The Flat Tax – Is It Really All Bad?

A few days ago, Craig examined the Fair Tax which is a tax system based largely on sales tax. Today, I will examine the pros and cons of the Flat Tax which is a tax system based on income taxes with everyone paying the same rate. Because everyone pays the same flat rate and loopholes are eliminated in the process, everyone pays in and everyone pays less than they do under the current system. Estimates often suggest a tax rate of 10-15%. Compare that to current rates.

Often, it is rejected out of hand as a regressive tax. At one time, I too recited the usual talking points on the issue. But after examining the issue during my undergraduate career, I began seeing it in a different light. And in recent years, a few liberal economists (a tiny minority) have begun to soften their position on the issue. The fact is that people would pay the same rate so by definition it is not a regressive tax. A regressive tax is one where those with lower incomes pay relatively more. Under a Flat Tax system, everyone would pay the same.

Today, we are locked into a system that has been rigged for the wealthy and corporations. Credits and loopholes exist for everything imaginable. As a result, of this and recent reductions in tax rates for the wealthy, the lower and middle income earners have picked up the slack through increased property taxes, sales taxes, and various other taxes and fees.

In this way, the Flat Tax would equalize the rate of taxes the lower and middle class pays with the rates paid by the wealthy whereas currently they pay more. A person making 10 times the income of someone else would pay 10 times the taxes. Lower income earners now pay a greater proportion of their income in total taxes and fees than the wealthy. If you’re looking for a regressive tax system, it is our current one. The Flat Tax would result in lower income taxes and lower overall taxes for lower and middle income earners than they currently pay. Certainly, regardless of label, that would be a better policy for those on the lower end of the income spectrum than what we have today.

Another benefit for low income individuals and families is that proposals often exempt from paying taxes families making below a certain income ($30,000, for example). This tax system would be another tool to help to address poverty.

It is also worth noting that the Flat Tax would reduce the bureaucracy involved in our current tax system, reducing the cost of government. Because taxes would be a simple calculation – a flat percentage of one’s income – taxes would be simpler to file, encouraging greater participation. Some point out that remaining IRS staff could file the paperwork, eliminating the need for citizen participation. Either way, a Flat Tax would almost certainly lower the cost involved in following up with people who fail to file their taxes under the current system. Estimates show the total annual cost involved in filing taxes (including private costs) is around $100 billion.

The Flat Tax is not without limitations. It would theoretically reduce donations to charities. Charities would have to rely more on the goodness of people’s hearts, though people would generally have a little more money to play with. And it is really the government that has been donating to charity as they provide the credit at the end of the year. The government currently simply relies on taxpayers to “vote” on which charity to donate to before they get their credit.

Another limitation is that exemptions from taxes for those making under a certain threshold, say $30,000, would put a slightly greater burden on those making more. It may also provide a negative incentive for promotions and success. For example, would a person making $29,999 tax free want a promotion that results in them making $32,000 with a 10-15% tax? On both accounts it might be more ideal to exempt those under $10,000 or $15,000 which is slightly higher than under our current system.

Lastly, it is important to note that more study is needed on the system. But the Flat Tax is something that should no longer be on the back burner. It should be studied and given a public debate because, contrary to many sound bites, it likely is less regressive and more beneficial to lower and middle income earners than it is given credit for.

Advertisements

6 Responses to The Flat Tax – Is It Really All Bad?

  1. Rhonda says:

    Flat tax…”A scenario” -would the wealthy be able to find a loophole by putting some of their income in to “pre-tax” savings program of some kind? As the poor could not sacrifice any of their income like this would that be an unfair advantage for the rich? And in the “Just A Thought” category….could a charity provision be put in to a Flat Tax system?

  2. Troy says:

    Good questions. Generally, a flat tax eliminates loopholes like credits and hideaways for money. There may be some programs (such as retirement accounts for individuals) where pretax funds would go. And you could still allow some credits for charity under a flat tax. Though the more loopholes and more credits allowed, the greater the rate of taxation must be to make up the difference.

    I’ve often though a hybrid system would be beneficial, starting from scratch. One that starts with a 2 tiered tax rate and adding only limited credits. For example, 15% tax rate for those between $10,000 and $100,000 and 20% for everyone above that.

    I really wish more time and debate was spent on the issue because I think, starting from a flat tax, we could come up with a more fair system than we have today.

  3. Brandon says:

    Part of me actually likes the idea of a progressive tax system. Many would say that it is unfair to be “Penalized” for earning a higher income. I like to think that wealthy people should be willing to contribute more dollars to a system that has been so good to them. Also, those with higher incomes gain less utility from their money than those with lower income. So from a utility point of view it makes sense for the wealthy to pay a higher percent. This also helps close gap between the rich and the poor, which is continuously growing. A growing gap between rich and poor is always negative for societies.

    • Troy says:

      True. I like a truly progressive tax system as well. But while the income tax portion of our current system is technically progressive, there are so many loopholes, credits, and hideaways, that the budget ends up balanced disproportionately on the lower and middle class through property taxes, sales taxes, etc. Whether we choose to use a flat tax or a progressive tax, I think we need to start over with a simplified system that is less costly to administer and enforce. Ideally, I would like to see more of a hybrid system as mentioned in the post with 2 tiers and eliminating loopholes, credits, and hideaways.

  4. Adam Brown says:

    How would those that are technically not earning an income be taxed? When I was working for the Minnesota Conservation Corps, I was not being technically “paid,” I was earning a living stipend. The tax fudging involved with that always left my mind boggled– I wonder if there is something involved with this to close up that fuzziness?

    I think that a progressive rate of tax is a good idea, but more along the lines as you mentioned, of a tiered system. When those in the upper crust don’t even know how much they are paying in taxes because their accountant handles it all while they are on vacation for four months out of the year, yet working-class families have to work extra hours to offset the taxes they face on the money they are rightfully earning because it may or may not mean hunger even though they are working themselves to the bone, something has to be done to even the playing field. (And not just in the tax ballfield.)

    • Troy says:

      That’s interesting, I’m not familiar with the exemption relating to the Minnesota CC and others like them. I suspect that a Flat Tax or hybrid system that exempts people under a certain income threshold ($30,000) from paying taxes would address most of these cases.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: