The Flat Income Tax in the United States - Case Study Example

The Flat Income Tax: A Policy Whose Time Has Come The income tax in the United s has evolved from a simple system designed to generate revenue to a complex process of economic engineering and politicized monetary management. In an effort to implement the complicated maze of US tax laws, the Internal Revenue Service (IRS) has grown to become one of the largest bureaucratic institutions in the world. To eliminate this burden from the individual taxpayer as well as businesses, tax reform advocates have suggested that we move to a flat income tax system. Under the proposed system would be taxed at an identical rate, which some legislators have proposed to be 17 percent (Armey 24). In addition, all taxpayers would be given a liberal personal deduction These changes in our tax code would simplify the administration of taxation, be more fair, generate greater revenue, and stimulate the economy. One of the biggest complaints about the current system of taxation is its overwhelming complexity. The myriad forms, schedules, and attachments required to even file the most basic income and expenditures is beyond the capability of the average taxpayer. The Internal Revenue tax code contains more than 9.4 million words, thousands of provisions for business and individuals, and an instruction booklet that is over 100 pages in length (Graetz 49). The flat rate income tax form would have only the demographic information and lines for income, personal deduction, tax rate (17 percent), and total taxes. By eliminating the tables, worksheets, and schedules, anyone could calculate their taxes in a matter of minutes. Steve Forbes, former presidential candidate and president of Forbes Inc. argues that, "The flat tax is the only way to bring back sanity and put an end to the clutter, confusion, and distortions of the current system" (58). The flat tax would not only save the taxpayer countless hours of organizing and calculating their yearly taxes, the IRS would save a significant portion of its budget by reducing the time it takes to collect, examine, and audit the returns. The simplified system of the flat tax would also be more fair to all taxpayers. All taxpayers would pay an equal percentage of their income toward taxes, without regards to income bracket or economic class. This would eliminate the ongoing criticism of tax breaks for the wealthy and eliminate the public's distaste for the upper income people who currently pay no taxes. This debate has sparked class resentment among the voters, and Fuest, Peichl, and Schaefer contend that, "Tax simplification concerning the determination of income for tax purposes [. . .] reduces inequality and polarisation" (88). In addition to an equal tax rate, the system's fairness would also benefit from the elimination of the special provisions and loopholes that are afforded some specific industries and individuals. Tax credits and exemptions for special interests such as oil exploration would no longer exist and would eliminate the inappropriate economic engineering that the tax laws do to the free market system. The revenue system is designed to generate revenue and not construct the economy. Loopholes are awarded to special interests and have more to do with social and political concerns than they do with raising revenue. The progressive tax system, and its high marginal tax rate, is often seen as an acceptable method for the redistribution of wealth from the upper classes to the lower classes. Not only are high marginal taxes unfair, Zolt and Bird contend that this concept is outdated and "'most analysts and policymakers had come to believe that high tax rates not only discouraged and distorted economic activity but also were largely ineffective in redistributing income and wealth" (8). Tax credits further disrupt the intentions of the free market by subsidizing activities that would otherwise be unprofitable. This may be in the form of social programs, such as a deduction for charity, or a tax incentive to develop a new technology. Either way, the flat tax would eliminate the improper and artificial market forces produced by tax credits, tax incentives, and deductions. While the tax system can be made fair and balanced, it must also generate the revenue necessary to run the government. In fact, a flat tax would result in an increase in total revenue for several reasons. The simplification of the tax forms would increase taxpayer participation and the number of filers. There are many people who fail to pay taxes simply because they do not understand the tax code. In addition, the high marginal tax rates discourage upper income people from accurately claiming income that can be reasonably, and