ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Politics and Social Issues»
  • United States Politics

The Flat Tax & The United States Tax System

Updated on August 18, 2013

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, 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.


    0 of 8192 characters used
    Post Comment

    • point2make profile image

      point2make 6 years ago

      Thank-you for your insightful comments Au fait. Your point on a flat tax being regressive on low income earners is correct. Any flat tax would have to have a starting point that addresses this issue. As I stated in my hub a flat tax that was not applied to the first $25,000 of income would overcome this regression and protect those, in our society, who need protection. Thank-you again for your observations.

    • Au fait profile image

      C E Clark 6 years ago from North Texas

      Law makers and governing entities use taxes to promote certain behaviors and activities, and to discourage others. Unlikely that will change any time soon.

      Most people who think they want a flat tax want it because tax forms intimidate them. Most people in this country qualify to use the 1040EZ form, which is so simple a normal 10 year old could complete it without help, yet I personally know people who are afraid to do it themselves and still pay a tax preparer to do it for them for fear of making a mistake.

      Either a flat income tax or a flat sales tax on everything would be regressive and hurt low income people. Most low income people are paying far less than 20% of their income in taxes, and would be raising their own taxes considerably if they were to get what they think they want -- an easy flat tax form that a 3-year old could complete.

      Interesting hub with all the history of taxes, etc., included. Thank you for SHARING!

    • point2make profile image

      point2make 6 years ago

      With the issue of the Roth and the tax rates in the coming years going higher...that is a real possibility. With nearly a 15 trillion dollar national debt and an unfunded liability bomb of over 100 trillion in our future we are in trouble. We finance our debt with government bonds and our ability to sell these bonds, in the future, is not guaranteed.

      Whether you use a Roth or a traditional IRA your retirements financial future is not assured. We need to fix the system. I believe there is still time but a financial collapse for the United States is not only a real possibility but could be a frightening reality if we do nothing.

      Thanks for the comments Brady...very insightful and informative.

    • point2make profile image

      point2make 6 years ago

      Thanks for the comments BradyBones. I appreciate the insight and the observations. As we all know taxes, in their many guises, will always be with us. It is time, however, that we change how we administer and levy taxes.

      The politicians, at every level, must be held accountable for all spending programs and policy. If we don't put some kind of "protection" to cover a flat tax proposal then politicians will simply change the rate and within a few years we will lose the advantages of a flat tax.

      We must find a way to remove the cronyism that is rampant in our tax policies. Politicians, on both sides, beholding to their "friends" have given us a tax code that is so heavily tilted to corruption that it desperately needs an overhaul. Allowing those same politicians to take charge of the tax code "fix" would be folly.

      Taxes are a necessary evil in our society and most of us are fine with paying our share. We do not, however, agree with the way the tax code is administered. Runaway spending, corruption, and incredible waste is affecting the long term stability of our economy. Things must change and we need a national dialogue with input from all points of view to fix the system.

    • BradyBones profile image

      R. Brady Frost 6 years ago from Somewhere Between a Dream and Memory

      To reiterate the point about 401k savings, a Roth is much more beneficial if you believe that taxes today are less than they will be by the time the working generation is ready to retire. If you look at government spending and who benefits from the current system, it isn't that big of a stretch to say that taxes will be higher by the time we retire.

    • BradyBones profile image

      R. Brady Frost 6 years ago from Somewhere Between a Dream and Memory

      There are a lot of taxes that we pay above and beyond what we see taken out of our paychecks. For every dollar that we pay, our employers pay the government based on our wages. That is, unless you are a 1099 contract worker. Which if I understand the relationship correctly, you'll end up paying far more in taxes because your company elects to pay you at a higher rate and for-goes that responsibility. In that situation, you'll also be responsible for your own health insurance as well.

      Most of us pay state taxes and sales tax, which goes to the state we reside in as well as the county and city where the purchase is made. Gasoline and deisel prices reflect a very high rate of taxation that we pay every time we fill up at the pump. Hotels and certain luxery recreational type activities have taxes built into the price we see at the register. County fairgrounds and campgrounds often have an admission fee, the properties of which are controlled by county, state, or federal agencies and therefore should belong to the people without fee -- this is thus another form of tax assessed on those who chose to utilize these benefits of citizenship.

      If we're going down that road, we might as well add the cost to fish or hunt instead of relying on supermarkets for food. If you live in a township or city, there are zoning regulations which may prohibit you from owning your own livestock for dietary use. If you drive, you also have to register your vehicle and/or boat. If you fail to pay these taxes and operate these vehicles anyway, they can be seized by the government and auctioned off if you fail to pay a ransom tax to get them back.

      You pay taxes on the money you make while you're alive, but your family will pay more taxes on that same money if you leave it to them as part of your will.

      The 401k program seems like a great deal, and investing in this program is highly recommended even by people such as myself. I put 6% into mine every payday, and my employer adds another 5% -- all based off my base wages. The amount invested is pre-taxes and works to reduce my upfront taxes today, but when I retire I'll be taxes at least twice, if not more, on that money. I'll be taxed when I take it out of the 401k portfolio, and then I'll be taxed when I spend it.

      All of this is good food for thought and I, for one, am in favor of a flat tax rate. Let the cost at the register reflect the cost of goods. If you want to put additional taxes on everyday items on top of what you take out of my pay, put additional taxes on items imported from other nations, or produced by American companies outside of our borders, or made with a certain threshold percentage of foreign parts. Even though my list of taxes seems like a lot, it is not all inclusive. So many people say that we should tax the rich more, but those taxes eventually come out of our own pockets by the way of higher costs at the stores we shop in for items we buy every single day.

