voluntary. Any contract a person wants to have enforced by the courts and police would need to pay a percentage of the value of that contract in tax. If they don’t, it is 100% buyer beware. Most retailers from Amazon to Cub would require the tax as a way of protecting themselves and the value of their company. It benefits from being self-enforcing and ensures the wealthy pay a percentage proportional to the value they get out of the system. Somebody who is buying. caused car from their grandparents wouldn’t need to pay it at all and transactions like that encourage a robust, healthy community that has an incentive to trust one another.
Of course, it would also require an extraction tax (to offset the damage done by industries based on things like petroleum that generate wealth based on socializing the damage they do) and the elimination of corporate protections and bankruptcy in all but extreme cases.
“I thought conservatives didn’t believe in generational wealth”
Like so many aspects of conservatism, you got that one wrong too. Conservatives believe in private property and that the owners of that property get to decide what to do with it, not the state.
They also tend to claim that the wealthy get that way simply because of hard work and not largely due to the privilege of their birth. That because slavery was partially eliminated 157 years ago any current economic differences have nothing to do with systemic racism. That the descendants of those who benefited from slavery, redlining, and other such practices owe nothing to anyone because they themselves didn’t implement those policies.
Also, the conservatives claim that they believe in private property is a complete farce. I tend to be very libertarian so am very aware of the differences between what conservatives say and how they actually act. Conservatives are fine with eminent domain to build pipelines and border walls. They also don’t seem to have any problem sticking their noses into private medical decisions or what happens between consenting adults in their bedrooms or what bathrooms people use. They also mostly support the ability of cops to steal property at will through civil forfeiture. While not alone in this regard they also believe that corporations have the rights of people while shielding them from any of the responsibility or liability that actual individuals have. Private property is a very flexible term for conservatives.
But, as is typical, you missed the relevant points. Both about generational wealth and a tax system that conservatives should like but don’t support because it wouldn’t allow them to reward support their supporters in their warped crony capitalist version of the free market. The type of free-market where Jared Kushner can take billions from the murdering Saudi crown prince (which now represents around 80% of the wealth his fund manages) six months after being Trump’s official main contact there.
That is what conservatives actually stand for because that is how they actually act. The rhetoric you repeat is a thin veneer to fool the simple-minded. Just like the conservative use of the term patriot is a veneer that covers over their Taliban level xenophobic Christian nationalism. Conservatives are not Christians, patriots, or libertarians in their beliefs or actions. Just in their marketing.
Mr. Tanick’s argument merely shows that the affluent have too many ways to take deductions.
And not to to mention the corollary issue of unlimited non-taxable growth of wealth.
“unlimited non-taxable growth of wealth”… wherewithal to pay is a foundational element of taxation. The recent ideas around taxing unrealized gains on securities is opening Pandora’s box on a generationally terrible tax policy.
Regulation has already forced growth companies out of public markets. Now we want to further burden the ability to participate in public markets by taxing valuations.
More companies would just find private financing and further avoid public markets. Unless the government believes it can value private companies, which is almost ha ha funny given the current state of the IRS.
Whether or not you’re in a position to pay, from a position of unlimited growth of non-taxable income (say, of assets), depends on what’s growing. If you’re retired and it’s your home, certainly not, but the situation is different when you have stocks that are quite liquid and saleable in incremental batches.
In your example even more companies would become or stay private and further shut out public investment access to growth companies. It’s a worst case scenario where public equities become a puking ground for private equity exits. I would rather tax realized gains at 50% for AGI’s over 100k then further wreck public markets.
Me, too. But the wealthy won’t let us make any reasonable changes to the tax code to benefit the country. The next best alternative is the absurd. Whether it’s taxing unrealized gains or an outright economic collapse leading to violent “redistribution” by the hungry mobs, something’s gotta give. Mr. Tannick’s nonsense is the type of nonsense half-heartedly designed to prevent the latter by sounding “fair.” But fair and equitable are two different things. There’s a reason that the term “fair” also means something less than “good.” Certainly, in Mr. Tannick’s context, “fair” doesn’t mean “without unjust advantage.”
