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.