Can someone please explain the flat tax to me. Also, the pros and cons. I’m not looking for a debate, just an understanding.
Thanks!
A flat tax means, at it’s most simple, that there are no deductions and that everyone pays exactly the same amount. No graduated rates, etc.
Pros: it’s very simple. Theoretically it’s more difficult for richer folks to avoid paying taxes and you can cut the cost of administering the revenue collections. Also, in theory, it gives fewer people an incentive to cheat on their taxes.
Cons: in any tax change, somebody will pay more and somebody will pay less. Also it could wipe out the whole tax processing industry. Presumably tax preparers spend a lot of money lobbying against this.
Taxes are sometimes used to adjust for “social inequities” and this would reduce the ability to leverage that (some people see this as a pro and some as a con).
Basically, the USA has a bracketed income tax with a huge mess of allowable deductions… you pay the government a small percentage if your income, after deductions, is less than so many tens of thousands of dollars, otherwise the basic percentage goes up and up as your income does, remultiplying the amount of tax due.
There’s no one ‘flat tax’, but generally the term is understood to mean a proposed income tax system with one percentage that would apply to everyone, and a drastic reduction in the number and magnitude of allowable deductions. Thus everyone, from the poorest to the richest, might have to pay 35% of income, and not be able to get a tax break on their mortgage or retirement savings, say.
Pros: simplify the system enormously. Make it a lot easier for people to do their taxes… cut down on a lot of the overhead at the IRS, since they wouldn’t have to investigate nearly as many deductions.
Con: You would probably have some poor people paying more tax than they do now. (Whether the very rich would pay much less is an open question, since they’re probably making use of tax shelters that would be closed under the flat tax system.)
Hi shibb, chef.
You’ll pay more. Bill Gates will pay less. 'Nuff said?
It’s important to note that almost all “flat tax” proposals do include a large standard deduction for everyone. So, the first X amount of income is untaxed, and then you pay a fixed rate above that. The tax is flat on the amount above the deduction, but not flat when viewed relative to your total income.
For example, let’s say we have a flat tax of 20% on all income above $10k. Someone making $20k pays $2,000 in tax, which is actually 10% of his or her total income. Someone making $200k pays $38k in taxes, which is very close to 20% (19% to be exact) of total income.
One problem not mentioned so far is how you define “income”. This is similar to the problem we have today, and can result in shifting money around in just the same way. If dividends don’t count as income, financial institutions will be biased towards offering dividend income instead of other taxable forms of income.
Yeah, I was wondering about that sort of thing, especially with people who run small businesses, say. Obviously all revenue doesn’t count as income for them, it’ll have to be set against expenses… and so you’ll get into the same kind of mess with business owners trying to declare pleasure vacations as ‘business trips’ to write it off as an expense, and so on.
Wrong. (It depends on the details.) 'Nuff said?
- Flat tax has nothing to do with tax simplification.
- Flat tax has nothing to do with tax simplification.
- Flat tax has nothing to do with tax simplification.
Note that there are people who have proposed flat tax schemes that include simplification, but the two are basically orthogonal. You can switch to a flat tax scheme and keep all the deductions etc. You can kill all the deductions and keep a progressive system.
There is an obvious reason to deliberately confuse the two: It helps convince many people (who would like tax simplification) to sign off on a flat tax scheme.
Tax simplification isn’t going to happen. All those strange things are put into the code because congress likes to please their folk. I noticed a couple places in this year’s form where Katrina victims got breaks. Switch to a simple tax scheme and the next year dozens of special breaks will be added. Then dozens more the next year, etc. Plus, killing deductions for charity, mortgages, etc. will never happen.
Flat taxes are the favorites of people like Steve Forbes who isn’t exactly poor. That should clue people in.
Graduated taxes are the favorite of people like John Kerry, who is even richer than Steve Forbes. See how useful that kind of argument is? Why can’t we just keep this thread focused on the facts, as the OP requested?
One issue that always seems to be left out of the debate is business expenses. A flat tax will never be “fair” as long as there are business deductions for anything other than raw materials. The reason is that businesses will always expense perks on their highly compensated employees that are not available to lower compensated employees whether its coffee, cars, laptop computers, lunches, ball games or conferences at country clubs and luxury resorts.
Just look at any big sporting event, luxury hotel, or first class airline cabin. Much, if not most of the cost of those expenses are being paid by businesses in pre-tax dollars while indivuals are enjoying the benefits.
If Joe Factory Worker wants to go to the Masters Golf Tournament (if he could get tickets) why should he have to pay for everything in after tax dollars while Schmoe Executive gets to enjoy it, eat, drink, and get put up in a great hotel without ever having to have paid tax on the same benefit when (with a flat tax) their incomes are being taxed at the same rate. The result is that Schmoe is actually enjoying a lower tax rate even though the stated tax rate is the same. Joe packs his lunch and buys his beer on after tax dollars while Schmoe is enabling his alcoholism and dining at the Ritz on the company dime.
