Our current tax system is complex, costly, and unfair. Surely, America can do better for our children than redistribution and regulation. Our nation is over four trillion dollars in debt. It is time to act instead of letting lawyers and politicians play with our money.
A flat tax plan is a simple solution to remedy the stagnant apathy our nation has been so accustomed to for the last seventy years. A flat tax would make calculating and collecting tax simple. According to 1996 studies, Americans devote 5. 4 billion dollars a year to Federal Tax related paperwork. The IRS estimates that that it takes about 27 hours for the average family to keep records and prepare an itemized form 1040 with a few schedules.
With the Armey-Shelby flat tax plan, everyone well above the poverty line will pay seventeen percent of your income. No credits or exemptions unless you have dependants and no taxes on saving or investments. The tax form will be the size of a postcard. An argument for A FLAT TAX FOR THE U. S. : THE ADVANTAGES AND DISADVANTAGES OF A FLAT TAX Calculate your own FLAT TAX RETURN YOU are visitor number Introduction Purpose and Procedures Background of the Flat Tax Tax Facts Basic Structure of the Fact Tax Individual Wage Taxation Business Taxation Arguments forthe Flat Tax Fairness Simplicity Economic Growth Lower Compliance Costs Higher Compliance ArgumentsAgainstthe Flat Tax Benefits the Rich The Flat Tax is Unfair Economic Decline The Effects of the Flat Tax on Americans Overhaul in Allowed Deductions Flat-Tax Effects on Investment Flat-Tax Effects on Employee Benefits Conclusions Recommendations Sources Introduction An intensely debated topic during the last two years has been the issue of tax reform.
The principal voices of tax reform call for a flat tax to be the foundation of a new tax system in the United States. Supporters of the flat tax argue that our current tax system is filled with too many loopholes and contains so many complications that people spend way too much time and money filing taxes. These supporters also claim the current tax system is not fair. Opponents of the flat tax reason that a flat tax is quite unfair to low and middle income families and argue that a flat tax would drastically inflate the deficit.
Purpose and Procedures The purpose of this issue paper is to discover how using a flat-tax system in the United States would affect most citizens. More specifically, the following questions will be answered: 1. What is the flat tax 2. What are the pros and cons of a flat-tax system for America 3. How would the implementation of a flat tax affect the lives of Americans of all economic circumstances Background of Flat Tax Proposals The flat-tax issue is a fairly new issue for most Americans. The first major flat-tax proposal was written by Congressman Dick Armey and Senator Richard Shelby.
This proposal calls for a 17 percent flat tax. Since the time of Mr. Armey and Mr. Shelby's proposal, many other people have proposed their own flat-tax plans. These alternate plans vary little from the proposal by Dick Armey and Richard Shelby. (Armey & Shelby) During the last part of 1995 and the first part of 1996, Steve Forbes made the flat tax part of his primary campaign platform as a candidate for the Republican nomination for president.
The Forbes flat-tax proposal is based on a 17 percent tax rate and is very similar to the proposal by Dick Armey and Richard Shelby. (Forbes) Tax Facts A look at several current tax facts is needed to understand why so many Americans seem ready for major tax reform. Several of these statistics are the following: Americans devote 5. 4 billion dollars a year to federal tax-related paperwork. A volume of 293, 760 trees are felled yearly to print the Federal Tax Regulations alone. This does not include the paper used in tax forms.
The IRS estimates that it takes about 27 hours for the average family to keep records and prepare an itemized form 1040 with a few additional schedules. (Armey-Facts) Basic Structure of the Flat Tax The flat tax proposed by Congressman Armey and Senator Shelby would replace the income tax with a 17 percent flat tax. Individuals would pay 17 percent of their wages and businesses would pay 17 percent of business income. (Armey & Shelby) Individual Wage Taxation Each individual pays 17 percent of total wages, salaries, and pensions. The calculation is to be made after deducting family allowances. The family allowances are $11, 350 for a single person and $22, 700 for a married couple filing jointly with an additional deduction of $5, 300 for each dependent.
Mortgage interest payments would no longer be deductible. The flat-tax system eliminates the estate tax, the capital gains tax, and the tax on interest and dividends. The flat tax would not tax social security benefits and would have no effect on current Medicare payroll taxes. (Armey & Shelby) Business Taxation All businesses pay a 17 percent tax on the difference between revenues and expenses. Under the flat-tax system, businesses can immediately deduct all expenses-including structural expenditures and equipment. Businesses would not be allowed to deduct fringe benefits, interest, or payments to owners.
(Armey & Shelby) Arguments for the Flat Tax Supporters of a nation-wide flat tax give many reasons for their position. These supporters maintain the flat tax upholds freedom, fairness, and trust. Supporters of the flat tax also claim the new, simple tax system would stimulate the economy. Fairness The 17 percent flat tax is fair because it offers no special tax breaks going to politically favored groups-everyone pays the same rate. Senator Armey argues the flat tax is also progressive because of the family allowance.
The plan is progressive because the less you make, the more the family allowance is worth. For example, a family of four making $36, 000 would pay zero percent of its income in federal income tax. The same family making $50, 000 would pay five percent of its income, and if its income was $200, 000 would pay 14 percent of its income. I estimate the plan takes about ten million low-income taxpayers off the rolls entirely. This is the definition of progressive. (Armey) Simplicity Proponents of the flat tax trumpet the call for a simple tax system-one with no loopholes and few deductions.
Humberto Cruz, a columnist for the Fort Lauderdale Sun-Sentinel newspaper, writes, "The tax code is a mess, a morass of 437 tax forms, most of them filled with incomprehensible jargon. The Internal Revenue Service is a useless bureaucracy, often unable to answer a simple tax question." (Cruz, 22) Steve Forbes used the simplicity issue to further the popularity of the flat tax. He declared, "The flat tax would be simple. You could fill it out on a postcard. Millions of people would be off the federal income tax rolls." (Forbes) Economic Growth Many business economists believe the flat tax would generate some type of growth for the economy. According to the Bureau of National Affairs, "Some 55 percent of the 156 analysts polled by the National Association of Business Economists think the economy would benefit from some type of flat tax...
