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How Does Paying a Single Federal Tax Rate Sound to You?Jun 28 '01 Write an essay on this topic.The Bottom Line The Flat Tax would help make the payment of taxes much simpler, but I don't think it will ever be implemented. Tax is a word that people love to hate. It’s something that we all dread, but have grown to accept as inevitable. Somebody has to pay for all of the government programs and services, so taxes seem to be impossible to avoid. Still, everyone tries to find whatever loophole or tax shelter they can, to lower their tax burden. It’s easy to see why people are so fed up with taxes. According to the U.S. census bureau, taxes now take 48 percent of the national income! Most of us don’t realize that the level is so high because we only think about the income tax that we pay, which is anywhere from zero to 33 percent (under the new tax laws). What we forget to include is all of the “hidden” taxes that we pay. This would include things like sales tax, gasoline tax, hotel tax, corporate tax, property tax, luxury tax, airline tax, import tax, death tax, etc, etc. When everything is added up, it equals 48 percent of the national income. Politicians are always proposing ways to simplify taxes. One such proposal is the idea of having a Flat Tax. Under this type of system, everyone would pay the same rate of tax. There would be no deductions, tax credits, or anything else. We would all pay the same rate. Is something like this really practical? Would it help or hurt different groups of people and the economy? Let’s take a closer look at the flat tax. Basics of This Type of Tax: Currently, the Federal Tax is composed of progressive tax brackets; meaning, the rate of tax owed increases as income increases. With the new tax laws that just went into effect, the brackets are now 10%, 15%, 25%, and 33%. Keep in mind that a taxpayer pays tax for each bracket, as his/her income increases, not a flat rate for all income. In other words, a person who is in the highest bracket pays 10% on the first part of his income, then 15% on the next portion, 25% on the next, and 33% on all income over a certain level. With a flat tax, these brackets would all be replaced by one single rate. There would be no tax- write off for interest payments, or other things. Everyone would just pay the flat rate, which would be deducted out of their paychecks. The threshold at which tax would begin to be paid would have to be determined by the politicians. They would probably set the rate at a level that would be less likely to impact the poor. The proposal by U.S. Congressman Dick Armey, for example, sets the flat tax rate at 17 percent and the threshold of income at $36,800 for a family of four. A family of four would, therefore, not start paying the 17 percent tax rate until it made over $36,800 in annual income. Advantages of a Flat tax: Some of the advantages of a flat tax are obvious. With this type of tax, there would be no need to hassle with tax filing each year because there would be no itemizing and no deductions. The tax would be withheld out of a person’s check, so there would be nothing left to do. It would lessen the chances for tax cheating because the tax would be withheld automatically. In the absence of tax filing, the opportunities to cheat would diminish. Another advantage would be improvement in the efficiency of the Internal Revenue Service. This institution would still exist under a flat tax plan, but it would be much more streamlined than it is now, because the tax preparation would be so simple. There are some variations on flat tax proposals. Most of them would eliminate taxes on capital gains and interest income. This would be a great advantage to investors and savers, because they would no longer have to consider taxes when they make an investment decision. Also, there would no longer be any debate over “double taxation” because, without the capital gains tax and interest taxes, these types of income would only be taxed once. Disadvantages of a Flat Tax: The most vocal critics of a flat tax are those who are concerned about its impact on the poor. Even though flat tax proposals usually exclude poor people from paying any tax at all, critics are still convinced that the poor would pay more than their “fair share”. Of course, the rich would still be paying the most of any group under this plan, but that doesn’t seem to be good enough for these critics. They would rather see the rich taxed at much higher margins and the wealth redistributed to lower income tax payers. Another valid concern with a flat tax is that it would possibly have a negative impact on charitable donations and home ownership. Currently, donations to charity are tax- deductible. So is mortgage interest. With these things being eliminated, it might cause people to give less to charity and it would take away the tax advantage of owning property. Also, what would happen to 401K and IRA contributions? Would they still remain tax- deductible? I would think they would have to, or else there would be less incentive to save for retirement. Then, what about withdraws of 401K and IRA money in the future? Would it be subject to the new flat tax? These are important things to consider. Another disadvantage (or advantage, depending on your perspective) is that thousands of tax- related jobs would be lost. Businesses that specialize in tax services would no longer have a market for their services. These employees would have to go out and find a productive job. Final Thoughts: These are just a few of the advantages and disadvantages of having a flat tax rate. A person could write a full book on a complicated issue like this; discussing how it would affect different people, how it would impact spending and saving habits, and how the overall economy would be impacted. Having a flat tax would definitely make life easier! There would be no more tax returns to file and no tax deadlines to worry about, making the payment of taxes less stressful than it is today. Realistically, though, I don’t think the flat tax will become reality. The main reason is because I can’t imagine politicians coming to an agreement on the issue. There are just too many details that would need to be agreed upon, before a major tax change like this could be implemented. And there would be strong resistance from tax preparation services and from various consumer groups who would be worried about the negative consequences of a flat tax. Opponents would argue that rich people should be paying much more tax than a flat tax would require them to pay. It wouldn’t matter that a rich person earning $200,000 per year in taxable income would pay $34,000 in tax (using a 17% rate) while a poor person with only $2,000 in taxable income (the amount beyond the tax threshold) would pay just $340 in annual tax. These critics would still cry foul, even though the rich person was paying 100 times more tax. I like the idea of making the tax code simpler (if we have to have one at all) and I welcome any attempt to streamline the way Federal Taxes are collected in the United States and make the process less complicated. But I’m afraid that this type of proposal is pretty much a pipe dream. It would take a very strong, persuasive president to push a proposal like this through congress, and it would require that the congress be made up primarily of members of his/her own party. Opposition party members would fight the proposal to the very end, just to play politics, if nothing else. And there would undoubtedly be members of the president’s own party who would reject the proposal, too. So it would be imperative that a large majority of the members of congress be a member of the party who wants the flat tax to be implemented. What are the odds of that happening? Slim to none. In short, I think the flat tax does have its good points and it would make life easier, but I doubt it will ever become reality.  |
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