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Community Corner

The Armchair Economist's Guide to Taxes, Part 1

Heather Rayne Geyer takes on the tax system.

During this past weekend, my husband and I were discussing tax rates. I know, right...we are a couple of feisty whippersnappers!! Party on!!

Neither of us are math geniuses or economists. In fact, I despised math and pretty much slept my way through econ. These subjects are not my forte and I will not pretend otherwise. So, this is why I decided to give myself a crash course in Tax Rates and Systems. Will someone please pass the Excedrin?

As my brain cells throb and my common sense floods—I try desperately to mend our country's fiscal woes. It is no joke that our current tax system is mind-bogglingly ridiculous. But the options are also overwhelming and difficult for the lay person to completely understand. I read about proposed Flat Tax plans and I can easily see the pros as well as the cons. I read about Fair Tax proposals and can see that the term “fair” is utterly subjective. 

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First, here are some basic definitions (thanks to Wikipedia) to get you through this oh-so-exciting topic.

Flat Tax: A tax system with a constant tax rate. Usually the term refers to household income (and sometimes corporate profits) being taxed at one marginal rate. Flat taxes offer simplicity in the tax code, which has been reported to increase compliance and decrease administration costs. Flat taxes that allow a tax exemption for household income below a cutoff level are not true proportional taxes, because, for household incomes below the cutoff level, taxable income is less than total income.

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Fair Tax: A proposed change to the federal government tax laws of the United States intended to replace all federal taxes on personal and corporate income with a single broad national consumption tax on retail sales. The taxes that would be repealed include personal income taxes (including the alternative minimum tax), corporate income taxes, capital gains taxes, payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes. Personal services such as health care, legal services, financial services, haircuts, and auto repairs would be subject to the Fair Tax, as would renting apartments and other real property. Exports and intermediate business transactions would not be taxed, nor would savings, investments, or education tuition expenses as they would be considered an investment (rather than final consumption).

Progressive Tax: A tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. Progressive taxes attempt to reduce the tax incidence of people with a lower ability to pay, as they shift the incidence increasingly to those with a higher ability to pay.

These are all options, but there's still this to consider: 

400 Americans have more wealth than half of all Americans combined

So what's to be done? Come back tomorrow for Heather Rayne Geyer's analysis and suggestions.

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