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Flat Tax MythsMar 30 '00 (Updated Apr 23 '00) Write an essay on this topic.First, I'll come right out and say I'm against the flat tax. As far as I can see, it's just a scheme to dramatically reduce the taxes of the wealthy while giving little or no relief to anyone else. Nevertheless, much of the debate I've seen about the flat tax is grounded in various myths. We all have to get past these myths to think clearly about this issue. Myth 1: If you have any complaints about the tax system, you can blame the IRS. This myth applies not just to the flat tax, but the taxation system in general. The fact is, the IRS just carries out the tax laws that are enacted by congress. Both Democrat and Republican controlled congresses have enacted countless provisions that do nothing but complicate the tax law and serve special interests. Blame congress if you have problems with the tax system. Myth 2: You'll pay a smaller percentage of your income as tax under the flat tax. The reality is this: the most plausible flat tax proposals have tax rates in the range of 17% to 20%. Under today's (1999) tax rates, a family of four with income of $100,000 and $20,000 of deductions pays tax of $13,731. That's only 13.7% of their income. Of course, they are in a higher marginal tax bracket, but the fact is they pay less than 14% tax overall. Today's rates look even better if your income is lower. Myth 3: Under a flat tax, everyone will pay the same tax rate on their income. Not true. All flat tax proposals exclude income below a certain level from taxation in order to provide relief for low income taxpayers. In addition, most flat tax proposals do not tax investment income. Since wealthier taxpayers have more investment income, they will effectively be charged a lower tax rate than middle income taxpayers. It's not hard to see why wealthy taxpayers oppose the taxation of investment income. Myth 4: The flat tax will simplify tax filing ("you'll be able to file your taxes on a postcard"). Most of the complexity in tax filing comes from investments, business expenses, and specially targeted tax breaks such as mortgage interest and retirement, medical, and educational savings accounts. Although some flat tax proposals eliminate taxation of investments, they treat businesses just as they are treated today. Furthermore, it would be political suicide to eliminate the specially targeted tax breaks mentioned above, so that will never happen. Note that even today, 40% of taxpayers file the simple one-page form 1040EZ. In addition, much could be done to radically simplify the present system without going to a flat tax. No matter what tax system we have, congress will always add layers of complexity over time. Myth 5: Everyone will pay less tax under a flat tax system. All the realistic flat tax proposals are "revenue neutral." That means the tax rate will be set so that the total amount collected under the flat tax will be the same as it was under the old system. Low income tax payers will pay zero tax, and high income tax payers will get a significant tax reduction. That means the rest of us will get a tax increase. Myth 6: The only fair way to tax people is to charge everyone the same percentage of their income. Well, fairness is a concept subject to debate, and all of the following ways of taxing are considered fair by lots of people: 1) Charge everyone the same dollar amount of tax no matter what their income. That's how most states have set up their annual motor vehicle license taxes; they're based on the value of the car, not the owner's income. Similarly, local property taxes are based on the value of the property, not the income of the taxpayer. 2) Charge lower income people a higher tax rate. That's how the Social Security tax works. If your income is below about $70,000 you pay one tax rate. As your income goes higher and higher, you pay a smaller and smaller percentage as tax. 3) Charge everyone the same rate. That's how Medicare tax works. No matter what your income, you pay the same percentage as tax. 4) Charge higher tax rates to people who make more money. That's how the federal income tax works. So, you'll never get complete agreement that one rate for all is the only fair way to assess taxes.  |
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