A Not-So-Taxing Conversation | Eastern NC Now

   Publisher's note: The author of this fine report is Mitch Kokai, who an associate editor of the Carolina Journal, John Hood Publisher.

    RALEIGH     A friend bills himself as a socialist with libertarian tendencies.

    We've never discussed the apparent contradictions, but I gather what he really means is he doesn't care much for Republican politicians. We often reach different conclusions during our conversations about political controversies. But that's not always true. One example offers an interesting anecdote for those lawmakers and pundits pursuing tax reform.

    The subject of tax rates cropped up during a discussion this fall of Republican presidential nominee Mitt Romney's tax records. My friend wanted Romney to release more details about his tax liabilities. Never able to pin him down on exactly what he expected the tax returns to show, I did get the sense that his primary concern involved Romney's tax rates.

    We know the former Massachusetts governor paid an effective tax rate of 13.9 percent on $42.5 million of income in 2010. He said during the course of the presidential campaign that his effective tax rate had topped 13 percent in each of the past 10 years, and his campaign estimated an effective tax rate of 15.4 percent for 2011.

    My friend and I didn't discuss these details, but he lamented that Romney's effective tax rate would be lower than rates affecting people with much smaller incomes. To him, that didn't seem fair.

    "Suppose," I said, "we consider not just tax rates, but the actual amount of money paid."

    Let's say a person earns a taxable income of $40,000 and faces an effective tax rate of 20 percent. (That percentage is on the high side, but that was not the point of the exercise.) His actual tax bill would be $8,000. Another person earns a taxable income of $20 million and faces an effective tax rate of 10 percent. His tax bill would be $2 million.

    One person is paying $8,000 toward operations and obligations of the federal government. The other is paying $2 million -- a whopping 250 times as much. Is that fair? Could the taxpayer with the larger bill conceivably get 250 times more value from the federal government than the taxpayer with the smaller bill?

    My friend accused me of resorting to trickery. I had used the actual amount of tax paid to disguise the fact that the higher earner had shirked his responsibility. While the $40,000-a-year earner likely struggled to use the rest of his income to pay bills and support a family, the higher earner was able to "sock away" $18 million.

    As I started to respond with another line of questioning -- What happens to that $18 million? Does it all go to yachts, European skiing trips, and high-dollar champagne? Might some, if not most, of it head toward investments that lead to new jobs? -- my friend turned the discussion in an interesting direction.

    "Everyone ought to pay the same rate," he said. "No loopholes. No breaks." Really? Had my socialist libertarian friend really called for one across-the-board tax rate, regardless of the taxpayer's income level? What tax reform advocates label a "flat tax"?

    After confirming that he meant what he said, I interjected: "What if I told you many conservatives would support that option? What if I told you many would even go as far as tying one flat rate to a system with a 'zero bracket,' meaning that the rate would kick in only above a certain income level?"

    Asked to explain, I said a 10 percent tax rate -- I avoided the words "flat tax" -- could kick in at $20,000. Anyone earning up to $20,000 in taxable income would pay no tax. At $20,001 in income, the 10 percent tax would apply to only $1. Moving from $20,000 in income to $20,001 would cost you a dime in taxes.

    At $40,000, the taxpayer would pay 10 percent of $20,000, or $2,000 total. The effective tax rate would be 5 percent. The $20-million-a-year earner would pay 10 percent on $19.98 million, meaning a tax bill of $1.998 million with an effective tax rate of 9.99 percent.

    Not willing to endorse my idea on the spot, my friend nonetheless found it intriguing. I told him I was confident that if people of his ideological persuasion supported a single tax rate, people on my side would agree to exempt those with the lowest incomes.

    This is one anecdote. It's not meant to represent views typically held by conservatives, liberals, or "socialist libertarians." But the conversation elucidates some critical points.

    First, we ought not assume that a self-described liberal or conservative holds a particular view on a particular topic. An idea that makes sense to you might make sense to someone with whom you disagree on many issues. You won't know unless you share ideas.

    Second, "sharing ideas" doesn't mean hurling insults. My friend would not have responded to my comments if I had labeled his position as inconsistent, ineffective, or silly. I would have tired of the conversation had he peppered his comments with nonsensical asides about "evil right-wingers," "extremists," or "Big Oil."

    Third, and perhaps most important, labels can make a difference. Our conversation might have taken a different turn if I had interjected the line: "So you support a flat tax?"

    Recognizing "flat tax" as one of those shady conservative ideas designed to hurt poor people, my friend might have backed away from the position he brought to the table. Instead we reached agreement on a basic concept -- flat tax rates -- underlying the critical tax reform issue facing the state and nation in the years ahead.

    As conversations go, this one was not so taxing.