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The Flat Tax & The United States Tax System
The Flat Tax and You!
Taxes have been a part of the human experience for thousands of years. Where ever people have gathered and established settlements and cultures taxes, levies, or tribute of one form or other, quickly followed. The adage ...the only thing you can count on, in life, is death and taxes is recognized by most with a nod of recognition and resignation.
While our leaders and governments, throughout history, have spent much of their efforts identifying potential areas for taxation that could be levied upon their citizens WE THE PEOPLE have spend just as much time finding ways to avoid the results of their efforts.
Taxes have been with us for a very, very long time. It is generally accepted that taxes got their start in Egypt nearly 5000 years ago. Ancient papyrus scrolls, refer to the citizens of Egypt paying taxes in the form of sending a percentage of their crop harvest to the Pharoahs' store houses. The Book of Genesis also refers to this practice in the story of Joseph. The New Testament reveals the reason Mary and Joseph returned to Josephs' home town of Bethlehem was to be counted in a Roman census for taxation purposes. Two thousand years ago, in Israel, tax collectors were shunned and reviled by society however Jesus taught his followers that paying taxes was a responsibility. His teaching, in the Temple, regarding taxes and tribute is still widely quoted twenty centuries later . "Render unto Caesar that which is Caesars....Render unto God that which is God's."
European tax records are very detailed with many of the files dating back to the 16th century. Many of the original records are still in existence. In the USA taxation is ,in someways, responsible for the birth of the nation. The heavy taxation by the British Crown on the colonies proved too much of a burden leading to the Boston Tea Party in 1773. The Tea Party led to the Continental Congress which was followed in 1775 by the American Revolution. The battle cry then was "No taxation without representation" today is can be shortened to "No taxation....we can't pay anymore"
After the American Revolution and up until the First World War the largest source of revenue for the Government was trade tariffs. Unfortunately in 1909, with war in Europe looming on the horizon, Congress began work on the Sixteenth Amendment known by some as "The Income Tax Amendment" This gave Congress the authority to tax income. The 16th Amendment was ratified in 1913 and that is why you pay income taxes. The only real changes since 1913 has been the level of taxation. which has swung wildly, depending which party was in power, from the 28% rate to the 80% rate and everywhere in between. .
The complexity of the US Tax Code had led to extreme inefficiency and colossal waste. The code contains more than 10,000 pages of rules and regulations. There are approximately 500 different forms of which the 1040 is only one. There are also close to 300 different tax guides to assist the taxpayers with completing the 500 different forms. The code is so complex that many Lawyers and Accountants have spent their entire careers looking for loopholes for their clients to help them avoid paying taxes. There is no one , in or out of government, who totally understands the US Tax Code including the IRS itself.
It has been estimated that the IRS telephone help line , created to provided taxpayers with answers and information on filing their taxes, gives incorrect advice 20% of the time. Under the current rules and regulations YOU are responsible for the accuracy of your tax return so if the IRS gives you the wrong answer to your questions. and you file your return based on their advice,.....it is YOU, not them, who will be held accountable and it is YOU who will be subject to any applicable penalties or fines.
Incredible as it may sound the true cost of collecting taxes from the citizens of the United States are not known and can only be estimated. There are estimates that suggest anywhere from a low of 40% to a high of 97% of the total revenue from the Income taxes collected are consumed just by the tax collecting system itself. Multiple hundreds of billions of dollars are spent, by the inefficient and out of control bureaucracy just to collect the taxes. How bizarre!!!
So now that we have taken a brief look at taxes in the past what about the future. Is there a Flat Tax in our future?
A Flat Tax is simple in concept but incredibly complex in practice. A Flat tax would be a straight tax, lets say 20%, on income. The tax form would be simple and , in fact, there are situations where the individual taxpayers would not even have to fill out any forms. They would have no contact with the IRS because all the taxes would have been deducted from their paychecks and submitted to the IRS by the company they work for. It would be the companies who would deal with the tax department not you. Everyone pays the same rate and it's as simple as that......only, of course, it is not that simple at all.
