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sorry if this has been discussed before, but I was wondering if someone could give me the pros/cons of a national flat tax and doing away with federal income tax. I have always been a proponent of a national flat tax, tho I do realize it would be a major undertaking to implement it. But, I think it would be a nice thing since a lot of the non-taxed monies (drugs etc) would be taxed. Anyway, I am just looking for some insight - pros and cons, and I thought there might be some finance people on here that could do that for me
What you are proposing sounds like a national sales tax similar to what Canada now calls the HST. It's also been known as the "Fair Tax".
The biggest problem I see, is the Fair Tax hits the lowest income folks the most just like a flat tax rate would, as they are the ones spending all of their money. The wealthiest don't spend nearly all their money, allowing most of it to go untaxed. This would actually hurt the economy, as it's the bottom income earners that actually drive the majority of the economy.
the low income spend the most of their money as a percentage of total income, or as a total amount?..meaning, if I were to add up the total expenditures of a low income and compare it to the total amount spent be a high income, the low would be more?..good point, I never thought about that.
the low income spend the most of their money as a percentage of total income, or as a total amount?..meaning, if I were to add up the total expenditures of a low income and compare it to the total amount spent be a high income, the low would be more?..good point, I never thought about that.
Both. The top 5% income earners in the US spend 29%, the bottom 95% spend 71%. The bottom 95% are far more important than the top 5%.
Essentially, it boils down to circulation of money. When a wealthy person gets money, they spend very little as a percentage of income. When a poor person gets money, they immediately spend that money and put it back in the economy - buying things such as food, rent, cell phone service, car repairs, etc. That money stays here in the US.
ETA: This is why welfare and unemployment is so effective, and why the ROI is typically quoted as being > 1.
What you are proposing sounds like a national sales tax similar to what Canada now calls the HST. It's also been known as the "Fair Tax".
The biggest problem I see, is the Fair Tax hits the lowest income folks the most just like a flat tax rate would, as they are the ones spending all of their money. The wealthiest don't spend nearly all their money, allowing most of it to go untaxed. This would actually hurt the economy, as it's the bottom income earners that actually drive the majority of the economy.
Indeed, flat tax is a single-bracket income tax. I propose 20% on gross revenues, no deductions, no credits, no exemptions, tax code reduced to two paragraphs to define gross revenues, one half-page tax return, no complicated formulas, no references to other forms, all IRS efforts focused on complete and accurate reporting of revenues and collection.
The simplification by itself would be a great boon to the economy as a result of the creative potential that it would unleash, not to mention that the government would have more money than it would know what to do with.
Don't hold your breath. The goal of the tax code and income taxation is neither popular creativity nor government revenue. Figure it out.
Indeed, what the OP refers to is a national sales tax, not a flat tax. The national sales tax is also known as the value added tax (VAT) in Europe and other regions.
The cited problem with the 1) flat tax and 2) national sales tax could be easily overcome:
1) the flat tax rate would kick-in at, say, $15,000 or $20,000 of gross revenues (though some argue even against that exemption);
2) basic items such as food, non-luxury clothing, and books and other school supplies could be exempt from national sales tax or charged at lower rates.
But this is not even on the ruling class's agenda and it will probably never happen.
Indeed, flat tax is a single-bracket income tax. I propose 20% on gross revenues, no deductions, no credits, no exemptions, tax code reduced to two paragraphs to define gross revenues, one half-page tax return, no complicated formulas, no references to other forms, all IRS efforts focused on complete and accurate reporting of revenues and collection.
What you propose is ridiculous. Its an example of someone who likes to talk a lot about theory, but understands little about how the world really works. Here are just a few of the problems with what you suggest:
1. You'd take a huge section of poor people who aren't paying any taxes now and you'd suddenly reduce their income by one fifth. Considering how loaded things have gotten in this country in favor of wealthier people this might be a formula for violence and unrest. It also is bound to reduce overall consumption of goods and services because--unlike the rich--the poor have virtually no savings. Everything they earn is spent.
2. You don't make any attempt to project what the overall affect on government revenues would be. Considering many people at the top of the income scale pay far more than 20% of their income in taxes, you're almost certain to reduce overall revenues. Do you care whether government is able meet necessary defense expenditures, social security and medicare distributions, and pay the interest we have agreed to on the national debt?
3. Is this 20% tax you propose in addition too--or a replacement for--social security taxes? If the poor must pay this tax plus social security taxes many will not even be able to afford living in their homes.
4. You, like a few others, apparently see no important purpose being served by the incentives and disincentives established by the tax code. I, for one, have observed the difference in rental property compared to property actually owned by people living there. Owned property is in much better physical condition and is better cared for. There is less crime in neighborhoods where people own their own dwellings as compared to places that consist entirely of rental units. I would submit this country is well served by a tax system that includes a deduction for mortgage interest simply because this encourages home ownership. Do you really want to do things like prevent employers from being able to deduct the cost of hiring employees from their taxes? Hmmmm...I wonder what affect that change might have on the employment rate? What do you think it will do to charities and charitable causes in this country when money given to those entities is no longer tax deductible. Goodbye Heart Association. Goodbye American Cancer Society. Colleges are huge recipients of donations. Plan on college tuition increasing further to pay for donations they no longer will be getting.
