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Flat Tax or Graduated Tax?

David Langness | May 26, 2016

PART 4 IN SERIES Ending Tax Evasion

The views expressed in our content reflect individual perspectives and do not represent the official views of the Baha'i Faith.

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David Langness | May 26, 2016

PART 4 IN SERIES Ending Tax Evasion

The views expressed in our content reflect individual perspectives and do not represent the official views of the Baha'i Faith.

O my friend! In all circumstances one should seize upon every means which will promote security and tranquillity among the peoples of the world. The Great Being saith: In this glorious Day whatever will purge you from corruption and will lead you towards peace and composure, is indeed the Straight Path. – Baha’u’llah, Tablets of Baha’u’llah, p. 171.

You hear this political and policy debate a lot lately: flat tax or progressive tax?

A flat tax system has one constant marginal rate: the rate stays the same, regardless of income. People pay the same fixed percentage, no matter how much they make. Thirty-nine countries in the world have flat tax systems. Most of them are small countries, with two exceptions: Russia and Saudi Arabia.

A progressive tax system has a graduated rate: the tax rate rises as the taxable amount increases. People with lower incomes pay a lower percentage of their income in taxes—or no tax at all. Progressive taxation, economists and experts agree, reduces income inequality. The overwhelming majority of the world’s countries have some form of progressive taxation.

Which system do you think is the fairest?

The Baha’i teachings advocate a progressive tax system:

For example, a rich person has a large income and a poor person a small income. To put it in a more explicit way: a rich person has ten thousand kilos of products, and a poor person has ten kilos. Now is it fair to tax them equally? Nay, rather, the poor person in this case must be exempt from taxes. If the poor person gives one-tenth of his income and the rich person one-tenth of his income, it will be unjust. Thus in this way a law should be made that the poor person who has only ten kilos and needs them all for his necessary food, be exempt from paying taxes. But if the rich person, who has ten thousand kilos, pays one-tenth or two-tenths taxes on his products, it will not be a hardship to him. For example, if he gives two thousand kilos, he will still have eight thousand kilos. If a person has fifty thousand kilos, even though he gives ten thousand kilos, he will still have forty thousand kilos. Therefore, laws must be made in this way. – Abdu’l-Baha, Star of the West, Volume 4, p. 83.

Progressive taxation, Baha’is believe, represents a more humane way to administer any government:

…the income tax must be collected in the following manner, for example: When all the income of a person amounts to $500.00 and his necessary expenses amount to $500.00, he should be exempt from paying taxes. Another person whose expenses amount to $500.00, but his income is $1,000.00, should pay one tenth of his income for taxes, because he has more than he needs for his living and can afford to pay one tenth of his income without trouble. Another person whose expenses are $1,000.00 and his income, $5,000.00, should give one and a half tenths of his income, because he has more than he needs. Another person whose necessary expenses are $1,000.00, and his income is $10,000.00, should give two tenths because he also has more than what he needs. Another person whose expenses are $4,000.00 or $5,000.00 and his income is $100,000.00, should give one fourth. Another person, whose income is $200.00, and his actual needs, just to exist on, amount to $500.00, who does his best in his work, but has had poor luck with his crops, such a person should receive help from the storehouse, that he may not starve, but have a decent living.

In every village the necessary means of support for all the orphans must be appropriated from the storehouse. Also for the aged, the helpless, the unemployed, education, public health—for all these, appropriations must be made from the storehouse. – Abdu’l-Baha, Star of the West, Volume 9, p. 347.

From a Baha’i perspective, though, any income tax plan must be a fair and all-inclusive one. In most countries today that levy an income tax, a pattern of deductions, exemptions and adjustments have made their way into the tax code, creating favoritism for certain income brackets, investments and types of income. Heavily influenced by paid special-interest lobbyists, legislatures have often created carve-outs, limitations and exclusions that unjustly benefit some but not others.

The Baha’i teachings say these inconsistent, unfair exceptions circumvent the principle of equal justice.

Instead, the impartial, universal Baha’i principles of taxation, after adjusting for income, do not allow evasion of responsibility, or laying a burden of payment on any economic class greater than justice would allow.

In the past, many nations unfairly exempted the wealthy from taxation, and therefore laid the largest part of the tax burden on the middle classes—wage earners, professionals and those who labored for their living. Currently, the hodge-podge of varying national taxation policies and the proliferation of tax havens have allowed the very wealthy, both individuals and corporations, to use quasi-legal methods to minimize or even entirely escape any taxation. This unjust current condition, Baha’is believe, will only disappear when humanity builds a just international tax system run by a democratically-elected global government committed to world peace:

Implements of war and death are multiplied and increased to an inconceivable degree, and the burden of military maintenance is taxing the various countries beyond the point of endurance. Armies and navies devour the substance and possessions of the people; the toiling poor, the innocent and helpless are forced by taxation to provide munitions and armament for governments bent upon conquest of territory and defense against powerful rival nations. There is no greater or more woeful ordeal in the world of humanity today than impending war. Therefore, international peace is a crucial necessity. An arbitral court of justice shall be established by which international disputes are to be settled. Through this means all possibility of discord and war between the nations will be obviated. – Abdu’l-Baha, The Promulgation of Universal Peace, p. 317.

Next: How Do We Really End Corruption?

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Comments

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  • Rodney Richards
    May 27, 2016
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    Love the specific quotes on taxation found from the writings, and not to be overlooked is the "storehouse" or social programs so that everyone has some living income or services. Yet work is paramount to any system of taxation, or product and services sales etc. It's so obvious that carveouts in the US tax codes have created massive inequalities, although certain ones like agriculture, deserve a higher position in society and in taxation levels. Those carveouts are so entrenched with special interests that very few of the wise even know how to get rid of them, and seem paralyzed to ...act (legislators) in fear of losing constituent votes, which highlights this poor system of representation this is all built upon.
    As to Stephen's Fair Tax, I see personal consumption but not corporate or business consumption being taxed. Am I wrong?
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  • May 26, 2016
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    This is why I mentioned the FairTax in my last post on the previous article in this series.
    The FairTax is a proposal to reform the federal tax code of the United States. It would replace all federal income taxes (including the alternative minimum tax, corporate income taxes, and capital gains taxes), payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes with a single broad national consumption tax on retail sales. The Fair Tax Act (H.R. 25/S. 155) would apply a tax, once, at the point of purchase on all new goods and services for personal ...consumption. The proposal also calls for a monthly payment to all family households of lawful U.S. residents as an advance rebate, or "prebate", of tax on purchases up to the poverty level. First introduced into the United States Congress in 1999, a number of congressional committees have heard testimony on the bill; however, it has not moved from committee and has yet to have any effect on the tax system. In recent years, a tax reform movement has formed behind the FairTax proposal. Attention increased after talk radio personality Neal Boortz and Georgia Congressman John Linder published The FairTax Book in 2005 and additional visibility was gained in the 2008 presidential campaign.
    As defined in the proposed legislation, the tax rate is 23% for the first year. This percentage is based on the total amount paid including the tax ($23 out of every $100 spent in total). This would be equivalent to a 30% traditional U.S. sales tax ($23 on top of every $77 spent—$100 total). The rate would automatically adjust annually based on federal receipts in the previous fiscal year. With the rebate taken into consideration, the FairTax would be progressive on consumption, but would also be regressive on income at higher income levels (as consumption falls as a percentage of income). Opponents argue this would accordingly decrease the tax burden on high-income earners and increase it on the middle class. Supporters contend that the plan would effectively tax wealth, increase purchasing power and decrease tax burdens by broadening the tax base.
    The plan's supporters state that a consumption tax would increase savings and investment, ease tax compliance and increase economic growth, increase incentives for international business to locate in the US and increase US competitiveness in international trade. The plan is intended to increase cost transparency for funding the federal government. Supporters believe it would increase civil liberties, benefit the environment and effectively tax illegal activity and undocumented immigrants. Opponents contend that a consumption tax of this size would be extremely difficult to collect, and would lead to pervasive tax evasion. They also argue that the proposed sales tax rate would raise less revenue than the current tax system, leading to an increased budget deficit. Other concerns include the proposed repeal of the Sixteenth Amendment, removal of tax deduction incentives, transition effects on after-tax savings, incentives on credit use and the loss of tax advantages to state and local bonds.
