Flat Tax

A similar argument against a flat tax.  On the surface, a flat tax sounds fair.  Everyone pays the same percentage of their income in taxes.  We could make it even "fairer" by exempting those below a certain income threshold, but such exemptions create their own problems.  The first question is, of course, what should a flat tax be?  I will leave it to the budget experts to determine just how much the public would need to pay to cover the expenses of, say, our war on terror, but we can assume that it would be set to "balance the books" another rallying cry of the "fiscal conservative."  We could even imagine an itemized spread sheet letting us know where our tax dollars are being spent, so much for the military, so much for medicaid, so much for NASA, so on and so forth.

For the sake of argument, and to keep the arithmetic simple, let us just assume a flat tax of say 20%.  Again, for the sake of argument, let us again consider the impact on a median income of $50K and a substantial income of $1,000K.   A flat tax of 20% on the median income would, of course, be $10K, which leaves the median income person with $40K in net income.   The flat tax on a million dollar income would, likewise, be $200K.  Yes, that is considerably more, and at first blush it would appear that they are bearing a greater share of the tax burden, but the key word in that is "burden." Even at a $200K tax bill, the millionaire is left with $800K in net income.  So what?  No doubt they earned it.

Let's consider the savings issue again.  Let us say the $40K net income person is extremely frugal and saves 10% of their income or $2K.  At 3% interest,  there would be $60 in interest.   Most of that $60 is eaten away by inflation, so both to keep the math simple and to account for the effects of inflation, we'll assume current prices and only the principle saved.   When we start to consider the shocks of day to day life, we come up with a picture.   How many years would it take for this person to save up sufficient capital to purchase a home?   Of course, he is not going to buy a million dollar home, but a modest home, in a reasonable neighborhood, at say $150K.  Assuming his credit is good, and all is right with the world, he would need to save 20% of $150K or $30K for the down payment.  With savings of $2K a year, it would, of course, take 15 years to save enough money for the down payment.  In the meantime, the median income person must live somewhere, and so he pays rent.

True story:  in the last months of my employment at Salt Lake Community College as the provost, Lora and I had decided that she would move closer to our kids and grandchild in Idaho, while I remained behind in Salt Lake.  We put the house up for sale, and I moved into a smallish, two-bedroom apartment for which I paid around $700 a month in rent.  Because we had put a substantial amount down on our $250K home, I was actually paying more in rent than we paid on our mortgage.  Of course, on the mortgage, I was accumulating "capital" and we did receive some "capital gains" on our property,  which we used, in turn, to pay "cash" for our place in Mountain Home.  The rent we paid on the six month lease, went into what for us and for most was a black hole.  I moved on, but most of working class residents of the apartment complex were simply stuck.  Short of a windfall, they were where they were going to be.   The mortgage payment on a $150K home, after the down payment, would be $608 per month at the current interest rates of 4.5%.  All the residents of that apartment complex are paying more in rent than they would pay for the mortgage being discussed.

Back on track, assume the millionaire saves the same percentage amount from his net income or 10% of $800K or $80K.  It would take him about five months to save the down payment on the $150K home.  Let us say he purchases the home. not for his personal residence, of course, but as an "investment."  He pays the standard mortgage payment of $608 at the current mortgage rate of 4.5%.  He wants to make a modest 5% over and above his costs to own and rent the home, so he charges $635 in rent to our median income person.

Here again, the rentier is accumulating capital while the renter is paying for it.  The argument, I realize, is simplistic, not because the general pattern is misleading, but because no millionaire would actually purchase and manage the rent on a $150K home.  He would "invest" in a financial instrument, stock in a management company or a number of management companies, which actually buy and manage the properties.  Just as the iPhone required a network for its production and distribution, real estate too requires a network for its management.  Everyone in the network expects a 5% return on their investment, so altogether, the rent is likely to be more $635 to cover the costs (and profit margins) associated with that network.

In other words, our median income person is going to send about $9,600 or about 25% of his net annual income into the black hole of rent for a property that he would pay $7,296 to own, should he be patient and frugal enough to save for it over the 15 year period.  That assumes, of course, that there are not shocks to the system, like an unexpected job loss, health care costs, et cetera.

Of course, the millionaire will want to live in a million dollar home while he collects his rent from the median income person.  Along the lines of the same argument, it will take the millionaire 2.5 years, not 15 years, to save enough for the down payment million dollar home.   The mortgage rate would be about $60K per year or about 7.5% of an annual net income of $800K.  My point is simply this:  20% of $50K is much more significant, in terms of the life that it allows one lead, than 20% of one million.  It virtually guarantees that the median income person stagnates, while the millionaire accumulates more and more capital.