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Time for a Flat-Rate Income Tax

It’s almost April 15th, which is time for my annual tax rant.

I was just kidding about the rant.  People have enough problems at tax time and I’m not one to rub salt in the wounds.  Besides, the tax filing deadline is a day to give thanks for living in the greatest nation in the world.  It’s a time to remember how this country started as a plucky little colony and became a world superpower.  It’s a time to be proud of the nation we have built and the opportunity it has created for millions of people.  And, it’s a time to reflect on how much money we made last year and to wonder where it all went.

Why we Need a Flat Tax Rate

Uncle Sam at the ATM

Photo by Jeff Sandquist

Here on Hope to Prosper, I attempt to present solutions to our most difficult financial problems.   This year, I propose we replace our existing tax system, with a flat-rate income tax.  Let’s get rid of the credits, the deductions, the line numbered forms and the flow charts.  I say, eliminate the AMT, nuke the schedules and pare it down to a couple of forms.

We should have three tax brackets and make people pay those rates.  If everyone had to pay, we could lower the rates and still collect more in taxes.  If you are a corporation, you pay your taxes.  If you are an individual, you pay your taxes.  If you moved last year, have a mortgage and donated to a charity, you pay your taxes.  Even if you have a blind dog or convert your car to run on bio-diesel, you still have to pay your taxes.

We must eliminate the ability of the connected and the wealthy to game the system to avoid paying taxes.  And, we should require everyone over the poverty line to pay taxes, regardless of the number of dependents.  Everyone uses our Government resources and everyone should pay their share.  The free lunch mentality is bad for America.  So are the corporations who think they are too big to pay.  We need to put a stop to it.

Why Our Current System is Broken

I wrote this post is because of an article I read in CNN Money.

In 2009, roughly 47% of households, or 71 million, will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center.

It is mind-boggling to expect the other 53% of households to fund the entire Government.  I’m all for a progressive tax system, but way too many people are getting a free ride.  And, it’s well known that many corporations don’t pay any income tax.  So, the tax burden falls increasingly on the middle-class employees and their families.  Our income tax system is complex, confusing and unfair.  It is unsustainable and it has to change.

Another problem is that our tax code has become a mechanism to encourage or discourage certain behaviors.  It’s wrong for the Government to reward or penalize people, based on their personal decisions.  And, it’s wrong for special interest groups to receive tax breaks after they contribute to a politician’s campaign.  In my opinion, this is legalized corruption.

New Taxes Coming Soon

Since the Federal Government is spending our country into ruin and raising income taxes during a recession isn’t very popular, the next surprise may be new taxes and fees.  There are already rumblings around Washington about a European style VAT (Value Added Tax).  This would allow the Government to tax the things we buy, much like a sales tax.  The Value Added part of this tax is questionable.  Most states already have a sales tax and this hasn’t solved any of their financial problems.  It only encourages more wasteful spending.

The Bottom Line

The bottom line is that it’s time to sunset the tax code, lay off the auditors and close down the IRS.  There are much more efficient ways to assess and collect income taxes.  We should be spending our precious tax revenue for bridges and roads, instead of wasting it on auditors and field offices.

“If Congress were to pass a ‘flat’ tax, you’d simply pay a fixed percentage of your income, and you wouldn’t have to fill out any complicated forms, and there would be no loopholes for politically connected groups, and normal people would actually understand the tax laws, and giant talking broccoli stalks would come around and mow your lawn for free, because Congress is NOT going to pass a flat tax, you pathetic fool.”

Dave Barry – American Author & Columnist

Recommended Reading

This post was featured on the Carnival of Money Hacks. This is a wonderful collection of articles and I am honored to be posted among such a talented group of bloggers.

9 comments to Time for a Flat-Rate Income Tax

  • I’m torn on this one, Bret.

    In theory, I’m all for it – but for me that depends on how it’s implemented.

    For example:

    When you call for a flat tax, does that also cover the payroll tax?

    If not, what will be my flat tax rate?

    Will the flat tax come with a corresponding cut in the size of government? If we can agree to cut government (including entire cabinet position departments), as well as a lot of other wasteful government programs, then I suspect our flat tax rate can be astoundingly low.

    Our economy would certainly be much better off!

    All the best,

    Len
    Len Penzo dot Com

    • No, the flat rate I am advocating would only be for Federal Income Tax. Payroll taxes would stay the same. If the flat-rate was adopted, I assume states like California would mirror the changes, but with lower rates. That’s what they do now.

      According to Steve Forbes (when he was running for President), if filers all paid a flat-rate of only 15%, we would collect a lot more taxes than we do with the current system. And since 47% of household may not even pay Federal Income Tax for 2009, I think he is probably right.

      My recommendation would be to have rates similar to:

      10% for above poverty to $100%
      15% for $100K to $200K
      20% for above $200K

      If we had brackets this low, we could ditch all of the credits and deductions. I think people would be a lot happier than paying the current 15-35% and working through a bunch of receipts.

      As for shrinking the size of the Government, that is the subject of a whole new post. I could never fit that in the comment box.

  • Yikes, that schedule would end up costing me about $5000 extra per year based on my payments this year!

    How would it affect you, Bret?

    Best,

    Len
    Len Penzo dot Com
    .-= Len Penzo´s last blog ..Expedia, Orbitz, Priceline and Others: What’s the Best Travel Search Engine? =-.

    • Len,

      I’m pretty sure you calculated it wrong. The way tax tables work is they charge progressively, so you don’t get killed if you slip into a higher bracket. I explained it in more detail in my response to Ryan’s comment. Plus, as I said, the rates I recommended were off of the top of my head. I assume someone would have to do a lot more research than me, to implement a fair rate.

  • I am all for a flat tax. Just give everyone a handsome deduction per dependent and tax income at a flat rate. My big objection is the tax code is so complex an audit is a nightmare. Since audits are arbitrary the tax code is in effect arbitrary. Threat of an audit can become a political weapon. When politicians begin using audits against their opponents successfully our democracy is history.
    .-= Daddy Paul´s last blog ..The best taxable bond mutual funds =-.

  • I’m for a flat tax in theory, but again, it depends on implementation. If done, then I think there should be an income credit everyone for income at or below the federal poverty level, then start taxes from there(otherwise those at the lowest income levels are disproportionately taxed).

    I don’t think we will see anything like this soon, however. Why would 47% of the population support what would effectively be a tax increase when they aren’t currently paying anything?
    .-= Ryan´s last blog ..How to Hire a Lawyer =-.

    • Ryan,

      I was thinking the tax tables should start above the poverty level (around $22K for a family of four) and exclude everyone below that point. And, people would pay the flat rate on anything above the poverty rate. So, someone making $32K with a family of four would pay $1,000 in taxes (10% of $10,000), while the same person making $72K would pay $5,000 in taxes (10% of $50K). The same family of four with an income of $150K would pay $14,800 in taxes (10% of $78K, plus 15% of $50K). This would be very progressive, while at the same time, ensuring everyone over the poverty level pays some income taxes.

      I agree there would definitely have to be a more exhaustive study of the demographics. And, the tax rates could probably be even lower or more progressive. But, the most important thing is to spread the tax burden more evenly. To have 47% of household and most corporations pay zero taxes is not fair to the 53% that have to cover the cost of government.

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