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Curing the Terminally Ill United States Tax System: Flat Tax and Fair Tax Proposals

Updated on March 16, 2014

The popular saying that nothing is certain except death and taxes fails to recognize that, while people can't halt the inevitable onslaught of mortality, citizens of a free national certainly have the right to investigate and reform their tax system. In recent years, income taxes—and the powerful federal government agency, the Internal Revenue Service that oversees them—have been placed under a microscope for closer examination. If income taxes can be compared to a terminal illness, then maybe 2014 is the year when Americans need to biopsy their taxes. By taking a scalpel to the taxation process and removing the malignant growths, a healthy tax system can be restored.

Did you know that we are tripled taxed on Social Security/Medicare?

1) when payroll taxes are initially withheld;

2) when those withheld payroll taxes are counted as part of the taxable base for income tax purposes; and

3) when the promised benefits are finally received.

While it may seem to be a daunting task, news headlines in recent years have accelerated the impetus toward change. Americans who are concerned about the nation's tax system have an added reason to distrust the Internal Revenue Service after the 2013 revelation that the IRS was targeting both conservative and liberal political groups that had applied for tax-exempt status. During a time when citizens are increasingly alarmed by the invasiveness of the federal government and the all-seeing eye of the National Security Agency, this news evoked outrage. But the encroachment of the IRS and the perception that the federal government is already too eager to reach into taxpayers’ pockets has generated a vigorous movement for tax reform. The taxation system itself, with six federal income tax brackets that range from 10-35 percent, is severely flawed: the Internal Revenue Code contains more than three million words; and the income tax return process takes an average of 26.5 hours of preparation on the part of the average American.

Flat Tax

Conservatives and liberals alike agree that a change is long overdue. The two most prominent suggestions are to adopt either a flat tax or a fair tax.

A flat tax, which is supported by FreedomWorks, an advocacy group of six million which supports less government, lower taxes, and increased economic freedom, personal liberty and free markets. They like the simplicity of the flat tax, which would tax all Americans at the same rate, regardless of whether their income was $100,000 or $20,000. The flat tax only taxes earned income; money that comes from sources such as dividends, interest on savings, or capital gains would not be taxed, which FreedomWorks believes would encourage investment.

As FreedomWorks describes the reform, the tax code would no longer include loopholes for special interest groups. The postcard-sized tax form would take an average of five minutes to fill out and file. It's worth noting that although the federal government imposes a progressive tax, seven American states already tax their households at a single rate; these states include Pennsylvania, Massachusetts, Illinois, Indiana, Michigan and Utah.

Fair Tax Act

In 2003, the Fair Tax Act was created by the Americans for Fair Taxation. This Act would get rid of the Internal Revenue Service. The 16th Amendment would have to be repealed. Instead of personal and corporate income taxes, Social Security and Medicare taxes, estate, gift, capital gains, self-employment and alternative minimum taxes, a federal sales tax of 23 percent would be imposed.

Fair tax advocates also find inspiration in the idea of having a simplified code with which to work. Their proposal to Congress is outlined in 132 pages; in comparison, the current code that takes up 60,000 pages. With the fair tax, the income tax is gone, and the money that you earn is the money that you see in your paycheck.

Because you pay the tax as you purchase items, you determine how much you'll be paying: if you spend less, you pay less in taxes. With a fair tax, loopholes that play to the advantage of those with higher incomes are no longer an open-all-hours playground for people who have managed to use the tax system to support their extravagance. The playground is closed. Instead of being taxed on every dollar earned, Americans would be taxed on every dollar spent.

How the Prebate Works

In order to counteract the financial hardship that a 23 percent sales tax would inflict on the poor, a low-income family of four would receive a “prebate” that’s the equivalent of 23% of the poverty level, or $525 per month.

Which one do you like?

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Fair tax proponents believe that the country would financially benefit from this reform because the increase in consumer spending that would develop because workers hold onto their pay would create an increase in productivity, jobs, GDP and wages.

As Americans become more invested in the different tax options, the federal government would do well to remember that it was the simmering resentment against British taxation that inspired our colonial ancestors to rise up against tyranny.

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    • profile image

      Old Poolman 3 years ago

      As d.william pointed out, far too many benefit from our current tax structure to see it changed. Tax preparation companies such as H&R Block pay a fortune to lobbyists to keep the current system in place. They and many others would be out of business and a job if we went to a fair tax system.

