Why Wouldn’t You Consider a Flat Tax?

by Kevin on April 15, 2012

Raise your hand if you are frustrated with filing your taxes every year.

I know I am. With the tax code being over 13,000 pages long (you can order a copy from the US Government Printing Office) it is easy to see where the frustrations come from. Every year little things change from the standard deduction amount to what income level you can have and still contribute to a Roth IRA.

This year I delayed filing my taxes a lot longer than I normally do. Once I did some basic math and realized I was going to owe the government some money, but urgency to get everything sorted correctly plummeted. Of course that meant I had to run around last weekend and print off some additional documents, and wonder what to put on certain forms. I neglected to count some deductions related to my freelance writing income and will let a CPA figure that out in the future when I incorporate an LLC (which I’m sure will make my taxes even more complicated).

Another way to phrase the question is: do you know anyone who likes filing their taxes? I mean really gets a true joy out of the hour or two or three they have to spend to crunch the numbers, double check everything, and cross their fingers hoping to avoid an audit?

I bet the only people you find who enjoy it are the CPAs and tax prep companies! So why can’t we come up with something more simple?

Would You Vote for a Flat Tax?

I’m curious if you would vote for a flat tax.

I absolutely would, but not without some hesitation. Frankly I’d love for there to be no income tax and then the government can’t get it’s grubby hands on my income, but I know that’s not a possibility.

But filing taxes is incredibly frustrating, boring, and frankly a non-productive use of most American’s time. If we all paid a flat percentage of our income it would be simple and easy.

What Opponents of a Flat Tax Would Say

There have been many politicians touting a flat tax for years, and they have their enemies too. Opponents of flat taxes say a flat tax rate puts an undue burden on the lower and middle class because 15% of their income is more significant to their ability to live than someone who makes millions of dollars per year.

There is also the idea out there that with a flat tax you get rid of all deductions, and not many people would want to do that. Suddenly your mortgage interest deduction doesn’t mean anything because regardless of what you spend on interest and other previous deductions, you now pay a flat percentage of your income in tax.

These reasons are the fronts for hidden agendas: the real reason we probably will never have a flat tax is because being able to give deductions and credits to certain demographics of the population — whether earned income credits for the poor or big mortgage writeoffs for the rich — is a huge point of power for Congress. As an elected official I can buy votes by touting all the great deductions I gave a certain type of tax payer, and get re-elected for the next term.

Risks of Having a Flat Income Tax

While having a flat tax certainly isn’t perfect, I think it would be a step in the right direction from the broken system of deductions, credits, and constantly changing tax brackets. There are some risks to consider.

First, what would happen to all of the CPAs, accounting firms, and tax software organizations? Would the corporate tax code be different and thus they would be able to serve those markets? Or would everything be flat taxed?

Secondly, you would need to carefully write the legislation so that the tax rates could never increase. The original income tax was 1% of income above $3,000 and 6% on income above $500,000 (astronomically high numbers back in 1913!). Of course, over time, Congress legislated the tax rates higher and higher where now the highest tax bracket is 35% and the lowest (starting at $0!) is 10%. A flat tax might start at 10% or 15%, but could easily be increased by Congress in the future to today’s high rates.

What do you think? Would you ever vote for a flat tax? How would you structure it?

{ 3 comments… read them below or add one }

Bryan April 15, 2012 at 9:50 pm

I am all in favor of a 10% flat tax. As you say serious legislation would have to be in place so that it does not steadily increase.

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Mark April 16, 2012 at 8:40 am

I’m in favor of a flat-like tax, like the original income tax you’ve described. The smaller percentage could be 15%, with the larger at 30%, and the smaller percentage could be a function of minimum wage (currently $7.25). So for example, the smaller number could be $21170, defined as working for minimum wage 8 hours every day for 365 days. The higher number could be defined as working for minimum wage (or maybe twice minimum wage) every hour of every day for 365 days – currently $63510
or $127020. Minimum wage increases with inflation, so I think defining it based on minimum wage is fair and keeps in mind the lower class, whom we should care about more than the middle or upper classes.

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chrism April 30, 2012 at 6:27 pm

UK perspective. Over here we have what I think you would call a “flat tax” . Roughly speaking – for everyone the first $8000 is tax free, 20% on anything between £8k and $55k, 40% on over $55k. On top of that there is a flat 6% compulsory welfare tax (called National Insurance). Both these taxes are removed directly from your wage by your employer and passed on to the Government, no need for us to complete yearly tax papers. The starting level for tax and the % rate of payents can change every April, depending on the state of the economy and the inclinations of the party in charge of the country. We also pay a minimum of 17.5% purchase tax (called Value Added tax) on EVERYTHING we buy
Word of warning – our “flat rate” of tax started out at about 10% just after WW2

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