    • point2make profile image

      point2make 6 years ago

      Thanks for the comments WBA they are appreciated. Because the "political favors" would be, essentially, removed from a flat tax system there will always be great opposition from the politicos. That's a given. I believe the flat tax can work and would be a fair and easy system to administer. The revenue stream to the Feds would be increased and, if the politicians didn't spend every dollar in sight, it would eventually balance the budget.

    • profile image 6 years ago from upstate, NY

      point2make- I see progressive income tax to be constitutionally questionable at best, the flat tax could take the politics out of taxation in the long run. I also see the flat tax as another step towards reducing the power of the federal government to control and manipulate the poeple. But as you demonstrated, there any multiple issues that need to be carefully considered.Regards-WBA

    • point2make profile image

      point2make 7 years ago

      Thanks for your comments Poolman they are appreciated. Questions are always welcome here...I will always try my best to answer them.

      Bringing in a National Sales Tax to replace the income tax system is a viable option. There are many supporters of this idea. One of the problems is the potential for people to invest rather than spend their money. A national sales tax is totally dependent on consumer spending and there are some models that show consumer spending would rise initially but flatten very quickly leading to a possible reduced revenue flow for the government. Another area of concern is the regressive nature of a sales tax. Put simply if I make 100,000 and you make 20,000 our ability to pay the taxes are not even and therefore not fair. It would take a much higher percentage of your disposable income to pay the taxes than mine. We would have to address that shortcoming.

      You are right in pointing out that those who "fly under the radar" would not be able to escape the new tax and that would be a revenue generator for the system.

      There are many good ideas, like yours, out there and we need to find a way for the people to make the politicians sit down and listen to them. Thanks for the ideas and comments Poolman. You know your stuff!

    • profile image

      Old Poolman 7 years ago

      Very informative hub and well written. The biggest problem I see with the flat tax is it would still not tap all the unreported income that takes place in this country. These would include drug dealers, prostitutes, and cash type businesses owners. Yet these people all spend money, lots of money. For this purpose wouldn't a National Sales Tax bring in more revenue for our government while still eliminating most of the forms and deductions? In most states every honest business is already collecting and reporting state and city sales taxes so would be familiar with the process. I'm only asking a question, not disagreeing with anything in your hub.

    • point2make profile image

      point2make 7 years ago

      I believe some form of flat tax is in the future. The problem is, with a flat tax system, the politicians would be excluded from visiting favors on their friends and financial backers by giving them preferential tax treatment which they do now. They would not be able to manipulate the system for their own personal ends and indeed would have to give up some of their power---to the people on this one. The voters will have to demand such a tax change and only support those politicians who are prepared to do "The People's" bidding.

      As always I thank you for your comments James. They are always welcome here.

    • James A Watkins profile image

      James A Watkins 7 years ago from Chicago

      I read the book about the flat tax and it is very convincing. Your Hub is also convincing. I am in favor of it—or a national sales tax collected by the states. This is an excellent and needful Hub. Thank you.

    • point2make profile image

      point2make 7 years ago

      Thank-you for your comments sheila b. I do appreciate them. I do hope you found some useful information in the rest of the hub as well. If we don't start demanding that the politicans listen to the people and remove them from office when they don't then we will lose this fight. The will of the people must trump all otherwise the politicans will continue to embrace corruption and power for their own gains and if they prevail then... "WE THE PEOPLE"...lose

    • sheila b. profile image

      sheila b. 7 years ago

      I am in complete agreement with your last paragraph.

    • point2make profile image

      point2make 7 years ago

      Thank you for your kind comments cluense. I am glad you enjoyed it.

    • point2make profile image

      point2make 7 years ago

      Thanks for the comments LRC they are appreciated

      Actually there are several revenue models for a flat tax system. There is even some concensus among the various plans.

      The optimum percentage range, for a flat tax, is more or less accepted to be 16-21%. It is predicted, by some, that 19% is the point of neutrality. In other words a 19% flat tax would collect the same amount of tax revenue, for the government, as our current system delivers now.The flat tax would be revenue neutral. There is some disagreement on this threshold number but all agree a flat tax would tend to increase revenue for the government

      As they say the devil is in the details and the outcome would depend on several factors. Perhaps the most important factor would be whether the tax was applied on every dollar of income. In most flat tax proposals there would be no tax paid on the first $25,000 of income in order to protect the lower income tax payers. The revenue neutral percentage of 19% includes this provision.

      There is also the predicted increased tax revenues, for the government, that would result from higher levels of economic growth that would be realized by a flat tax system. The evidence of an increase of tax revenue to the government in a flat tax system is quite compelling. Perhaps the best illustration I could use LRC is to compare what you pay in taxes now to what you would pay in a flat tax system. Let's say you make 50,000/year. Under the current system you pay, depending on your deductions, approx 30+%. Under a flat tax you would pay nothing on the first 25,000 and over all your tax rate would be, even with no deductions, less than 10%. What would you do with all that extra money. This is where the potential higer level of economic growth would come from. I hope I haven't rambled on to much and I hope this answers your question

    • cluense profile image

      Katie Luense 7 years ago from Buffalo, NY

      Awesome Hub! I rated it up a notch!

    • LRCBlogger profile image

      LRCBlogger 7 years ago

      nice article, you really looked at a lot of scenarios. I was wondering if there are any revenue models or predictions on the amount of revenue the govt would take in under a flat tax. In other words, if there was a 20% flat tax in individuals, how much money in taxes would the govt collect Versus what they were collecting under the current system.