      Less than 50% of us pay tax these days. The very rich pay little or nothing due to special tax loopholes they bought from some politician and they don't want it changed either. Corporations have moved to other countries to avoid paying taxes here in the USA.

      It would seem that only those of us in the Middle Class (If there is such a thing) are paying all the government bills.

    • d.william profile image

      d.william 3 years ago from Somewhere in the south

      Great article. There are too many that want the system to remain as it is because they are getting tax breaks, and free rides, so i doubt it will every change any time soon.

      Those who propose alternative tax systems also have something to gain.

      Congress has no clue how to fix this problem, as they are not educated enough to understand how it works or how to fix it.

      So, as with any other broken agency run by the feds, things cannot change without 50 to 100 years of nonsensical debate.

    • dragonflyfla profile image

      dragonflyfla 3 years ago from South Florida

      Hi tsadjatko,

      You bring up some very important points! It would have to proceed with extreme caution taking in consideration of how our politicians pull the bait and switch on us. Plus, as you mentioned, voting without reading the bill or from Pelosi famous words "you have to pass the bill to see it".

      My concerns also lies in how they add things to the bill the once it is passed! I still can't believe they can get away with this. Another concern is that they keep raising the 23%, I believe I read somewhere that it would make it harder to raise the rate since it is open and everyone would notice and complain.

      Our tax system is only a 100 years old. So we have been without the IRS more than we have been with them! And it was even ruled unconstitutional in 1894. We should be able to go by that. I believe this current admin. has awaken a lot of people who are fighting for our constitutional rights.

    • dragonflyfla profile image

      dragonflyfla 3 years ago from South Florida

      Hi Old Poolman,

      LOL, I can only imagine what your suggestions would be! It could be a fun article to write. The lobbyist probably get the majority of their money back in cronyism and/or tax loop holes.

    • tsadjatko profile image

      TSAD 3 years ago from maybe (the guy or girl) next door

      Excellent hub page, thank you for taking the time and effort to present this. Although our system is archaic, corrupt and inefficient my concern is that any change suggested concentrates on selling us on the various improvment and advantage aspects of making a change with virtually no attention given to the possible ways flat tax or fair tax could lead to various unintended consequences like fraud, corruption, black markets, forms of cheating, political favoritism, etc. What I would like to see is a systematic appraisal of all concievable ways of undermining these proposals and how they can (or can't) be dealt with. From what I see there has been a deliberate neglect of this approach and I suspect for some reason. Think tanks need to brainstorm the possible faults of a flat tax or a fair tax from the perverbial "outside of the box" thinking but from what I see they are more interested in selling the "fairness" of these systems compared to our present system. What we don't need is another law nobody reads and we have to experience it to find out how the real world will screw it up.

    • profile image

      Old Poolman 3 years ago

      I could do that but they might not like my suggestions. It would be interesting to know how much lobbyists are being paid to keep the system from changing to something that makes sense and would be easy to use.

    • dragonflyfla profile image

      dragonflyfla 3 years ago from South Florida

      One of us should come up with a hub for careers tax employers/employees can go into!

    • profile image

      Jayfort 3 years ago

      Hi OP,

      You are correct that the tax preparation folks would take it in the shorts if the Fair Tax or a flat tax were imposed. After having my taxes down this year, I got some back from the Feds, owed State, and owed the tax preparer. After all was said and done, it came out zero-zero. I didn't make anything back nor do I pay out.

      One by one, some career fields become obsolete and are faded out. I think it time to drastically cull down the IRS and do away with the tax lawyers and preparers. It's their time!

    • profile image

      Old Poolman 3 years ago

      An interesting hub on a subject that is near and dear to my heart.

      Nobody can deny that our current bloated tax system is out of control. We now have approximately 51% of our population who pay no taxes at all including some Corporations. We have citizens who pay zero taxes because they don't work, but they get a very nice "Earned Income Credit" tax return in the mail.

      We have drug dealers, prostitutes, and other cash only business's who pay zero taxes.

      The National Sales Tax proposal would take care of a great many of these problems almost instantly.

      Keep in mind that there are thousands of people who make their living preparing tax returns for individuals and business's who don't have the time or the knowledge to do it themselves. Most of them would not be needed if this new tax collection method were to pass. Companies such as H&R Block pay lobbyists to make sure the tax laws only get more complicated thus securing their future.

      This change is long overdue but I doubt it will happen in my lifetime.

    • profile image

      Jayfort 3 years ago

      Excellent Hub, Dragon! Well written and to the point. Enjoyed the quiz! Voted Up and Awesome!