legally, shielded. Ivanova, Keen, and Klemm state, "It seems to be widely believed - indeed taken as obvious - that a reduction in the rate at which a tax is levied will tend to improve compliance with it" (408). In addition, the flat tax's simplicity would make enforcement easier and result in even higher rates of compliance. More people filing and more income claimed can result in higher revenues. The Joint Economic Committee (JEC) of the United States Senate was even more animate when they argued that, "High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion" (Frenze para.4). The elimination of the high marginal tax rate would continue to contribute to a growing tax revenue stream. While the flat tax system would raise revenues through increased participation, it would also significantly contribute to economic growth. Implementing a flat tax policy would, "'eliminate the tax code's bias against capital formation by ending the double taxation of income that is saved and invested. This means no death tax, no capital gains tax, no double taxation of saving, and no double tax on dividends" (Mitchell). The increased savings and the economic rewards for investments would spur economic growth and "Even if a flat tax boosted long-term growth by only 0.5 percent, the income of the average family of four after 10 years would be as much as $5,000 higher than it would be under current tax laws" (Mitchell). These higher incomes would additionally contribute to the revenue base when they are taxed at the flat rate of 17 percent. The flat tax plan has been criticized for its failure to give a tax deduction for charitable donations and interest on home mortgage loans (Armey 26,41). While there is a valid concern for waning philanthropy under a flat tax system, Armey points out that charitable giving rose after the Reagan tax cuts of the 1980s, even though their value as a tax deduction was slashed by as much as 65 percent (41). The overeall reduction in taxes and increased wealth made it possible for Americans to continue compassionate giving through this period. The loss of the home mortgage interest deduction instills a sense of reluctance for many taxpayers, but has no basis in fact. Since interest income is tax exempt, interest rates on debt instruments would decline by the rate of tax on interest under the current system (Foster 3). There would be a zero sum gain or loss for the homeowner. In fact, for homes under the $200,000 range, the reduction in interest rates would raise property values by 10-25 percentage points (Foster 3). The loss of specific deductions would be more than offset by gains made in other areas. In conclusion, a tax system should be designed to be equitable, practical, and serve the important function of raising the necessary revenue. The flat tax would remove the mountains of paperwork and cumbersome tax laws that accompany the current system. The flat tax system would create equality by eliminating the unfair tax credits that are aimed at special interest groups, industries, and individuals to gain a political advantage. It would also remove the IRS from the role of artificially creating or discouraging markets through tax laws. The higher participation and compliance in a flat tax system would increase revenues, while increased savings and investments would spur economic growth. While citizens are naturally reluctant to surrender their current tax deductions, any advantage lost by the elimination of these deductions would be more than offset by gains in other areas. The IRS has grown to be an out of control federal bureaucracy that is overdue for an overhaul. The flat tax system would greatly benefit individuals and businesses alike, and it is a policy whose time has arrived. Works Cited Armey, Dick. "The Flat Tax in our Future." The Madison Review 1996: 24+ . 27 Apr. 2008 . Forbes, Steve. Flat Tax Revolution: Using a Postcard to Abolish the IRS. Washington, DC: Regnery Publishing, 2005. Foster, J D. "The Flat Tax and Housing Values." Tax Foundation: Special Report 59 (1996): 1-4. 27 Apr. 2008 . Frenze, Christopher . "The Reagan Tax Cuts: Lessons for Tax Reform." JEC Report (1996): 11 pars. 27 Apr. 2008 . Fuest, Clemens, Andreas Peichl, and Thilo Schaefer. "Does a Simpler Income Tax Yield More Equity and Efficiency'" CESifo Economic Studies 54.1 (2008): 73-97. Graetz, Michael J. "A Fair and Balanced Tax System for the 21st Century." President's Advisory Panel on Federal Tax Reform, Washington, DC. 11 May 2005. Ivanova, Anna, Michael Keen, and Alexander Keen. "The Russian 'Flat Tax' Reform." Economic Policy (2005): 397-444. EBSCO. 27 Apr. 2008. Mitchell, Daniel J. "A Brief Guide to the Flat Tax." The Heritage Foundation. 7 July 2005. The Heritage Foundation. 27 Apr. 2008 Read More