." (Columnist, 358) Advocates of the flat tax argue that the tax allows a business to invest more than it currently does. A study conducted by the Texas Citizens for a Sound Economy Foundation, a nonpartisan research organization, revealed many pro growth benefits of the flat tax. The Austin-American Statesman said of the study, "Under a flat tax, businesses could deduct the full cost of capital investments, labor costs and business expenses from gross revenues in the year the money is spent, rather than depreciating the purchases over several years. The study asserts that businesses would have more money to invest on capital and labor." (Breyer, D 1) Congressman Dick Armey insists, "[T]he flat tax will produce higher productivity and economic growth, leading to higher employment and wages." (Armey) Advocates of the flat tax also argue that after-tax income would go up for nearly all households; thus, the flat tax would increase the savings of almost all individuals and reduce the deficit. (Lambro) Lower Compliance Costs Proponents of the flat tax stress the fact that the compliance costs of the flat tax are much lower than those of the nation's current tax system. Flat-tax promoters equate the amount of money saved by using a flat tax system as a $100 billion tax cut for the American people.
(Foster) The study by Texas Citizens for a Sound Economy Foundation found that the flat tax would "dramatically" reduce compliance costs. The Foundation believes the amount of money saved by scrapping the 7, 817 pages of tax code will be approximately $131. 6 billion a year. (Breyer, D 1) Senator Armey estimates the current tax system's compliance costs are $232 billion a year.
This cost equals $900 for every individual in the economy. (Armey) Higher Compliance Supporters of the flat tax emphasize the new tax system would lead to higher compliance with our tax laws. Under the Armey and Shelby proposal, taxpayers would sit down and write out a check to the government once a month. Congressman Armey stated the following in response to concerns about whether Americans would pay taxes on their own without having taxes automatically withheld from their paycheck: The question arises: Would people still pay their taxes I am confident they would since the Armey flat tax eliminates the three primary excuses for noncompliance.
These are first, the current system's maddening complexity; second, the low likelihood of getting caught; and third, the feeling that today's system is somehow rigged to favor special interests "at my expense" which, for the most part, it is. Stripped of these rationales for noncompliance, the great majority of taxpayers will find it much easier to pay their taxes, and much harder to elude detection were they to cheat. The underground economy will shrink. After all, if you give the American people a tax system that is honest, direct, simple, and fair-something they have not had in more than 70 years-does it not stand to reason they would be more inclined to pay their fair share (Armey) Champions of the flat tax believe many wealthy Americans would pay more in taxes at the 17 percent rate than under the current tax system.
The underlying idea is that rich Americans could not search for every little loophole to escape taxation because those loopholes would not exist anymore. Americans would be assured everyone pays taxes. (Cruz, 22) Arguments Against the Flat Tax Plenty of people argue the flat tax is not good for America. These opponents indicate the economy would take a nose dive under the flat tax, and people would not be treated fairly in how they are taxed. (Gose, B 2) Benefits the Rich The leading argument against the flat tax is that the new tax system would benefit mainly the rich. A Treasury analysis of Congressman Armey's flat-tax plan reveals that under the 20 percent tax rate, the tax rate for the first two years under Dick Armey's plan, taxes would increase an average of $1, 000 a year for families in every income group except those families earning more than $200, 000 each year.
(McIntyre, A 35) Ross Stephens, a professor at the University of Missouri-Kansas City, states, "In many ways the flat tax allows the wealthy to abdicate the responsibility to pay taxes. Its [sic] a system of fiscal Darwinism-let the rich survive." (Gose, B 2) Bob Dole, the leading candidate for the Republican nomination for President, has stated that, "The one thing I will not do is shift the tax burden from the superrich to the middle class." (McIntyre, A 35) The reasoning opponents use to claim the new tax system would only benefit the rich lies in the new tax breakdown. Under the flat tax the rich and superrich pay a lower percentage of their income to the government than they currently pay. Also, the rich typically make a sizable portion of their money through interest, dividends, and capital gains; therefore, because the rich would deduct unearned income from their tax base, much of their real wealth would not be taxed.
The Flat Tax is Unfair Opponents of the flat tax use the same principle to make their case as do the supporters of the flat tax-fairness. Closely related to the argument that the flat tax benefits mainly the rich is the rationale that the flat tax is unfair for Americans. J. D. Foster, executive director and chief economist for the Tax Foundation, says the following in relation to whether the flat tax system is fair: The flat tax also appears to have a major fairness problem.
Consider two families. The Jones es have a combined salary of $50, 000 in wages. Under the Armey flat tax, a 20 percent rate would cost this family $3, 700. Now consider the Smiths, who in retirement consume every dollar of their $1 million in dividend income. Under the flat tax the Smiths owe no tax at all because capital income is excluded from the tax base. To be sure their dividend income was taxed at least once at the business level before they received it.
But the perception would persist that a high-income family could pay no tax. Will tax fairness be defined so that individuals consuming significant amounts of capital income would pay little or no tax. (Foster) Many Americans see the flat tax as a way to eliminate a big part of the current tax base for the rich. These people are not convinced the untaxed unearned income will stimulate the economy and increase the wealth of all. Opponents of the flat tax are quick to point out the failure of the Reagan tax breaks to create more wealth for all Americans. Many Americans simply believe the flat tax to be unfair.
(Wester, 11) Economic Decline Those who oppose the flat tax have no doubt the tax will hinder economic growth. The basic presumption is that if everyone's taxes were cut, as maintained by flat-tax supporters, then federal revenues would drastically fall and the deficit would sky rocket. (Yoder, 6 A) Most adversaries of the flat tax hold that the flat tax raises lower and middle- income families' taxes while still losing at least $30 billion a year in revenues as a result of the colossal tax cuts in the highest income group. (McIntyre, A 35) Another major reason many people believe the economy would suffer as a result of the flat tax is the effects the new tax system would have on businesses.
Many people are worried the new tax system would encourage businesses to produce in foreign countries. One element of Congressman Armey's proposal is the repeal of foreign and international rules. Edwin Hood, a professor of tax law, is concerned about this element of the proposal. He said, "That would effectively exempt from taxes money made by U. S.
companies outside the country. While those companies now must pay taxes on income they return to the country, HR 2060 would allow firms to return the money as dividends and escape taxation." (Gose, B 2) The Effects of the Flat Tax on Americans Opinions differ about how the flat tax would affect the lives of Americans of different economic circumstances. Many Americans feel the flat tax would be a simple and effective way to tax people, yet others feel the tax will create serious problems in the typical American's financial life. (Crumpley, F 1) Overhaul In Allowed Deductions Charles R. T. Crumpley, a columnist for The Kansas City Star, writes, "Indeed, everything that's been patted on the head and handed a tax deduction over the years would be kicked in the shins by a flat tax.