5. Once again the wealthy would be the winners in this deal. Even if you did pass a law abolishing deductions, within a few Congress would pass the same laws over again and what we would see is a system where top tax rates have been reduced, but the deductions slowly creep back into place. That's how political power works. The best tax code taxes higher income taxpayers at a greater rate, but does allow for deductions for truly socially useful purposes. Putting people to work and making charitable donations are truly important purposes.
Quote:
The simplification by itself would be a great boon to the economy as a result of the creative potential that it would unleash...
It might be desirable to simplify taxes. However, they are already simple for the millions of taxpayers who file the "short form" every year. My spouse and I have an income of about 200K per year. It costs me $200 or less to pay an accountant to prepare my tax return. Millions of other taxpayers dispense with an accountant entirely by using programs like Turbo Tax. The advantages of "tax simplification" are grossly overstated in the computer age.
I realize that support of a "flat tax" is nowadays standard Tea Potty rhetoric. However, there are so many lies and inaccuracies contained within it that it is just pitiful.
if i were you, OP, i would do a little googling on "progressive tax vs flat tax".
on here, you'll get a lot of partisan opinions of the pros and cons of both. but what you really want (i believe) is an economist's point of view on the theory of the pros and cons of both. also, check NPR's Planet Money blog to see if they've discussed this.
the one major con i can see about a flat income tax is the government would no longer have the capability of incentivizing or disincentivizing activity. we can all argue the merits of each incentive and disincentive, but for instance, if the government wants us to spend more of our money on charitable donations, they can offer us a larger tax incentive for that type of spending. if they want us to spend less, they could offer no incentive, or actually tax the activity.
our tax code exists because of many decades of incentives and disincentives that may have made sense at one time, but might no longer make sense.
For instance, within the last 5 years, the federal government finally eliminated a tax that existed to pay for the Spanish American War. yeah...go google when that war was
What you propose is ridiculous. Its an example of someone who likes to talk a lot about theory, but understands little about how the world really works. Here are just a few of the problems with what you suggest:
1. You'd take a huge section of poor people who aren't paying any taxes now and you'd suddenly reduce their income by one fifth. Considering how loaded things have gotten in this country in favor of wealthier people this might be a formula for violence and unrest. It also is bound to reduce overall consumption of goods and services because--unlike the rich--the poor have virtually no savings. Everything they earn is spent.
2. You don't make any attempt to project what the overall affect on government revenues would be. Considering many people at the top of the income scale pay far more than 20% of their income in taxes, you're almost certain to reduce overall revenues. Do you care whether government is able meet necessary defense expenditures, social security and medicare distributions, and pay the interest we have agreed to on the national debt?
3. Is this 20% tax you propose in addition too--or a replacement for--social security taxes? If the poor must pay this tax plus social security taxes many will not even be able to afford living in their homes.
4. You, like a few others, apparently see no important purpose being served by the incentives and disincentives established by the tax code. I, for one, have observed the difference in rental property compared to property actually owned by people living there. Owned property is in much better physical condition and is better cared for. There is less crime in neighborhoods where people own their own dwellings as compared to places that consist entirely of rental units. I would submit this country is well served by a tax system that includes a deduction for mortgage interest simply because this encourages home ownership. Do you really want to do things like prevent employers from being able to deduct the cost of hiring employees from their taxes? Hmmmm...I wonder what affect that change might have on the employment rate? What do you think it will do to charities and charitable causes in this country when money given to those entities is no longer tax deductible. Goodbye Heart Association. Goodbye American Cancer Society. Colleges are huge recipients of donations. Plan on college tuition increasing further to pay for donations they no longer will be getting.
5. Once again the wealthy would be the winners in this deal. Even if you did pass a law abolishing deductions, within a few Congress would pass the same laws over again and what we would see is a system where top tax rates have been reduced, but the deductions slowly creep back into place. That's how political power works. The best tax code taxes higher income taxpayers at a greater rate, but does allow for deductions for truly socially useful purposes. Putting people to work and making charitable donations are truly important purposes.
It might be desirable to simplify taxes. However, they are already simple for the millions of taxpayers who file the "short form" every year. My spouse and I have an income of about 200K per year. It costs me $200 or less to pay an accountant to prepare my tax return. Millions of other taxpayers dispense with an accountant entirely by using programs like Turbo Tax. The advantages of "tax simplification" are grossly overstated in the computer age.
I realize that support of a "flat tax" is nowadays standard Tea Potty rhetoric. However, there are so many lies and inaccuracies contained within it that it is just pitiful.
and you could most likely do it yourself, as you were saying. part of the issue with simplifying the tax code would also be a job killer in the accounting field. California moved to simplify their state taxes a few years ago, and H&R Block lobbied against it....
Forget tax rates. Pay attention to the deductions and dare we say it, loopholes.
Sure.
The various versions I have seen and read of the "Flat" and "Fair" are full of them.
Same scammers.
Different names for the same games.
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