Flat Tax for America?
Most US citizens become engaged in a frenzy of anxiety and motion in April of each year. Why? This is the month that income taxes are due to be filed. Many economists propose a flat tax which would tax each household at the same rate. It could also be applied to businesses as well. This flat tax would eliminate some current problems with the current system of taxation and provide benefits for the American economy and society at large.
The purest flat tax system typically consists of two parts, one that taxes individuals and one that taxes businesses. The individuals would only be taxed on wages and other earnings and not on dividends, interest, etc. However, no deductions would be allowed either. The businesses would be taxed on the difference between gross receipts and costs. However, many modifications to this system to include some deductions for dependents, donations to charity, etc. have been offered as some US lawmakers consider drafts of bills to implement a flat tax in the United States. These types of flat tax systems are called “modified flat tax” systems.
One benefit of the flat tax is its simplicity. As most taxpayers know, the current tax code is so complex most people take their chances on guessing as to its meaning, pay tax advisors to discern the puzzle or cheat. According to Michael Kibbs, 2006) of Freedomworks.org, a national organization dedicated to the implementation of the flat tax, April 15 should be renamed National Lawbreaker Day. He says, “Everyone could be a criminal on tax day because of the sheer size and complexity of the federal tax code. At more than 9 million words and growing, the tax code is a leviathan of potholes, pitfalls and disasters waiting to happen.”
This complexity is also extremely expensive. The Economist goes on to report that current system of tax administration, which has not been revised since 1986, incurs costs so great that they consume nearly 20 % of the tax money collected. This is between 25% and 50% of the government’s budget deficit (The Flat Tax Revolution, 2005). A flat tax would reduce this outrageous cost burden and thus provide more revenue for the United States.
In fact, Senator Ron Wyden estimates that implementing his version of the flat tax will reduce the government’s budget deficit by nearly $100 billion within five years of its implementation. (Wyden Provides Real Tax Relief, 2005). This bill, “The Fair Flat Tax Act of 2005”, simplifies the current tax forms to one page by reducing the tax brackets from six to three, and offering one corporate flat rate while ending corporate tax benefits(Wyden Provides Real Tax Relief, 2005).
The two major arguments in opposition to the flat tax are 1) it look fine in theory but will not work in practice, and 2) it produces a greater tax burden, proportionally, on the lower income levels and a lower tax burden on the higher income levels. Both of these arguments are unfounded.
First, many countries and US states have successfully adopted a flat tax system. Several countries in Europe have already established a flat tax system. Estonia was the first to do so in 1994. It’s economy has definitely benefited — “with one uniform rate of 26%. Simplicity itself. At the stroke of a pen, this tiny Baltic nation transformed itself from backwater to bellwether, emulated by its neighbours and envied by conservatives in America” (The Case for Flat Taxes, 2005). Eight countries have followed suit: Lithuania, Latvia, Russia, Servia, Ukraine, Slovakia, Georgia, and Romania (The Case for Flat Taxes, 2005). Hong Kong allows its citizens to choose between a graduated tax and a flat tax. In addition, researches at the Adam Smith Research Foundation are seriously considering flat tax models for the United Kingdom based on its research comparisons of the above countries and the US (Griecu, 2004).
In fact, some states in the US have gone to a flat tax for their state models. Illinois, Indiana, Massachusetts, Michigan and Pennsylvania tax individual income at a single rate. The least tax is 3% in Illinois while the highest is 5.3% in Massachusetts (Flat Tax, 2006).
For many years, tax researchers have argued that the most fair tax systems place the largest tax burden on the wealthy while reducing the burden on the poor. They argue that a flat tax will reverse this. Research has shown that this is not the case. The flat tax on individuals’ income offers a threshold level. If a person makes less than this threshold, he does not pay taxes at all. If he falls a little above the level, he only pays taxes on the portion of his income that is above the level. In this way, poor families are relieved of the burden of taxes (The Flat Tax Revolution, 2005).
Congressman Armey’s version of the flat tax would set these thresholds at the following levels: married filing jointly at $26,200, unmarried head of household at $17,200 and single adults at $13,100. In addition, each dependent would add a $5300 deduction. Beyond that everyone would pay 17% of the remaining income as tax (The Armey-Shelby Flat Tax, 2005; Hall, 1995). Many other similar proposals exist such as the Negative Income Tax (NIT) suggested by renowned economist Milton Friedman. NITs guarantee people with a minimum income and subsidizes low incomes up to a point. NITs have been likened to welfare benefits, but they are administered through the tax system. This reduces the need for separate welfare administrations (Rethinking Redistribution, 2000).
Tax reform is on the lips of almost every politician in the US. Even President George Bush has looked into this option. As other countries successfully implement the flat tax system, it is hoped that the US will follow suit with one devised to meet the needs of the US. All can agree that something must be done to revolutionize the tax code in the United States.
The Armey-Shelby Flat Tax. (2005, August 30). Tax Almanac. Retrieved 28 July 2006 from: http://www.taxalmanac.org/index.php/Flat_Tax_vs_Fair_Tax
The Case for Flat Taxes. (2005, April 14). The Economist. Retrieved 29 July 2006 from: http://www.economist.com/opinion/displaystory.cfm?story_id=3860731
Flat Tax. (2006). Wikipedia.
The Flat-tax Revolution. (2005, April 14). The Economist. Retrieved 28 July 2006 from: http://www.economist.com/opinion/PrinterFriendly.cfm?story_id=3861190
Griecu, A. (2004). Flat Tax – The British Case. London: Adam Smith Institute.
Hall, A.P. (1995, July 1). An Analysis of the Tax Burden and Compliance Costs of the Armey- Shelby Flat Tax. Special Report No. 52. Retrieved July 28 2006 from: http://taxfoundation.org/research/show/721.html
Kibbs, M. (2006, April 17). Tax Code Is Recipe For Pitfalls, Cheating: The U.S. tax code remains the principal source of political pollution inside Washington. Freedomworks.org. Retrieved 28 July 2006 from: http://www.freedomworks.org/ informed/issues_template.php?issue_id=2559
Rethinking Redistribution. (2000). Policy Library Database. Retrieved 28 July 29, 2006 from: http://www.policylibrary.com/redistribution/nit.htm
Wyden Provides Real Tax Relief for Middle Class in ‘Simpler, Flatter, Fairer’ Reform Plan. (2005, October 27). Media Release. Retrieved July 28 2006 from: http://wyden.senate.gov/media/2005/10272005_fair_flat_tax_act.html