That would include health-care benefits, which could be a candidate for the endangered species list, some think." (Crumpley, F 1) The most visible and talked about deduction laid on the flat-tax cutting board is the home-mortgage-interest deduction. Under the 17 percent flat tax, Americans would no longer be allowed to deduct interest payments on their home mortgage. A study released by the National Association of Realtors asserts that, by eliminating deductions on mortgage interest payments, the flat tax would reduce housing values in the U. S.
by about 10 percent. (Foster) Supporters of the flat tax are mostly unaffected by the possible reduction in housing values if the flat tax were to become law. One strong advocate of the flat tax argues, "Opponents of the pure flat tax say home values would drop if the mortgage interest deduction is eliminated. They say homeowners would be hurt if they had to sell their home. But wouldn't home buyers benefit They say taxing agencies would have to raise property tax rates to compensate for falling values.
But wouldn't homeowners still pay the same total amount of tax" (Cruz, 22) A flat tax would benefit taxpayers who do not currently take large tax deductions. Renters, for example, would be on the same level as homeowners because homeowners would not be allowed to deduct interest payments on their mortgage. (Crumpley, F 1) Flat-Tax Effects On Investment The flat tax would have serious consequences on investment and investors' decisions. Those who derive much of their income from investments would benefit greatly under the flat tax plan because investment earnings would not be taxed. Many people feel the current tax system's double taxation of savings is unfair and believe investment income should be taxed only once. Flat-tax supporters firmly believe the new tax would stimulate investment and economic growth.
(Crumpley, F 1) Flat-Tax Effects On Employee Benefits Employee benefits end up taking a beating under the flat tax. Employers would no longer be eligible for a tax deduction for providing health insurance and other benefits to their employees. The flat tax would probably give employers an incentive to cut benefits or even eliminate benefits altogether. Flat-tax advocates say employers would probably give the money normally spent on benefits to employees in the form of additional wages because employers would still be allowed to deduct the cost of wages.
Employees could buy whatever insurance they need. (Crumpley, F 1) Conclusions After carefully studying the criteria of the flat tax and the effects of the tax on Americans, several important conclusions can be assumed. These conclusions are the following: 1. Advocates of the flat tax express their desire for a tax system that is fair, simple, and beneficial to the economy. 2. Opponents of the flat tax argue the flat tax would be unfair because it benefits the rich and harms middle and lower-class Americans.
3. The flat tax is generally known as a 17 percent tax rate for all Americans, regardless of economic circumstances. The flat tax eliminates most of the current, standard deductions while introducing new, generous deductions based on the number of individuals in the household. 4.
The flat tax ends the double taxation of savings by eliminating interest payments, dividends, and capital gains from the tax base. 5. The most visible of all deductions eliminated by the flat tax is the deduction on interest payments on home mortgages. Recommendations The above conclusions offer several important recommendations about the flat tax. These recommendations are as follows: 1. Americans should give the flat tax serious thought as a viable way to create an economically sound tax system.
2. Americans should support the flat tax because the flat tax is a much simpler form of taxation than the country currently uses. 3. Americans should support the flat tax because the flat tax taxes all Americans equally and fairly. 4. Americans should support the flat tax because the flat tax would create an incentive to invest, increasing the economy's capital stock.
Armey, Dick. "Why a Flat Tax," World Wide Web. Armey, Dick & Shelby, Richard. "Flat Tax Summary," World Wide Web.
Armey-Facts, Dick. "Tax Facts," World Wide Web. Breyer, R. Michelle. "Flat Tax Would Benefit Texas, Study Maintains," The Austin American-Statesman, 21 February 1996, D 1. Columnist.
"Business Economists Say Some Type of Flat Tax Would Benefit Growth," Bureau of National Affairs Banking Report, 4 March 1996, 358. Crumpley, Charles R. T. "Would a Flat Tax Help or Hurt You," The Kansas City Star, 28 January 1996, F 1. Cruz, Humberto. "Flat Tax Benefits More than the Rich," Sun-Sentinel, 29 January 1996, 22.
Gose, Joe. "Flat Tax Would Benefit Wealthy Most, Professors Say," The Kansas City Star, 4 March 1996, B 2. Forbes, Steve. "Steve Forbes on The Flat Tax and How Much Your Family Saves," World Wide Web. Foster, J.
D. "A Friendly Critique of the Flat Tax," World Wide Web, 11 August 1995. Lambro, Donald. "Flat Tax Would Benefit America's Middle Class," The Atlanta Journal and Constitution, 20 February 1996.
McIntyre, Robert S. "A Flat Tax Would Benefit the Fat Cats," Newsday, 24 January 1996, A 35. Wester, Dave. "Yes, Flat Tax Plans are Shallow," Milwaukee Journal Sentinel, 14 February 1996, 11. Yoder, Edwin.
"Forbe's Basic Spiel Sophomoric." The Montgomery Advertiser, 6 February 1996, 6 A. Last modified May 27, 1996 Send Comments to mailto: This document was created with the assistance of WebMania! 1. 2 (Unregistered) - 1995, 96 Q&D Software Development - web This document was created with the assistance of WebMania! 1. 2 (Unregistered) - 1995, 96 Q&D Software Development - web Why America Needs a Tax Cut Chapter 8 | Previous Chapter | Next Chapter | Contents THE FLAT TAX: THE FINAL STEP Daniel J.
Mitchell McKenna Senior Fellow in Political Economy The Heritage Foundation Although cutting taxes will begin to simplify the current tax system and help the economy meet its growth potential, more fundamental changes are needed. And the answer is the flat tax. There has been a surge in support for a flat tax in recent months, thanks largely to the efforts of House Majority Leader Richard Armey (R-TX). Many Americans see the current tax system as a complicated failure that hinders the nation's growth while allowing the politically well-connected to manipulate the system to get special breaks not available to average workers and businesses.