I live in GA currently–miss you MN!–and was appalled when the GA REP-led legislature passed this flat tax bill at the midnight hour w little discussion, planning, running the numbers or public feedback. It’s called: buying votes. Just like Kemp keeps giving $$$ to teachers & police in the form of ‘bonus checks’ with monies from the general funds (but which actually came to GA from the Biden Admin in the firm of pandemic monies.) Last election he wiped out 300k+ voter registrations–primarily minorities–to enable himself to claim/steal a ‘win’ over Stacy Abrams, who then fired ip and registered lots of voters for the next elections, enough to give legitimate wins to Biden, Warnock & Ossoff! This unexpected occurrence so enraged the REPs they wrote & passed approx 400 voter suppression bills in multiple red states to permanently limit minority voters in perpetuity. Of course if Biden’s Build Back Better bill had passed as written ALL AMERICANS would be assured of their one vote, one voice voting rights moving forward. And these are the political games being played 24/7 in America now…or at least when all politicians aren’t spending their time doing money asks…cuz our perpetual election cycles cost BILLIONS now. Money that could & should be used to protect and educate and elevate all Americans instead.
I wondered as reading this why he thought we should be so keen on Georgia that we would want to emulate it? We have some good gridlock at the state level but nothing I would remotely consider trading for all the political riches in Georgia.
One of my favorite thoughts: If you are paying lots of taxes you should be celebrating, it means you are making a lot of money or have a lot of wealth.
Flat Tax! we already have a flat tax its called sales tax, everyone, no matter what their income pays the same rate.
Really? Thus, if I make a million then I should be happy if I pay a million. Then trust the government will provide for my needs? And when I decide making a million, in return for what I receive toward meeting my needs, is not worth it, will the government still cover my needs? Where are they going to get the $20,000 to cover my needs let alone the $980,000 to cover others’ needs and/or their largesse?
Agree on the flat sales tax. How about you (MN) raise the sales tax to 9% (plus max 1% local add on) including food and clothing (with a rebate/credit for food/clothing….based on what a family making twice the poverty rate would spend on those items) and no phase outs for the higher earners. Partial year residents would get the rebate prorated based on when the became a resident or moved away). The wealthy and higher earners will likely pay more because they are likely to spend more. Non-residents will pay more when they are in the state. Throw in a flat tax of 3% (or to appease those who think this unfair, have graduated rates from 2% to 4%. And you could easily have 20 rates within that range (I.e. 2.0, 2.1…..3.9, 4.0). Oh, and add 5-10 cents to the gasoline tax. Whatever revenue these numbers (0r something very very close!) generate, make it work.
Well lets leave it here, you can’t have rational conversations with irrational arguments!
Right? From zero straight to absurd. This is why we can’t have nice things.
I hope Mr. Tanick is a better lawyer than he is commentary writer because he offers absolutely no good reason for the state of Minnesota to consider this. To the contrary, our current system seems to be working quite well. Why would we want to mess with it like this?
A family of four has an income of $50,000 and they need every penny to make ends meets, while a family of four earning $400,000 has ample extra income and you think the low income and wealthy income should pay the same rate?
Are you the same wealthy elite undermining our schools desiring us to pay for your private education because you don’t want to send your kids to a public school? Finland has it right…no private schools. All go to public and everyone invests in the school to be sure the kids receive a quality education
It seems this inanity from the wealthier never stops and I frequently wonder why anyone believes their deceit and outright foolishness.
“Finland has it right…no private schools. All go to public and everyone invests in the school to be sure the kids receive a quality education”
Not sure why we would ban private schools, in America, Home of the Free. And our present Minnesota tax system requires us all to fund public education with our taxes but I’m not so sure that that means all of our kids are receiving a quality education.
You do realize:
Scenario 1. Using a 5% flat rate and no standard federal deduction of $25,000, the first family pays $2,500 in state income taxes and the second family pays $20,000 in state income taxes….8x the amount of the first family.
Scenario 2: Using the same 5% flat rate and the standard federal deduction of $25,000, the first family pays $1,250 in state income taxes and the second family pays $18,750…15x the amount of the first family.
Raise the deduction to 75000
First family pays nothing
No private schools? As long as you include college in that I’m 100% in agreement. No more $60,000/year worthless degrees from “nonprofit” universities subsidized by the government. Far fewer disillusioned youngsters working at Starbucks.
You also realize Finland’s system is merit based and involves rigorous testing and little, if any, choice?
The flat-taxxers are the same misguided people that want to drown the government in the bathtub, giving the biggest breaks to the rich so that they can trickle on the rest of us.
