Flat Tax vs Progressive - A Grudge Match
With a new election cycle looming, politicians are trying to win over voters with speeches about how they will fix the tax system if they get elected. Many are speaking about doing away with the current progressive tax system and replace it with a simpler, flat tax methodology. Why would changing the tax code be a good idea? The following articles are two points of view. What do you think?
As a working American, filing ones taxes can be a stressful time every year. The complexity of our current tax code is a perfect example of how special interests (accountants and lawyers) and our federal and state governments wreak havoc on our lives. Figuring out what one actually owes every year often times requires at least one CPA and several hours of prep-time. For me, the effort is complicated by the fact that I have a business and have to file corporate taxes in addition to filing a personal return. It feels like a game that each American who has a job has to play and the outcome of the game depends on how good your team preparing your returns is. If you don’t have good council you will most certainly pay more than you should or leave yourself open to audit risk if your team doesn't know how to play the game.
Every year the tax code changes and your CPA needs to stay up on all those changes. The current tax code has over 4 millions words, 5000 changes to the tax code since the year 2001 and Americans spend over 6 Billion hours a year in preparation to file. 6 BILLION HOURS! That’s quite a bit of time and money spent.
The code is so complex that no-one can really be certain that we are following the rules and filing properly. I have heard it referred to as more of an “art” than a “science”... Well, I believe we would all be better off with the more simplified approach that a flat tax system would offer. I know a flat tax system is not a silver bullet, and the devil is in the details, but at some point we have to step back and reassess things and I believe a flat tax is a step in the right direction.
Although flat tax supporters have had success overseas in getting some countries to adopt flat tax systems, in the U.S. the idea has been a non-starter for years. And, there are many good reasons why the U.S. shouldn’t adopt a flat tax system.
First, the revenue gains from moving to a flat tax system aren’t likely to show up. Even after the large tax cuts enacted in 2001, overall tax receipts went down. Despite claims that the tax decrease would raise overall revenues by prompting economic growth, it didn’t happen.
Second, a flat tax benefits high earners and the wealthy much more than lower income workers. Many flat tax plans would also keep certain deductions, especially for mortgage interest, which again benefits wealthy homeowners over renters who can’t deduct anything from their taxes.
Finally, a flat tax does not address the growing income inequality in the United States at all. Inequality has been steadily growing since the 1970s and a progressive tax is one of the few ways tax policy benefits lower income households. Under the progressive tax system, people under certain incomes do not pay income tax. However, they are still paying Social Security, Medicare, and other taxes on each dollar earned. In the meantime, these payroll taxes only apply up to a certain income, and also do not apply to capital gains or other investment income. Under a flat tax, existing taxes on capital income could disappear, or be reduced substantially.
For these reasons and many more it appears unlikely that the U.S. will adopt a flat tax system soon. Although high income and wealthy individuals would benefit, roughly half the U.S. would experience either no change or end up paying more in tax.