The flat tax, on the other hand, is simple, treats all taxpayers equally, and greatly increases incentives to work, save, and invest. WHAT IS A FLAT TAX There have been several flat tax proposals over the years. While they differ in important ways, almost invariably they contain three features, each designed to fix a major problem with the current tax code. The major features of a flat tax are: A single flat rate. All flat tax proposals have a single tax rate that applies to all income subject to tax.
Flat taxes also usually include provisions to ensure that all income is taxed just once. The actual tax imposed varies, with rates in some plans as low as 10 percent and in others approaching 20 percent. The low, flat rate solves the problem of high marginal tax rates by reducing penalties against working, saving, investing, and entrepreneurship. Elimination of deductions, credits, and exemptions. Flat tax proposals eliminate provisions of the code that bestow preferential tax treatment on certain behaviors and activities. Examples of such preferential treatment include deductions for home mortgage interest, charitable contributions, and state and local taxes.
Eliminating these special provisions solves the problem of complexity, allowing taxpayers to file their tax returns on a postcard-sized form. No double taxation of savings and investment. Flat tax proposals are designed to reduce or eliminate the tax code's bias against capital formation by ending the double taxation of income used for savings and investment. Simply stated, these plans often have the equivalent of a "super IRA," which means essentially that taxpayers would be taxed only on the portion of income that is consumed. This reform to ensure that income is not subject to a second level of taxation is needed since today's tax code penalizes future economic growth by discouraging capital formation. ADVANTAGES OF A FLAT TAX There are two principal arguments for a flat tax: growth and simplicity.
Many economists are attracted to the idea because the current tax system, with its high rates and multiple taxation of savings and investment, reduces growth, destroys jobs, and lowers incomes. A flat tax would not eliminate the damaging impact of taxes altogether; but by dramatically lowering rates and ending the tax code's bias against savings and investment, it would boost the economy's performance when compared with the present tax code. For many Americans, however, the most attractive feature of a flat tax is its simplicity. The complicated documents and instruction manuals taxpayers struggle to decipher every April would be replaced by a brief set of instructions, and the lengthy forms by a simple postcard-sized return.
This radical reform appeals to citizens who not only resent the time and expense consumed by their own tax forms, but also suspect that the existing maze of credits, deductions, and exemptions gives a special advantage to those who wield political power and can afford expert tax advisers. If enacted, a flat tax would yield major benefits to the nation, including: Faster economic growth. A flat tax would spur increased work, saving, and investment. By increasing incentives to engage in productive economic behavior, it also would boost the economy's long-term growth rate. Even if a flat tax boosted long-term growth by as little as 0. 5 percent, the income of the average family of four after ten years would still be as much as $5, 000 higher than it would be if current tax laws remained in effect.
Instant wealth creation. According to Harvard economist Dale Jorgenson, a flat tax would boost national wealth by some $1 trillion. 1 The reason: All income-producing assets would rise in value since the flat tax would increase the after-tax stream of income they generate. Simplicity. All taxpayers, from General Motors to a teenager flipping hamburgers, would be able to fill out their tax return on a postcard-sized form, and compliance costs would drop by tens of billions of dollars. According to a study conducted for the Internal Revenue Service, the current tax code requires taxpayers to devote 5.
4 billion hours each year to their tax returns. 2 Yet even this commitment of time is no guarantee of accuracy. The code is so complex that even tax experts and the IRS often make mistakes. Fairness. A flat tax would treat people equally. A very wealthy taxpayer with 1, 000 times the taxable income of another taxpayer would pay 1, 000 times more in taxes.
No longer, however, would the tax code penalize success and discriminate against citizens on the basis of income. An end to micromanagement and political favoritism. The flat tax gets rid of all deductions, loopholes, credits, and exemptions. Politicians would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy. According to Professor Alvin Rabushka of Stanford, co-author of The Flat Tax, $100 billion worth of uneconomical investments are made for tax purposes. 3 Under a flat tax, those funds would be used to boost economic growth.
Increased civil liberties. Under current law, people charged with murder have more rights than taxpayers dealing with the Internal Revenue Service. With a simpler, fairer tax code, infringements on freedom and privacy would fall dramatically. Friendliness toward families. Under the Armey proposal, a family of four would be able to shelter the first $36, 800 of income from taxes.
Other proposals include similar family allowances. FREQUENTLY ASKED QUESTIONS Q: Should the rich pay more A: Under a flat tax, the rich do pay more than the poor. A wealthy taxpayer with 100 times more taxable income than his neighbor will pay 100 times more in taxes. A flat tax, however, does not use punitive and discriminatory tax rates to penalize those who contribute most to the nation's prosperity. For those who think the "rich" should pay a higher percentage of their income, the generous family allowance in, say, the Armey bill and others effectively creates a modest level of "progressivity." Q: Would a flat tax reduce the budget deficit A: It depends on the tax rate, what happens to spending, and how much faster the economy grows under a flat tax. Even taking supply-side effects into consideration, at some point lower rates do translate into less revenue.
The size of the personal exemption or family allowance also plays a key role since the decision to protect a certain amount of income generally means the rate on income above that level has to be higher. The Armey proposal probably would lead to lower tax revenues, particularly in the short term. But it also includes spending provisions that would cap the growth of government, so the long-term effect would be to reduce government borrowing. Q: What would happen to charitable contributions and housing markets A: Some worry that the transition from the current system to a new one would create problems for charities and homeowners. History suggests these fears are exaggerated. During the 1980 s, the top tax rate was reduced dramatically, falling from 70 percent in 1980 to 28 percent in 1988.
The effect was to reduce the value of itemized deductions by the same amount, yet the value of housing did not drop. Similarly, charitable contributions actually rose sharply during the 1980 s. This does not mean itemized deductions have no importance; it simply indicates that the benefits generated by a robust economy more than offset any costs associated with lost deductions. Q: Is there not a risk that politicians will raise tax rates in the future A: Recent events (for example, base broadening in 1986 followed by tax rate increases in 1990 and 1993) demonstrate that this is a real danger. But this is not an argument against the flat tax; it is further evidence of the need for a constitutional amendment that requires a super majority to raise taxes. Q: Should the income tax simply be abolished and replaced by a sales tax A: A flat tax does not eliminate the harmful aspects of income taxation; it only reduces them.