The graduated income tax mitigates some of this. That’s why it is many time more “fair” than a flat tax. In an effort to make taxes “fair” the tax code gets very complex. The cry to simplify must be examined carefully it can be a disguise to, in fact, shift more of the tax burden on those with lower incomes. The tax code will never be entirely fair but that’s no reason to use it to screw the less privledged for the benefit of the privledged.
Well, sure. But every Flat Tax proposal that has been seriously pushed has had the Rich paying less and thus the Middle Class paying more. True, I am assuming our OP joins the vast majority of us here in the Middle class.
Agreed. Too many people in this country bought houses factoring in the tax break. If you made that go away overnight I would imagine it would have disastrous consequences. Perhaps a phased 10 year reduction of it might work or make all new mortgages ineligible for a tax deduction (probably pop the housing bubble overnight though).
As for charity deductions you would almost have to leave them in. Charity manages to take up a great deal of effort that might otherwise fall on government to provide (which in turn would mean higher taxes to pay for it all and probably not be done as well).
Unfortunately when you allow the above two you have opened the door to other deductions and, as implied earlier, that would put us back where we are now.
Hmm… that seems like an interesting place to put the line to start out with… though I suppose it does have the advantage of being pretty clear.
I’m wondering about business space rental now, though I’m not quite clear on what question to ask. Is renting a business location (such as a convenience store, say) considered to be a business expense? It’s pretty clearly not raw materials, so it wouldn’t be deductable under your scheme. What would the long-term effects of that specific change be I wonder??
To be fair, a true flat tax would imply everybody pays the same amount, not the same percentage. This is not terribly practical, but much more fair. The rich pay an exorbitant amount of taxes, and if you check government expenditures you will notice that only a small fraction is in any way beneficial to the rich, directly or indirectly. In fact, I wouldn’t be surprised that if you were to calculate the monetary benefit of government expenditures it would be pretty even across the board regardless of income (including things like education programs and their effects on middle class consumer bases, etc.)
We had a flat tax tried here in the UK. It was called the Poll Tax.
‘The poll tax led to widespread riots: 1990 became a year of violent protests and organised demonstrations against the Government’s plan for the revised rating system. This became known as the Poll Tax after the hated 14th-century Poll Tax, which had been a major cause of the Peasants’ Revolt. The result in the late 20th century was a large anti-Government vote in local and by-elections.’
http://www.bbc.co.uk/history/timelines/england/pwar_poll_tax.shtml
The Poll Tax was a local tax, raised by local councils. Previously such taxes were based on the value of your house (so rich folk paid more).
The Poll tax was not a success :eek: and we are back with a local tax system proportional to house values.
'Conservative leader Michael Howard has apologised again for his party’s role in introducing the ill-fated poll tax. ’
http://news.bbc.co.uk/1/hi/scotland/3297425.stm
We have had a flat tax to fund the BBC for a long time:
‘The 2006/7 colour TV licence costs £10.96 per month - about 36p per day for each household. It is free if you are over 75, half-price if you are registered blind.
The annual cost (set by the Government) is currently £131.50.’
This argument is simplistic at best and most likely not at all correct. But it also veers into great debates so I’ll stay silent on it until the thread is moved.
It might imply that to you… and that might fit with the name on some intuitive level. However, there is a customary name for that tax scheme already, which is ‘poll tax.’
Switching the tax categorization system to suit ourselves seems like one complication that we can do without at the moment. 
On preview - look, you’ve already got ‘glee’ started calling poll taxes flat taxes. 
Well, by far and away the largest item on the Federal Budget (the part funded by Income taxes, that is) is defense. Which certainly benefits the rich, directly (the rich own the Industrail part of the Military-Industrail complex) & indirectly (allows them to be safe in their mansion). Next is Interest on the debt- most of which is paid to the rich. Direct benefit.
Next down is “Non-Medicare Health Spending: Medicaid grants, Childrens health programs, Indian health, Substance abuse and mental health services, Health research and training, Consumer and occupational health and safety, Other health care services.” I admit some of that primarily benefits the poor, but other stuff such as research and training is a direct benefit.
Next down is “Aid to Low Income Families” which only indirectly benefits the wealthy. Keeps the proles from rioting, allows big companies to pay no health benefits, etc.
The next biggest budget item is the Iraq war, where the Rich are getting even richer (you have heard of Haliburton, haven’t you?).
Thne there’s many small programs which directly or indirectly benefit the rich:
International affairs: Prop’s up nations where the Rich have investments.
Science, Space and Technology: The Rich own the companies that make this stuff.
Non-Defense Energy Spending: The rich own the companies the do this.
Natural Resources and Environment: We all benefit from breathable air and a clean environment.
Agriculture: Almost entirely big subsidies for huge Agribusiness.
Transportation: Everyone uses the highways.
Education? Sure, the Rich can put their kids through private schools- but Public schools train their wrokers. Indirect.
Then there’s the big Non-income tax budget items- Medicare and Social Security. Note there is no means testing for Social Security, the Rich get their checks same as everyone else who paid in.
In other words- most of the budget directly benefits the rich, and most of the rest does so indirectly.