    The Fair Tax Act (H.R. 25/S. 1025) is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level. The impact of the FairTax on the distribution of the tax burden is a point of dispute. The plan's supporters argue that it would decrease tax burdens, broaden the tax base, be progressive, increase purchasing power, and tax wealth, while opponents argue that a national sales tax would be inherently regressive and would decrease tax burdens paid by high-income individuals.
    The Fair Tax Act (H.R. 25/S. 122) is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.
    Supporters argue that a consumption tax, such as the FairTax, would have a positive impact on available capital (through deferred taxation on investment), increased U.S. international competitiveness (border tax adjustment in global trade), incentives for international business to locate in the U.S., increased economic growth, and ease of tax compliance. The plan may increase cost transparency for funding the federal government and supporters believe it would have positive effects on civil liberties, the environment, and advantages with taxing illegal activity and illegal immigrants. Because the FairTax plan would remove taxes on income, tax deductions would have no meaning or value, which concerns some law makers about losing this method of social incentive. There are also concerns regarding the repeal of the Sixteenth Amendment, transition effects on after-tax savings, impact to the income tax industry, incentives on credit use, and the loss of tax advantages to state and local bonds.
    The Fair Tax Act (H.R. 25/S. 1025) is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.
    A key question surrounding the FairTax rate is the ability to be revenue-neutral; that is, whether its proposed monetary numbers would result in an increase or reduction in overall federal tax revenues, and if so how large this disparity would be. Economists, advisory groups, and political advocacy groups disagree about the tax rate required for the FairTax to be truly revenue-neutral. Researchers can use a different tax base, time frame, or methodology that make direct comparison among estimates difficult. The choice between static or dynamic scoring further complicates any estimate of revenue-neutral rates.
    Proponents offer studies that calculate the tax rate consistent with the legislation (23% inclusive), while critics argue that the rate would need to be much higher and offer competing estimates. Supporters argue that if the rate seems too high or is otherwise higher, it brings to light the cost of the federal government and the true tax burden Congress has levied on the American taxpayer. Bruce Bartlett has stated that "public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%." If the FairTax is presented like all real world U.S. sales taxes and foreign VATs (tax-exclusive), the rate would be presented as 30%. Opponents argue the 30% tax-exclusive figure is better understood by the general populace and that the use of the 23% tax-inclusive number is deceptive and misleading. Proponents state that the 23% presentation is easier to compare to the inclusive income tax rates being replaced.
    Americans For Fair Taxation (AFFT), also known as FairTax.org, is a US political advocacy group dedicated to fundamental tax code replacement. It is made up of volunteers who are working to get the Fair Tax Act (H.R. 25/S. 122) enacted in the United States – a plan to replace all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax "prebate" to households of citizens and legal resident aliens.
    According to the Clearwater, Florida-based organization, it is the largest, single-issue grassroots taxpayers union in the United States, and claims to have signed up over 800,000 supporters. The organization states that it subscribes to the ideals of simplicity, fairness, and freedom which they believe are embodied in the FairTax.
    I have seen various other proposal which will in addition to the FairTax eliminate tax evasion and corruption. I regularly visit sites of libertarian think tanks, media outlets, blogs, and political parties, so I have read lots and lots of ideas on all political issues. By the way, I have endorsed Gary Johnson and the Libertarian Party for the United States 2016 election year.
    There are various tax reform ideas floated around, like I mentioned last time, but I prefer the FairTax above all the rest. I oppose the complexity and unfairness of the current tax code and itemized deductions. I, as a single person with no children that makes less than $100k/year, always files 1040EZ which means I always take standardized deduction.
    Also, a flat tax need not be a true flat tax.
    A flat tax (short for flat tax rate) is a tax system with a constant marginal rate, usually applied to individual or corporate income. A true flat tax would be a proportional tax, but implementations are often progressive and sometimes regressive depending on deductions and exemptions in the tax base. There are various tax systems that are labeled "flat tax" even though they are significantly different.
    The negative income tax (NIT), which Milton Friedman proposed in his 1962 book Capitalism and Freedom, is a type of flat tax. The basic idea is the same as a flat tax with personal deductions, except that when deductions exceed income, the taxable income is allowed to become negative rather than being set to zero. The flat tax rate is then applied to the resulting "negative income," resulting in a "negative income tax" that the government would owe to the household—unlike the usual "positive" income tax, which the household owes the government.