Some have suggested that the better approach is to replace the income tax with a national tax on consumption. While attractive in theory, however, the danger is that Americans could end up not with a sales tax instead of the income tax, but with a sales tax and an income tax. A sales tax should be considered only as part of a campaign to repeal the Sixteenth Amendment (which allowed the income tax). Otherwise, such an effort could play into the hands of those who want to impose a national sales tax or value-added tax (VAT) as one more way for politicians to get new money to spend. Q: Does a flat tax eliminate the marriage penalty A: It all depends on how the flat tax is structured.
The marriage penalty refers to the increased tax a couple face if they choose to get married. A flat tax automatically solves part of this problem since it would no longer be possible for one spouse's income to push a couple into a higher tax bracket. The penalty also arises, however, if the personal exemption for a married couple is not twice the size of the exemption for those filing singly. By giving a married couple twice the exemption of a single filer, the Armey proposal solves this problem. Q: What counts as taxable income under a flat tax Fringe benefits Capital gains A: A key principle of most flat tax proposals is that all income be taxed, but only once. Capital gains would be taxed at the business level, but the tax would not be applied a second time at the individual level.
Dividend income would be taxed in similar fashion. Fringe benefits are not taxed at all under the current system, but they would be subject to tax, typically on the business level, under most flat tax proposals. Q: How does a flat tax affect business and payroll taxes A: Most flat tax proposals, including the Armey plan, reform the corporate income tax as well as the personal income tax. Most, however, do not address payroll taxes. Both Social Security and Medicare face significant long-term structural problems. But while flat taxes could be designed to include substantial reform of Social Security and Medicare financing mechanisms, most lawmakers believe that problems of the income tax code should be addressed separately from those faced by retirement programs.
CONCLUSION The current income tax system punishes the economy, imposes heavy compliance costs on taxpayers, rewards special interests, and makes America less competitive. A flat tax would reduce these ill effects dramatically. Perhaps more important, it would reduce the federal government's power over the lives of taxpayers and get the government out of the business of trying to micromanage the economy. There will never be a tax that is good for the economy, but the flat tax moves the system much closer to where it should be: raising the revenues government needs but in the least destructive and least intrusive way possible.
Endnotes: 4. Telephone conversation with the author, February 1995. 5. Arthur D. Little, Inc.
, "Development of Methodology for Estimating the Taxpayer Paperwork Burden," study conducted for the Internal Revenue Service, 1988. 6. Malcolm S. Forbes, "Happy Days Will Be Here Again," Forbes, July 18, 1994. Previous Chapter | Next Chapter | Contents /hbut. map / hbut .
map onomic Committee How a Flat Tax Would Benefit Business Ends punitive double taxation of business income and fosters increased savings and investment needed for development and expansion. Ends individual capital gains and dividends taxation, and would spur increased corporate investment. Allows 100 percent first-year expensing of new business investment (plant, equipment, and land), eliminating one of the biggest accounting nightmares-numerous depreciation schedules that can stretch up to 40 years for investments or purchases. Spurs new investment and increased productivity by quickly freeing up capital needed in fast growing businesses through immediate expensing.
Eliminates the cost of keeping track of all interest and dividends paid out (1099 forms); because this income would only be taxed at the business level. Corporate income would not be taxed again when interest and dividends are paid to individuals. Eliminates the growth disincentives caused by high marginal tax rates now faced by expanding businesses. Eliminates the corporate Alternative Minimum Tax (AMT), which forces many businesses to calculate their taxes twice under two different methods. Reduces complexity in the taxation of multinational corporations. The flat tax only applies to domestic operations of all businesses, whether they are domestic, foreign, or mixed ownership.
Only the revenue from sales of a product within the United States, plus the value of products at export would be reported. flatax. htmlflatax. html onomic Committee How a Flat Tax Would Benefit Individuals Frees savings and investments from double taxation. After income has been taxed once at a low, flat rate, if it is saved or invested, the returns (interest and dividends) are not taxed again, as under the current system. Ends taxation of capital gains.
An individual's income investment in a home or small business would be free from the punitive double taxation of capital gains when sold. Ends estate and gift taxes that represent double taxation and unfairly transfer income from families to the government. Slashes the time, effort, and cost of complying with the tax code. Taxes could be filed on a form the size of a post-card. Reduces interest rates on home mortgages, credit cards, and auto loans. Since interest income is no longer taxable under the flat tax interest rates would drop to reflect the tax-free status of interest.
Stops punishment of individuals and families who work longer or harder to improve their standard of living. With only one low tax rate, government would no longer take an increasingly larger bite of someone's income. One tax rate means a spouse's income could no longer push a family into a higher tax bracket. Increases individual freedom of choice and civil liberties.
One low tax rate would allow people to keep more of their money as they earn it and would end government's current micro-management of people's behavior through the tax code. A simple flat tax would dramatically reduce the IRS's infringements on privacy. flatax. htmlflatax. html t Economic Committee The Flat Tax Vital for America's Future A TAX SYSTEM GONE AWRY There is a large and growing consensus among economists, lawmakers, and taxpayers that our current income tax system has become a tremendous obstacle to economic growth. After eight decades of misuse by lawmakers, lobbyists, special interests, and income redistributors, our tax system is unfair, complex, costly, and punishes work, saving and investing.
Simply stated, our onerous income tax system is unfit to carry us into the 21 st Century, and prevents us from ensuring a better future for ourselves, our children and grandchildren. The only legitimate purpose of any tax is to provide revenue to cover the cost of government (see "Principles of a Model Tax System"). Taxpayers should be able to clearly see the cost of government spending and thereby determine how much government they are willing to pay for. Unfortunately, since its 1913 enactment, the income tax system has fallen prey to a multitude of unintended purposes including income redistribution, social engineering, and government micro-management of saving, investing, and spending decisions.
We have the right to demand that our tax system be equitable, efficient, and supportive of our nation's greatest economic growth potential. Sadly, our current tax system treats individuals unfairly, exacts tremendous administrative and compliance costs, and hinders our economy from realizing its full productive potential. As a result, Americans' opportunity to better their standard of living is jeopardized. NEW THINKING REQUIRED Mere tinkering cannot correct the enormous problems now codified in our current tax system.