In a Flat Tax world you would pay 20% on your income...period. No forms, no deductions, no need for tax preparers or IRS audits. Tax lawyers and specialized tax accountants would become redundant in such a simple uncomplicated system. While business and self employed taxpayers would, necessarily, still require the services of tax professionals the rest of us would finally be free of what many call the most complicated system on Earth. Can you imagine how many tax lawyers and accountants would have to look for another line of work if a simple flat tax sysytem ever came into being. Do you think the lawyers and accountants, who stand to lose financially as a profession, would be supporters of a flat tax system that would benefit the people?
The first determination that would have to be made is "what is income?".Remember a flat tax system would apply to all "income". The wages we earn at our jobs do not, necessarily, make up our total income.There are other areas that can provide us with supplemental income such as stocks,bonds, dividends, interest on our accounts, capital gains from any source. pensions, rental income and a whole lot more. We would, first, have to decide what would qualify as "income" and that debate will be long and divisive. The special interest and lobby groups would be another stumbling block to a flat tax system. Their "special" influence which they shower upon our beloved politicians would, under a flat tax system, not only lose the status of "a deduction" on their own tax forms but the recipient politician would also have to claim this "special" influence as income. Have we just identified a few more groups who would not, necessarily, support a flat tax for the people?
The simple Flat Tax system gets further complicated when we attempt to determine at what level would a flat tax be applied. Some argue that there must be protection from low income earners and suggest an amount like $25,000 of income would have to be reached before a flat tax would apply to them. Others believe that all income should be taxed regardless of circumstance. So here we have another difference of opinion. What the two sides are proposing is either a straight flat tax applied to every dollar of income for everyone or a modified flat tax that recognizes the low income realities and gives that group an exemption before the tax is applied.As you can see the simple flat tax form of taxation is getting rather complicated.
Next on the radar, for our new flat tax, could be non profit organizations churches and any charitable or service groups.Will the donations they receive, that are their primary source of income, be subject to the new flat tax? If we determine that charitable donations constitute income where will that leave your church or service organization? How will these necessary institutions operate? Taking the thought one step further if you cannot claim your charitable donations against your income taxes will you still donate to your favorite charity? In a flat tax system, remember, there are no deductions, even for charitable donations.... you still pay the flat rate whether you donated or not.
If we look at the business world then a whole new set of problems begin to arise. If businesses are also subject to a 20% flat tax on income most would go bankrupt if they were not allowed to claim business expenses to offset the tax. The vast majority of businesses , who make a profit, make far less than 20% and under our hypothetical flat tax system would pay more in taxes than they earn. Obviously this would not be good for the business world or for the 100 million or so Americans that they employ. Applying the flat tax system to the business world would not be practical or possible. Does that mean we would need two separate systems? This problem is probably the biggest hurdle to a workable flat tax system.
I titled this hub...The Flat Tax and You! because it is not only the flat tax that is at issue here it is YOU and what side of the argument you will choose. In the current system of taxation, according to the latest numbers, almost 50% of Americans pay NO income taxes. What will be the reaction from this group when they learn that under a flat tax system they will certainly pay more taxes, most for the first time, than they do now? How will they react when the other 50% of taxpayers end up paying less taxes? You can almost hear the protests in the streets already. Of course the unscrupulous and morally corrupt politicians, with help from their lobbyists and special interest friends will seize the opportunity to divide the people and fan the flames of dissension.
If partisanship is allowed to enter into any part in the discussions then a fair flat tax system is a non-starter. There will be proposals but, in the end,the interests of the self serving politicians and their friends will carry the day. The "will of the people" has been and is being diminished The flat tax system would be a fair and much better alternative to what we now have. The system would be less prone to fraud and would spread out the burden of taxes so most people would pay a reasonable amount of tax with the least amount of fuss or paperwork. The government would raise more money, not less, because the deductions and loop holes would disappear. There would be major adjustments to the economy and to the labor force but those adjustments would be made quickly and more efficiently than under the current system. One of the unknowns in the equation is the corrupt political system we now are burdened with. The majority of politicans ON BOTH SIDES are more interested in their own political and personal agendas'. They are our Achilles heel and while the vulnerability of this fabled Greek warrior was eventually found and he was conquered .......he caused a lot of damage before he fell. Let us hope that we will choose our path wisely.