This week I read a great article at Financial Samurai titled Tell Us Why The Flat Tax System Isn't Fair. In it, Financial Samurai explains very well why the flat tax is a fair tax. While you should go to his site to read his reason, I thought that I would raise some more reasons why Congress should pass the flat tax.
Stop Using the Tax Code to Regulate People
While most flat tax opponents prefer a progressive tax system because people who make more money are taxed at a higher tax rate, I think that in many ways the current progressive tax system helps the very rich at the expense of the middle class.
The US tax code provides all kinds of ways to lower your taxes, but typically the wealthy are the ones who can afford to take advantage of these tax breaks. One example is the tax break available for investment property owners. These landlords can deduct all kinds of expenses from their taxes.
Instead, let's simplify the tax code by stating that everyone has to pay 15% of their income in taxes. But, let's stop giving tax breaks as a way to engineer the economy. There are enough benefits for owning a house without having tax deductions on mortgage interest. Let's stop giving tax breaks for buying "energy efficient" cars. How crazy is it that someone can get a tax credit for buying a hybrid Yukon because it is a hybrid, even though it gets worse gas mileage than my Honda Accord. Rant over. LOL
Too Many People Pay No Taxes
Another problem that I have with the current tax code is that too many people pay nothing in taxes. Don't get me wrong, I don't want the indigent to have to pay taxes, but everyone above the poverty line needs to pay something.
We can't have a society where half of the population pays nothing. This really hurts the middle class. As more and more people are taken off the tax rolls, middle class families need to pay more. Instead, government needs to cut its budget, become more efficient, and lower taxes for everyone.
We Need A Simpler Tax Code
The main reason that we need the flat tax is that it would greatly simplify doing your taxes. If you make $100,000, then send $15,000 to the government.
This is the way my State of Pennsylvania does it. In fact, most states have a flat tax. We could greatly reduce the IRS budget if the tax code was simplfied.
So, go check out the Financial Samurai's article. It is well done and the comments are great.
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“Another problem that I have with the current tax code is that too many people pay nothing in taxes.”
Just to add to that: Almost nobody pays “nothing in taxes.” There ARE people who pay nothing in federal income taxes, but what about payroll taxes (regressive)? State income taxes (regressive)? Sales tax (regressive)? Capital gains taxes (regressive because of the lower rate on cap gains even though the majority of people who have substantial cap gains are wealthy)?
I also wrote a post as a response to FS. It’s How Much Do the Wealthy Really Pay in Taxes? When all of the data is taken together, it already seems that the tax system is progressive.
So if you flatten JUST the federal income tax, the tax system as a WHOLE would actually become regressive. The only progressive tax in the system seems to be the federal income tax.
Where are you getting the 15% rate? Just curious.
I favor a national sales tax like the Fair Tax over a flat income tax. A Sales tax discourages spending and encourages savings while a flat income tax does not. In any event, it would be good to get rid of all the hidden taxes that inflate the cost of everything we buy, such as the federal tax on tires. I also think that there should be no taxes on business since all business taxes are ultimately paid by the consumer of the product or services rendered.
Hey Debt Hawk! Good to see you in support of a simple and equitable flat tax system! I could have used your backing during the ferocious battle I had over on my site.
At any rate, it’s a great discussion that just keeps on going and going and going. When I worked at McDonald’s for $3.3/hr, I supported the flat tax system. Now that I make more, I’m still in support of equality for all.
Hope to see you around debating our topics at Financial Samurai one day and I look forward to reading your posts too.
Best,
FS
If I recall correctly, when Steve Forbes ran for president, the right number was 17% or so, just a bit higher than the 15% you suggest.
As with most shifts in any financial structure, it’s great in theory, but the shift itself is what’s painful. What about people who in 2010 start the Roth conversion, paying 25% or 28% tax to convert, only to find years later, that the flat tax is 15-17%.
The financial math of landlording is what it is. The shift to a flat tax can have an unintended consequence of trashing realestate prices for all of us (maybe) or raising the cost of rental units to make up for the tax shift.
I’m in favor of tax simplification, I just am concerned about the potential shock to the system.
Joe
@MLR The taxes you describe as “regressive” are not in fact regressive (http://en.wikipedia.org/wiki/Regressive_tax). They are still progressive. All of those taxes are set as percentages, which means they automatically increase. A regressive tax is one where the rate decreases – usually in the form of a flat fee (e.g. everyone pays $100). A flat tax rate would still be progressive – you earn more, you pay more. It would just be less progressive than our current system.
Good point Joe! All about a 5 year PHASE-IN process to reduce shock!
Will someone do me a favor and show me ANY flat income tax proposal before congress that works the way it is stated here? They all have an exemption/deduction level that is GREATER than the current system and none propose a 15% rate. They all treat wage income completely different than weath income.
In his 1999 presidential campaign, Steve Forbes stated that a family of four wouldn’t pay taxes on the first $36,000. At the time, under the current system the exemption/standard deduction level for a family of four, was less than $20,000. If adjusted for inflation, the family of four exemption under the Forbes plan would be $48,000 today.
The lowest PERSONAL INCOME TAX rate proposed is 19%, not 15%. That is ONLY levied on wage income, not income from wealth, so many of those supporting it will pay zero as all their inocme comes from dividends and capital gains. In addition there is a 19% tax on BUSINESS income (minus wages and expenses) and the current PAYROLL TAX tax is continued…which will probably end up much higher to fund it. The combination of these taxes make the cost much, much higher than 15%.
Don’t get me wrong, I don’t feel capital should be taxed, but to do that under an income tax means those still producing are the only ones carrying the tax burden.
NO ONE has proposed an income tax system that applies an equal percentage to every citizen on all income. That is a pipe dream.
So assuming we are talking reality here, the flat income tax as actually proposed will convince an even greater number of Americans that government is free which leads to bigger (not better) government and will treat the income of workers completely different than the income from wealth.
Additionally, with society heading to a cashless society and electronic filing/reporting being the rage, a flat tax will leave us with the simpliest of systems; government can simple track you, tell you what you owe and take it from you with no action on your part. That might be simplicity, but it is not freedom.
That is one of the biggest reasons I support the FairTax. It visibility untaxes spending on basic necessities and it does it equally for all. It taxes consumption of wealth at the same level as consumption of wages. It is clearly and equally visible to all under the bright lights of the cash register. We will not have responsible, accountable government until we have that level of visibility.