Partial reforms have been tried repeatedly, with limited success at best. We must fundamentally rethink the manner in which income is taxed in order to construct a system that is equitable, efficient, and pro-growth. In order to achieve genuine tax reform, the blinders must be taken off, special interests must give way to overriding national concerns, politically motivated class warfare must stop, and the defenders of the status quo must get out of the way of positive change. The flat tax system, pioneered by Professors Robert Hall and Alvin Rabushka of Stanford University, encompasses the new thinking and fundamental change that is needed to create a fair, simple, and pro-growth tax system.
WHAT IS A FLAT TAX A flat tax would levy a single tax rate on all income subject to tax. Income would be taxed once and only once. The complexity and unfairness resulting from hundreds of exemptions, credits, loopholes and deductions now prevalent in the tax system would be eliminated to make the single tax rate as low as possible. Only a personal allowance and dependent deduction would be permitted. Can A Flat Tax Be Revenue Neutral Yes. Any flat tax system can be designed to bring in exactly the same amount of revenue as the existing federal income tax.
The specific tax rate that would result in revenue neutrality would depend on the size and number of allowances (deductions) permitted, creating a direct tradeoff between deductions and the tax rate. The higher the allowances are set, the higher the tax rate would need to be to bring in the same amount of tax revenue as the current system. The chart below shows a hypothetical set of flat tax rates and allowances that would result in revenue neutrality. This model, produced by the Congressional Budget Office shows that all federal income tax revenues could be fully replaced by a system with a flat tax rate of 13. 1 percent and no deductions. Allowing total deductions for a family of four to reach $36, 800 (more than double the amount allowed in 1995) would require a 19.
9 percent rate. Revenue Neutral Tax Rates Table Principles of a Model Tax System Why Do We Need A Flat Tax Comparison of the Current Income Tax System to the Flat Tax Frequently Asked Flat Tax Questions How a Flat Tax Would Benefit Individuals How a Flat Tax Would Benefit Business CONCLUSION Since the passage of the Sixteenth Amendment in 1913, the income tax system has been incrementally reformed and tinkered with for eight decades. Tinkering has only compounded the complexity and distortion of the tax system. The time has come for a flat tax system that is simple and equitable. Levying a flat tax is not a radical idea. In fact, except for the income tax, flat taxes abound.
The Social Security tax, Medicare tax, sales taxes, property taxes, government licenses and user fees all use a single-fixed rate regardless of income. The flat tax would end the inherent unfairness, complexity, government micro-management, and economic damage caused by the current income tax system. Replacing the current income tax system with a flat tax would foster increased economic growth and opportunity while providing all Americans a higher standard of living. Prepared by Paul G. Mer ski, Economist, and Jeffery W. Styles, General Counsel.
Economic Committee Why Do We Need A Flat Tax 7. Problem. Our current tax system is unfair, often levying different tax burdens on people with the same incomes. For example, higher taxes are levied on some senior citizens with Social Security income.
The tax code allows only certain individuals to take advantage of special tax loopholes and tax breaks, while others are forced to pay higher taxes. Solution. The flat tax, with its single low-rate, would both ensure that all taxpayers pay their fair share, and eliminate special tax loopholes that can only be used by a select few. 8.
Problem. Our current tax system is needlessly confusing and complex. It takes Americans six billion hours each year, at a cost of $200 billion, just to comply with the tax code. Solution. The flat tax eliminates confusion and complexity by replacing hundreds of deductions and multiple tax rates with one low tax rate. Taxes could be filed on a form the size of a post-card, and all taxpayers would clearly see exactly how much income tax they are paying.
The cost of complying with tax rules and regulations would be reduced tremendously for both individuals and government. These savings could be used to lower taxes even further. 9. Problem. The current tax code punishes people who work hard or take risks to improve their standard of living. Citizens automatically forfeit more of their money to taxes when they are pushed into higher tax brackets cutting Uncle Sam in on a larger share of their earnings.
Our current system's steep increases in tax rates crush work incentives and entrepreneurial spirit. Because of high tax rates, many people find themselves working longer and harder and ending up with nothing to show for it. Solution. The flat tax would not punish hard work and success. Under the flat tax, the more you make, the more you pay. However, Uncle Sam would not demand a disproportionately larger, punitive share of your income as you earn more.
10. Problem. The current tax code discourages saving and investing by taxing these activities more than once. This can make it much more attractive and rewarding to consume rather than to save.
As a result, the savings and investment needed for economic growth are eroded, and every American's chance for a higher income and improved standard of living is diminished. Solution. The flat tax eliminates double and triple taxation. Americans, regardless of how they make their money, would pay taxes when their income is earned.
However, the returns (interest and dividends) on after-tax income that is saved or invested would not be taxed yet again. All but those in the lowest income groups would pay taxes on their income, but they would pay once (and only once) at a single low rate. Unlike the current system, people who save and invest for their future would not be punished with higher taxes. 11.
Problem. Because of current high tax rates and the tax code's multitude of deductions, investment decisions are often based on tax consequences instead of economic merit. This stifles economic growth. Solution. A low-rate flat tax would eliminate special subsidies, loopholes, and tax shelters, allowing investment decisions to be based solely on their economic merit, not their tax consequences. Investment in unproductive tax shelters would shift to more productive endeavors and economic growth would improve.
12. Problem. The current tax code allows government to micro-manage behavior, jeopardizing individual liberty and the freedom of Americans to decide how best to use their own money. Currently, the government takes a huge chunk of people's income and then bribes them with their own money by giving some of it back with deductions and tax credits. Solution.
A low-rate flat tax would allow taxpayers to keep more of their own money as they earn it, and shield them from the changing whims of Uncle Sam. Simply stated, if individuals were given the lowest tax rate possible under a flat tax, their need for special deductions would be eliminated. 13. Problem. Tax rates are too high. Marginal income tax rates that were set at 15 and 28 percent just a few years ago, now reach as high as 45 percent.