The author spends an awful lot of time contradicting his own arguments favoring flat taxes, apparently intentionally to confuse low-information taxpayers into supporting policies that most benefit the already wealthy and powerful.
Minnesota has forever been better than Georgia in most metrics (they’ve got us beat in winter weather), why would we look to them for policy ideas?
The author failed to identify what was defined as taxable income. Which is a major failure for most tax schemes.
Flat rates work great–IF you count ALL income (from any/all sources) as earned *and* fully taxable in the tax year. The author does NOT do that because it could never pass.
Remember the right wing screeching “everyone has the same opportunity”? They do NOT really mean it. Huh? Money buys access. So how to prevent the idiot kids of rich people getting privileges and access to the sources of power? A 100% death tax fulfills the right wing screech (which the right wildly denies). Daddy can’t give his kids an advantage because there is no asset that can be passed on them. So all kids generally start at the same level and they get ahead based on their individual abilities–not by being a child of a wealthy person.
It would be interesting to know what you do (or plan to do) with your money/wealth to bring those children from lower economic means up the level of your children or what you are doing to ensure your children, when they reach the age of emancipation, are sent out the door with basically nothing other than what they’ve learned (from family, schools, media, etc.) and the clothes on their back.
Regarding the death tax to which you allude, how about about a federal death tax for all. Here I would support a graduated rate….say starting at 5% and maxing out at 25%.
And for what it is worth, I do think it rather sad the influence the wealthy have over our politicians (both parties) and politics. And it’s equally sad how politicians pander to voters with the promises of things paid for by others. I am absolutely ok with paying taxes. I’m just not keen on paying so much or on the time spent on figuring what I owe and hoping I did make a mistake.
And does one think those with wealth won’t find away around the tax laws? Sure way to cripple family businesses, and the goal will be to die penniless.
The law of uninterrupted consequences is as immutable as gravity and vikes playoff choking
> An additional benefit of a flat tax is simplification of the process, making it easier and less costly …
A flat tax rate by itself does nothing to simplify the process. If you’re doing your taxes on paper by hand, the only part of the process that a flat tax rate would affect is that you’d be told to multiply your taxable income by a value to get your tax instead of just looking it up in the pre-computed table in the back of the instructions. If you’re doing them online, you’d see exactly no difference.
Getting rid of the complicated structure of deductions, exemptions, credits, etc. would simplify the process, but there’s also exactly zero reason that has to be tied to the absurd notion of a flat tax rate.
Precisely. A progressive tax adds no complexity, except thru the myriad of efforts it prompts from those with higher incomes to subvert or invert that progressivity. Maybe the idea is that these folks would find a flat tax, at long last, so unimpeachably equitable that they would desist from spurring their elected representatives and captured bureaucrats to carve complicated but helpful exceptions from the tax code.
Getting rid of all exemption and deductions IS the heart of a flat tax.
Please explain how having a flat tax rate is in any way necessary to get rid of deductions and exemptions. The code could be enormously simplified and still have progressive rates.
As you see, in Marshall’s article, a flat tax is never really flat. The moment it is proposed, exceptions to it are offered. We deduct this or that, we exempt this person or that person. Old folks get a break because they are cute and because they vote a lot. Any genuine flatness quickly disappears. In practical terms, I really don’t know that any flat tax is significantly flatter in terms of it’s actual impact, than the mildly progressive tax rate system we have now. I am also pretty sure any system that shifts the tax burden from the poor and middle class to the wealthy is pretty much a political non starter, no matter how it is dressed up.
As for simplification, this time of year I always like to propose a challenge. Time the effort you put into preparing your taxes. Count the time you spend doing things that save you money against the time you spend doing things that cost you money. In my experience, I spend the most time on the tax saving stuff, the complications. As much as we might like the idea of a simple tax system, do any of us really want to give up the complications that reduce our tax bills?
“Old folks get a break because they are cute and because they vote a lot.”
This literally made me laugh out loud.
Quite frankly, if we can handle the English language, we can handle something more complicated than a flat tax. It’s not so hard if you just follow the rules. The problem isn’t that it’s complicated. The problem is that the rules only apply to those who can’t afford to buy the politicians.
