Wednesday, July 29, 2015

Sen. Specter's tax: Flat, or bent?

"Slash the mammoth IRS bureaucracy"

Sen. Specter's tax: Flat, or bent?

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Sen. Arlen Specter may be a Democrat now, but he's remained a supporter of the 20% flat income tax on U.S. incomes made popular by millionaire business publisher Steve Forbes, as he did in his last campaign as a Republican in 2004. (Back then the proposal was 19%).

Specter laid out his thinking in a 2007 floor speech that still represents his position, aide Kate Kelly told me. Said the senator: "The flat tax is a win-win situation for America because it lowers the tax burden on the taxpayers in the lower brackets" thanks to a family exemption of $40,000. Charitable donations and home mortgage would still be deductible.

But Specter's math only works if you ignore what, for many working Americans, is a larger federal tax burden: the 7.65% we pay for Social Security and Medicare. We only pay Social Security (7.2%) on the first $107,000 we earn (the smaller Medicare portion is unlimited.) You don't have to pay it on income above that limit. So the higher you earn in the six-, seven- and infinite-figure range, the lower your payroll tax rate.

Under Specter's flat tax, the Feds would take 28 cents of every dollar from the paychecks of people earning $40,000 to $107,000 a year. The rich would pay less. The poor would get a break, but may already do; and they'd still have to pay Social Security and Medicare.

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That's given Specter's quixotic primary challenger Rep. Joe Sestak, D-Pa., a club to beat Specter with. Citing data from the Citizens for Tax Justice, Sestak says the wealthiest 1 to 2 million Americans would pay less under the flat tax Specter backs, while most others would pay more.

Specter's on firmer ground when he says his way would be simpler. Pennsylvania already has a flat income tax, and the form's the size of an index card. "A 10-line postcard filing would replace the myriad forms and attachments" of the current code, saving time, money, frustration, the senator argued in his 2007 remarks. "It would allow us to slash the mammoth IRS bureaucracy of approximately 87,000 employees," not to mention paid tax preparers, freeing them for jobs "elsewhere in the government or private industry." And all that untaxed wealth, especially for people making $400,000 and up each year -- currently taxed at 36%, scheduled to rise to 39% next year -- would boost U.S. "growth" and "productivity," while cutting "fraud."

But is all that simplicity worth paying an extra $2,000 to $5,000 a year, as the CTJ estimates? For that much you could get a lot of tax prep help. If Specter wants to really flatten the tax rate -- instead of just bending it -- he could start by working the Social Security and Medical taxes into his plan, instead of ignoring them. The rich would still pay less.

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About this blog

PhillyDeals posts drafts, transcripts and updates of Joseph N. DiStefano's columns and stories about Philly-area business, which he's been writing since 1989.

DiStefano studied economics, history and a little engineering at Penn and taught writing at St. Joseph's. He has written thousands of columns and articles for the Inquirer, Bloomberg and other media, wrote the book Comcasted, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com, distefano251@gmail.com, 215.854.5194 or 302.652.2004.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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