High marginal tax rates damage economic growth by reducing the incentives to work, save, and invest. Marginal tax rates largely determine whether people save or spend, invest prudently or seek out tax shelters, and work or just stay home. Solution. Under a single, low-rate flat tax, people could earn more without being pushed into higher tax brackets. The savings from the efficiencies of a flat tax system would provide relief and encourage individuals to earn as much as they can without being penalized. flatax.
htmlflatax. html LOW-INCOME FAMILIES AND THE FLAT TAX The greatest benefits of a flat tax would go to lower-income families. Thus, those who say they are concerned about helping the less fortunate should be among its strongest supporters. Among the immediate, direct effects of implementing a flat tax: Since all income would be taxed, there would be no loopholes for the rich, and a person with 10 times the income of another would pay a tax at least 10 times as high.
Deductions and exemptions, most of the benefits of which accrue to the wealthy, would be eliminated. The tax burden would shift from poor and middle-class wage earners to those with higher incomes. Simplifying the tax code would eliminate the main business of special interest lobbyists in Washington - getting preferential tax treatment - and politicians could not exploit the tax code to generate campaign contributions. The working poor would pay no tax until well above the poverty line - thus a family of four would pay no tax until its income reached $33, 300 (under the Armey-Shelby plan). because of the personal allowance and dependent allowances, the flat tax would be progressive. In addition, a flat tax would have long-term benefits for low-income wage earners and the unemployed: The economy would grow faster, which would raise wages and create more jobs; and it would be easier for people of modest means to accumulate savings, since the flat tax would eliminate the tax on interest earned by savings made from already-taxed wages.
Source: Daniel J. Mitchell, "Why Liberals Should Support the Flat Tax," F. Y. I. , No. 85, February 7, 1996, Heritage Foundation, 214 Massachusetts Avenue, NE, Washington, DC 20002, (202) 546-4400.
web Dallas Headquarters: 12655 N. Central Expy. , Suite 720 - Dallas, TX 75243-1739 - 972/386-6272 - Fax 972/386-0924 Washington Office: 727 15 th St. N. W. , 5 th Floor - Washington, DC 20005 - 202/628-6671 - Fax 202/628-6474 1997 NCPA Tax Flat Tax Systems Popular Abroad Recently the Alexis de Tocqueville Institution examined 258 tax systems - for personal income, corporate income and capital gains - in 86 countries.
It found that the flat tax is the single most common arrangement in the 258 tax codes studied. Here are some other findings: Eighty percent of corporate income tax systems are flat - with an average rate of 30. 5 percent. Almost half of capital gains tax rates are flat - with an average rate of 28.
2 percent. However, wage earners pay a flat rate in fewer than one in five countries. Half of the 86 nations apply steeply progressive tax schedules, with effective top rates taking 50 percent to 90 percent of personal income - the average being 42. 8 percent. The researchers found that countries with flat personal income taxes grew at an average annual rate of 2. 1 percent over the 15-year period ending last January.
This compares to 1. 1 percent for all countries in the world during that period. Economies of developing countries with a flat personal income tax grew at an average rate of 2. 7 percent - versus 0. 7 percent for developing countries as a whole. The study's authors advocate a flat tax in the United States lowering rates across the board while strictly avoiding any exceptions.
Source: Gregory Fosse dal (Alexis de Tocqueville Institution), "What the Tax Reformers Are Missing," Wall Street Journal, November 13, 1997. web Dallas Headquarters: 12655 N. Central Expy. , Suite 720- Dallas, TX 75243-1739 - 972/386-6272 - Fax 972/386-0924 Washington Office: 727 15 th St. N. W.
, 5 th Floor - Washington, DC 20005- 202/628-6671 - Fax 202/628-6474 1997 NCPA FLAT TAX CASE IS COMPELLING The flat tax - an income tax with a single tax rate - is the subject of a lot of criticism since Steve Forbes made it the central issue of his presidential campaign and Jack Kemp's tax reform commission issued its report in January. Some of the opponents are spreading misinformation-wrongly claiming the flat tax must worsen the budget deficit and isn't progressive. However, flat-tax supporters hurt their own cause when they refuse to deal with some of the legitimate public-opinion challenges the idea faces. For example: Although some supporters, counting on faster economic growth and reductions in government spending, claim everyone will get a tax cut, some middle-income taxpayers will pay more - how many and how much depending on fine-tuning the plan. The flat tax would benefit the wealthy, a fact which is politically inconvenient but beside the point, since the purpose of tax reform is to make the system more efficient and pro-growth.
Supporters need to deal with these objections, because the case for a flat tax is compelling, based on its simplicity and - more importantly - its effect on investment. By reducing the tax on investment to zero, the flat tax would produce a huge surge in investment and capital formation. Source: Rob Norton, "The Wrong Way to Sell a New Idea," Fortune, February 19, 1996. web Dallas Headquarters: 12655 N.
Central Expy. , Suite 720 - Dallas, TX 75243-1739 - 972/386-6272 - Fax 972/386-0924 Washington Office: 727 15 th St. N. W.
, 5 th Floor - Washington, DC 20005 - 202/628-6671 - Fax 202/628-6474 1997 NCPA LOOK TO HONG KONG FOR FLAT TAX EVIDENCE The flat tax is alive and well and living in Hong Kong. And the benefits for taxpayer and government alike are enormous. On nearly every score, Hong Kong's tax system eradicates or avoids distortions so common everywhere else: Although there are four levels of income tax - from two percent to 20 percent - the system is structured so that no one need pay more than 15 percent of income to the government. There is no tax on capital gains or interest. Corporate profits are taxed at a flat 16.
5 percent. The form Hong Kong taxpayers fill out every year is four pages long - but that's only because it's printed in both English and Chinese. Far from hurting the middle class, as flat tax critics in the U. S. keep warning, Hong Kong's effective 15 percent flat tax does not even kick in until people's incomes put them well into the middle class. More than half of Hong Kong's citizens pay no tax at all.
Almost all the rest pay only seven percent of their income to government. Nearly 75 percent of tax revenue comes from the wealthiest 10 percent of the population. Even at that, the colony consistently runs a budget surplus in the billions of dollars. Authorities estimate that by the time Hong Kong is handed over to China in mid-1997, the national coffers will hold more than $40 billion. From its inception after World War II, Hong Kong's tax system was never meant to be anything other than a source of revenue. Concepts like redistribution of income are absent.