Many states don’t have a state income tax at all, what I describe as the ultimate flat tax. Unlike many flat tax proposals, assessing no income taxes at all really does have the virtue of the simplicity. In evaluating the impact of a flat tax states, let’s look at those states as our laboratories. Do people in no tax states pay less in taxes. Do they receive fewer services in exchange for their tax breaks, services that have to be paid for in other ways? How is the overall tax burden distributed? Perhaps the most basic thing to understand about tax policy is that tax rates don’t matter. What matters is the number on the check for taxes you actually write. You can have tax rates that are highest in the world, highest imaginable, but if you don’t pay them, what do they matter?
I think we gocuscway too much on income tax because it’s a great way for politicians to pit us against each other. I realize it’s not progressive, but sales taxes capture a lot of money from people with their wealth tied up in real estate and stocks.
The reason sales taxes are so much more regressive is that they capture a lot less money from the top decile than income taxes. A millionaire family of 4 doesn’t buy more toilet paper than any other family of 4 and they don’t spent THAT much more on luxury items per tax year.
The math never really works. If you give everyone tax cut like this you will not collect enough revenue to pay for government. You create deficits, and then you have to raise EVERYONES taxes. And yeah, you end up giving giving the top two deciles 90% tax cuts while raising taxes for the bottom decile many of who currently don’t make enough to even pay state income taxes. Then counties and cities start jacking up local taxes to make up for shortfalls… Several academic studies of countries with flat taxes have show that it doesn’t even necessarily simplify the tax code that much in the end.
Whenever someone brags about the new low tax rate but doesn’t provide a SINGLE dollar amount describing how much the government costs and how much your going to end up collecting… you know you’re being conned. We all know there’s no such thing as a free lunch right? Right now the top decile pays contributes around 48% of all the dollar that currently pay for government, you can’t slash that amount by 90% without making up the difference by collecting more from the of the other deciles… but your promising to slash their tax rates as well so how much are you actually going to collect?
look: government costs what it costs and your going to pay for it one way or another. Right now you’re actually NOT paying enough to make up for budget shortfalls and past cuts were made to “cope” with previous deficits. And you have no idea how much your underfunded and inadequate government resources are costing you in sooooo many ways from crumbling infrastructure to non-existent enforcements of various types.
We actually ended up with progressive tax rates for a lot of very basic and mathematically sound reasons not to mention fairness. That doesn’t mean the tax codes couldn’t be simplified but some reason EVERY TIME anyone wants to simplify the tax code the biggest winners are always the top two deciles.
These States like Georgia will play around with this because the Feds come in and make up the differences, unlike MN they recover far more tax revenue per dollar than they pay in. They assume that revenue source will continue.
By the way, long long before Forbe’s proposed the national flat tax Democrat Jerry Brown proposed it back in 1992. But be careful what you wish for. Back in 1992 Jerry Brown’s flat tax rate was 13%. According to Turbotax my wife and I paid an effective tax rate of around 8% last year. Had Brown’s tax gone into effect we would’ve paid more last year!
At any rate, even in theory the key to flat tax rates is zero exemptions of any kind, and our political system simply will not abide a tax regime without any exemptions. One way or another no matter how low tax rates are, those with the resources and connections to demand exemptions will find a way to get exemptions out of politicians.
A Flat tax can’t work among the states. It would cause tax rate feuds with neighboring states, which would lead legislatures to constantly change the rate without acknowledging their government’s short and long-term responsibilities causing bond rates to bottom out. A flat tax also shifts the burden from what one might not call perfectly fair, to one that is inherently unfair to the lower-middle-income and the working poor residents. The majority of residents of Minnesota are not in the top 1% nor are they in the upper-middle-income category, so there’s no reason they should want to take on more burden for those at the top than they already do.
A fair tax plan in Minnesota would be to adopt a gradual income tax system (instead of the recessive system), eliminate sales tax on all non-luxury items, and do away with the statewide property tax. And also ban certain tax additional reductions for part-year residents, as they should pay the same rates that year-round residents do. In short, no one should be taxed for putting a shirt on their back, a roof over their head, and food in their mouth; everything else is fair game.
Years ago I wrote a blog tax structures that feature here on Minnpost in a now defunct section called: “Blog Cabin”. It’s a lengthy three part series but it explains the basic rationale for our tax system and the problem with flat taxes. And no, my blog was never monetized, I have no sponsors. http://pudstrand.fatcow.com/blog/?p=8