Why America Needs A Flat Tax System

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Taxes in America

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Most Americans agree that the current tax code is far from perfect. In fact many compare it with the tax codes of other countries and conclude that the United States taxation system lags far behind and could do with a revamp. Two alternatives which repeatedly crop up in American politics and which show promise are the flat and fair tax. American economists and politicians, not really Democrats though, have long been in favor of a flat federal income tax in lieu of the graduated system of taxation currently in place.

Forbes’ Flat Tax

One proponent when in office of the flat personal income tax system was President Clinton. President Clinton believed there should be a standard deduction amounting to $100,000 applicable to all, and after that a single tax rate for all income over that amount. This is not really what people think about though when thinking about a flat tax; it is more along the lines of Steve Forbes (high successful investor and American finance expert) who says everyone should be taxed at 18% or so.

What Is The Flat Tax System?

A flat rate tax is a fixed percentage applied to all earners irrespective of their level of income. This includes the money they earn from investments and any other sources of income. It is called flat because it taxes everyone at the same rate regardless of what their income is.

As an example, a person earning $50,000 will pay the same tax rate as a person earning $500,000 per year. The taxpayer who makes $500,000 pays more in taxes merely because of the greater income earned, however the percentage at which the tax is paid remains just the same as the taxpayer earning $50,000 a year. The flat rate system makes no discrimination structured on income levels.

The flat tax can be compared with local sales tax in the country, where the same tax rate applies to every individual without exception. The rate may vary from one county to the next, and some goods such as food may be exempted, but in general the sales tax is a flat tax. When a person buys a product, whether it’s a box of chocolates or an automobile, the same rate of tax applies regardless of his or her income.

Basic Principles & Understanding

But when we refer to a flat tax we are typically using the term in relation to the tax applied to peoples’ income. The sales tax is applied to what people spend their money on, but the principle is the same – a flat rate of tax which is applied to all people irrespective of how much they earn.

Simplicity

The issue of instituting a flat tax system has long been hotly debated. In the progressive system currently in place, a lower percentage tax rate is applied to those who earn less money, but as your income increases and you reach a higher bracket, the rate of tax increases. But if this was replaced by a flat tax system, every individual of every level of income would pay the same tax percentage rate which would be determined by legislature. It would also be easier for people to calculate if the Forbe’s flat tax was ever implemented; this would save billions of dollars in accounting fees in which Americans, businesses, and companies spend every year trying to figure out their taxes.

Some proponents of the flat tax system believe that apart from being fairer, a simplified flat tax system would enable the government to save a significant amount in bureaucratic fees. The Internal Revenue Service under the present system spends a considerable amount of time and effort checking the proper filing of taxes, write offs, and exemptions. A flat system of taxation would have no exemptions to verify. Many believe that the operation of the existing tax system in itself is expensive and accounts millions of hours of wasted time and even fraud.

Many consider the current tax code to be so confusing since it is beyond the comprehension of the average taxpayer, most often requiring the services of a professional at a cost to that individual. Even an Internal Revenue Service Commissioner has conceded that the tax code is so confusing and complex that it contributes to honest mistakes and creates loopholes which allow for tax evasion (something already hinted at).

A flat tax will simplify the prevailing tax code and be fairer to all citizens. The simplicity which a flat tax rate will provide will be a huge benefit to an existing, unwieldy system. It will make it far easier for the IRS to compute taxes for anyone and provide for straightforward payments by taxpayers. Because there is only a single tax rate to apply it to, to any amount of income, the flat rate system would be so much simpler to understand and report. It will save taxpayers a considerable quantum of money currently spent on accountants and attorneys, to comply with current IRS regulations.

Tax Reforms

In a flat rate system, double taxation is eliminated because it removes that part of the tax code which is prejudiced against capital formation. The capital gains tax, death tax, and double taxation that is in the form of the dividends and savings taxes will be eliminated (double taxation is against the constitution which does not seem to bother some politicians). The need to report interest, dividends, and other sources of income which are business-related will no longer be necessary. This will save money and time in the private sector and with the IRS, both sides of the aisle. Many say this will actually generate more money for the government’s coffers because it will help stimulate the economy. A flat tax or a simpler tax code alone is not all that America needs but it is a huge step in the right direction.

High income earners would still have to pay a larger amount to the federal government though at the same taxation rate as already discussed.

More Equitable Income Distribution

A flat tax system will balance disparities of income distribution. High income earners would correct imbalances with increased tax obligations.

Increased Business Activity

In a flat tax system the tax burden on low income earners may actually increase a little since they do not pay any income tax at all which many people believe is unfair and causes some poorer people to take wasted government spending for granted. Because the economic activity will increase, there will be more jobs and opportunities for impoverished people which will more than offset them joining the tax ranks. A flat tax, depending on the rate, but if it is around 18% promoted by Steve Forbes, will mean lower taxes for millions of people and businesses. This will increase their spending power which will translate in more services and products paid for, only fueling the economic fire more.

Higher Business Profits

Increased household purchasing potential will translate into bigger profits for businesses across the spectrum because households will have more money to spend. Macro-economic performance will be improved because small businesses will enjoy increased revenue and be able to keep more of their money.

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About Author

Benjamin is from Sacramento, CA. He has 2 master’s degrees and served 4 years in the U.S. Navy. He has worked at Wells Fargo Financial and has been investing in equities since 1995. He is a constant reader of finance articles and books related to business.


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