There aren't any of those deductions and penalties that turn tax codes elsewhere into social engineering documents. Source: Editorial, "An 'Untested' Flat Tax," Wall Street Journal, February 9, 1996. web Dallas Headquarters: 12655 N. Central Expy. , Suite 720 - Dallas, TX 75243-1739 - 972/386-6272 - Fax 972/386-0924 Washington Office: 727 15 th St.
N. W. , 5 th Floor - Washington, DC 20005 - 202/628-6671 - Fax 202/628-6474 1997 NCPA a flat tax An argument for a flat tax system in the United States of America (hint: it already is! ) by Matthew Dent, average citizen Copyright Matthew Dent, 1996 Last Updated: 12/09/96 Please mail comments to: Me! There has been controversy in recent years over a flat tax system. Even this year's Republican nominee (Bob Dole) is advocating a "Flatter Tax" system which he says he will usher in beginning with a 15% across the board tax cut. I don't think there are many in America who believe that we are under taxed, and I know that there are many who believe we are over taxed. It can and should be pointed out, however, we are one of the lowest taxed industrialized nation in the world.
Many other countries including our northern neighbors in Canada, "enjoy" a much higher level of taxation than we do. Although it must be pointed out as well that they recieve services like a nationalized health care system which we do not. But many of these countries are being crushed under the high rate of taxation. The world economy (not just our national economy) has been experiencing a time of sustained growth in recent years.
In the United States, this has resulted in fewer people being as concerned as they used to be about job security and their financial well being. Whether this is truly the result of the nations economic well being or just the media's lack of reporting on financial issues (including the U. S.'s sluggish growth in the past few years) will be taken up in another document, but nonetheless, it is the case. The following research was originally done for a project on scientific method. The research yeilded some interesting results the most startling of which I wish to share with you in the following paragraphs.
In doing this research, the following two facts seemed extremely incongruous: The lowest rate of taxation on personal income is currently 15% of Adjusted Gross Income. The national average rate of taxation on personal income has hovered around the 10% mark since 1943. You may also now be remarking, "How can this be." The answers can be found in the tax code itself, however as everyone knows, the tax code is pretty complicated, so an entire enumeration of causes is impossible to create. However, there is one cause which is obvious...
Adjusted Gross Income (AGI). Adjusted Gross Income (AGI) is the money you are taxed on after you subtract the money which the government considered a good way to spend your money. For example, interest paid on a loan which was used to purchase your home (mortgage) is "deductible." This means that you can subtract that from the amount of money you received as income before your income tax is calculated. For expediency and ease of research, the standard deduction was used. The standard deduction is the amount the government allows you to subtract because they realize that it does cost something to sustain yourself with food, clothing, and shelter. Since there are different standard deductions depending upon wether you are married filing jointly, single, or a dependant child, it was decided that the deduction for a single person would be used.
We knew this would skew the results as the deduction for two single persons is generally (but not always) more than the deduction for a married couple filing jointly and that the standard deduction for a dependant is almost always less than the deduction for a single person filing alone. Even with this skew, our results didn't come near the 10% value. The 10% value is actually just an approximation / average of the rate of taxation on personal income. It was calculated very simply by computing the percentage of personal income which went to the government and was reported as "Federal receipts from Personal Income [tax]." These values were obtained from the National Income and Product Accounts (NIPA) put out by the Federal Government.
A summary of each calculation is presented in the accompanying Table 1. It was further noted that since 1943, except for the years 1977 through 1986, everybody except the bottom 20% of wage earners was being taxed at or above the "National Average" of 10%. The laws of mathematics indicate that with an average, approximately 50% of the population participating in that average will be below it, and approximately 50% of the population participating will be above it. However, as can be seen in Table 2 except for the years 1977-1986, 80% or more of the population was above the average (that is, if only the standard deduction was taken). Further discussion of this discrepancy can be found in the accompanying commentary on this research. Methodology What follows is the methodology used for the calculations which yeilded these results.
This methodology was performed within the context of a class on scientific method taught at Concordia College, Ann Arbor, MI, 1993, taught by Neil Sov. Data was obtained for the Number of Employees (part & full time) as well as income from Wages & Salaries from the National Income and Product Accounts (NIPA) information available through Econ Data. Then, data was obtained about Percentage Distribution of Income by population fifths from a variety of sources (including several years of The World Almanac and Book of Facts and other such compilations of existing data). This data was not only split out by population fifths, but also included information about the top 5%, so this information was also used in comparison calculations.
Further, this data was not available for all years. Missing years were approximated based on surrounding years. The years 1965-1985 most notably were missing from the data. We understood that the approximations certainly would not be 100% accurate, however, surrounding years did provide a basis for a trend and this trend was carried through the missing years. We then calculated "Per Person Income" based on the Number of Employees, Income from Wages & Salaries, and the Percentage Distribution of Income by population fifths. This calculation was done by population fifths as this gave us a much better approximation of personal income in differing economic strata.
We then consulted the United States Tax Code as published for the standard personal exemption. Then was calculated the Adjusted Gross Income of the population fifths computed earlier by subtracting the Personal Exemption from the Personal Income by Population Fifths. (The top 5% data and calculated data of the 15% below them was included as well). Then by using the information oba tined from the Tax Code, we calculated the tax bill for each of the population fifths. Finally, we calculated the Tax Rate of each of the population fifths by dividing the tax bill by the personal income. This provided the basis for comparing government collections to approximate codified tax rates.
To complete the comparison, we took Personal Income and Federal Receipts from Personal Income Tax (both in nominal and real dollars) from the NIPA tables. We calculated the percentage of Personal Income which the government received and used this number as "Actual Average Tax Rate", since it is the actual rate at which personal income was taxed and given to the federal government. We also calculated the Average Codified Tax Rates by averaging the tax rates of the population fifths. We also calculated this using the data which split the top 5% from the top fifth as a separate calculation for comparative purposes. Because we already had the data regarding personal income, we constructed hypothetical "flat" tax systems at a rate of 15%, 11%, and 10%. 15% was chosen because it was pushed by the then independent candidate, Ross Perot in the 1992 election.
We used 11% and 10% because those numbers were close to the actual average tax on personal income. These calculations are contained in Table 3. RESULTS Some of the results of this investigation were brought out in earlier paragraphs. In the following paragraphs I will attempt to analyze the results of the calculations in a more comprehensive manner. The first interesting thin.