    For example, let the flat rate be 20%, and let the deductions be $20,000 per adult and $7,000 per dependent. Under such a system, a family of four making $54,000 a year would owe no tax. A family of four making $74,000 a year would owe tax amounting to 0.20 × (74,000 − 54,000) = $4,000, as would be the case under a flat tax system with deductions. Families of four earning less than $54,000 per year, however, would experience a "negative" amount of tax (that is, the family would receive money from the government instead of paying to the government). For example, if the family earned $34,000 a year, it would receive a check for $4,000. The NIT is intended to replace not just the USA's income tax, but also many benefits low income American households receive, such as food stamps and Medicaid. The NIT is designed to avoid the welfare trap—effective high marginal tax rates arising from the rules reducing benefits as market income rises. An objection to the NIT is that it is welfare without a work requirement. Those who would owe negative tax would be receiving a form of welfare without having to make an effort to obtain employment. Another objection is that the NIT subsidizes industries employing low cost labor, but this objection can also be made against current systems of benefits for the working poor.
    In economics, a negative income tax (NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented. It was developed by British politician Juliet Rhys-Williams in the 1940s and later by United States free-market economist Milton Friedman.
    Negative income taxes can implement a basic income or supplement a guaranteed minimum income system.
    In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level.
    The effort for reporting and supervision can be significantly reduced by combining basic income with flat income tax. The relationship between gross and net income for individuals can be adjusted to correspond roughly to current relationship at all income levels, implying that income tax is effectively progressive. A flat rate income taxation with tax exemption implements a negative income tax as well as maintaining an actual tax rate progression at extremely low administrative cost. This is achieved by paying a tax on the tax exemption to all taxpayers, e.g. in monthly payments. The tax on the tax exemption is computed by applying the nominal flat tax rate to the exemption. The tax on the income is drawn directly from the source, e.g. from an employer. The tax on income is computed by applying the nominal flat tax rate to the income.
    This simple method results in an effective progressive rate taxation (although the tax rate for the taxes drawn at the source is flat) which is positive once the income exceeds the tax exemption. If, however, the income is less than the tax exemption, the effective progressive rate actually becomes negative without any involvement by any tax authority. As for the positive progression, only very high incomes would lead to an actual tax rate which is close to the nominal flat tax rate.
    The tax on tax exemption also can be understood as a tax credit, which is paid back once an income has reached the level of the tax exemption. This level marks the point where paid taxes and the tax credit are equal. Above that point the state earns taxes from the taxpayer. Below that point the state pays taxes to the taxpayer.
    Example:
    The income tax rate is 50%.
    The tax exemption is $30,000.
    The subsidy rate is 50% and equal to the income tax rate.
    Under this scheme:
    A person earning $0 would receive $15,000 from the government.
    A person earning $25,000 would receive $2,500 from the government.
    A person earning $30,000 would neither receive any money nor pay any tax.
    A person earning $50,000 would pay a tax of $10,000.
    A person earning $100,000 would pay a tax of $35,000.
    Flat tax implementations without the provision of a negative income tax actually need an additional effort in order to avoid negative taxation. For such a tax, the exemption only can be paid after knowing the earned income. Flat tax implementations with negative income tax allow to pay the tax on the tax exemption independent of the amount of the actual income.
    David Langgness, I have noticed you haven't read or responded to any of the comments anyone posted in the previous article, but I hope you read this one anyways as well as all other readers. Also, the quote from Abdul-Baha doesn't specifically and explicitly qualify as a progressive income as he didn't specify if the rates were the statutory rates or effective rates. A statutory flat tax like the negative income tax idea I posted while being a flat tax in theory is effectively progressive due to high poverty exemption and flat tax on all money above the poverty threshold.
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    • May 26, 2016
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      Thanks for your lengthy comment, Stephen. Just so you know, I do read the comments about BahaiTeachings.org articles, but rarely have the time in my over-subscribed schedule to reply, unfortunately. I wish I had more time to engage in discussion with our erudite and knowledgeable readers, but the continual press of writing and editing the material on BahaiTeachings.org keeps me very busy.
      Taken together, however, I believe that Abdu'l-Baha's various writings and talks on taxation policy definitely advocate for a graduated tax, not a flat tax. He very clearly calls for the wealthy to pay a higher rate than the ...poor or the middle class. He makes this clear in many places, perhaps none so specific as his writings on agriculture and the Baha'i concept of a community storehouse. If you'd like to read excerpts from those writings, please see the recent BT essays on the work of the Smallholder Farmers Alliance in Haiti, where those excerpts are quoted at length.
      What you're advocating here, which as far as I can tell works like a modified version of the European value-added tax (VAT) on consumption, has much promise as a replacement for an income-based taxation policy, I believe. It could certainly combine--as it does in many Scandinavian countries today--with a graduated net-worth tax to fulfill Abdu'l-Baha's principles. With the current gridlock in the American political system, though, the prospect of actual agreement on a replacement taxation system in the United States seems like an extremely remote prospect, indeed.
      Read more...
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