ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Reform the Tax Code with a Flat Tax

Updated on April 29, 2013

I think that everyone would agree that our current tax system is a failure. It is extremely complicated, very time consuming (or expensive) to figure out what you owe, and it has too many loophole that allow legal tax evasion. In addition, the corporate tax rate is a major contributing factor in jobs leaving our shores. I propose a flat tax system, where loopholes and deductions would be minimized, and everyone would pay the same rate on all earnings, be it wages, dividends, or capital gains. Before explaining my proposal, an understanding of our current screwed-up system is necessary.

Our Current System

I am amazed at the number of times I here average, middle class people lament about the wealthy not “paying their share” and then criticize any attempt to eliminate the very system that creates that situation. Our current system is rigged to benefit the wealthy, due to high taxes on wages, and relatively low taxes on investments. Lower and middle class individuals earn most, if not all, of their wealth through wages; for the wealthy investment income is the primary form of income. And not only are the taxes low on investment income, but there are many ways to legally avoid taxes altogether. Of course, since the poor in this country are eligible for all sorts of government assistance, we have the infamous “middle class squeeze”. Compare the following tax rates:


CURRENT FEDERAL TAXES ON YEARLY SALARIES
 
INCOME RANGE
TAX RATE
0-8,375
10%
8,376-34,00
15%
34,001-82,400
25%
82,401-171,850
28%
171,851-373,650
33%
373,651 AND ABOVE
35%
 
 
CURRENT FEDERAL TAXES ON INVESTMENT INCOME*
 
INCOME SOURCE
TAX RATE
LONG TERM CAPITAL GAINS
15%
CAPITAL GAINS, REAL ESTATE
25%
LONG TERM CAPITAL GAINS, COLLECTIBLES
28%
SHORT TERM CAPITAL GAINS
35%
DIVIDEND INCOME
15%
*This is based on an individual who is in the 35% bracket
 

NOTE: I am not going to chart a table showing the corporate tax rates, as they are even more confusing and screwed up than the individual’s rates. Rates range from 15-39%, although certain business must pay an additional 15%, no matter what the income level, while other business have received sweetheart deals from the government and pay no corporate taxes.

As you can see from the tables, every form of investment income (except for short term capital gains) has a lower tax rate than the rate for salaried income. On top of that, there are plenty of places for the wealthy to shelter their investments from taxes. For example, investments in municipal bonds are tax free. And while municipal bonds do not have an incredibly high return on investment, it is an excellent tax shelter for the wealthy.

What this creates is a system where it is difficult to become wealthy, but relatively easy for the wealthy to maintain their wealth. In essence, what we have is a lock on the clubhouse door. And raising taxes on investments really wouldn’t solve anything, as the wealthy would simply shift their investments around to tax shelters. And the numbers from the IRS confirm this.

A Stanford Professor and Economist, W. Kurt Hauser, has been studying the relationship between federal tax revenue and the GDP since the early 1990’s. If you look at the federal tax revenue from the 1950’s to present, the federal tax revenue has ranged from 17.9% to 20.6% of the GDP. That is quite a tight range, when you consider that the top marginal rate has ranged from 92% (1952-53) to 28% (1998-2000). In simple terms, if you want to increase federal tax revenue, you need to grow the GDP. How much growth in the GDP will take place if investors are investing in municipal bonds?

A System that Favors Economic Growth

The federal government should not discriminate the tax on earnings based on where the income came from, or what the current income level is. A flat tax would have overall lower rates with no loopholes. This would both fulfill the “equal justice under the law” principal, as well as promoting economic growth. Here is how they system would work:

  • All income, no matter what the source, is taxed at a flat rate. Corporate, wages, dividends, capital gains….all the same. I would suggest a 15% rate, but that number could be adjusted as needed. It would be nice to get the GDP up and federal expenditures down so that the rate could be below 10%.
  • A $15,000 personal deduction would be the only deduction (married couples filing jointly would get $30,000). We do not need to reward individuals (or corporations) with behavior that fulfills some politician’s political goal (or attempt to get reelected).
  • To level the playing field and eliminate loopholes, there are no additional deductions or tax shelters, including municipal bonds. Believe me, the state and local governments need no encouragement to go into debt.
  • Instead of the current 850+ tax forms, there would be two postcard-sized forms: One for salaried income and one for business/investment income. For individuals, you would basically take you gross income and subtract your personal deduction. Multiply this by the tax rate, and you have your yearly taxes. Subtract what was withheld from your paycheck, and you have your refund or the amount you owe. The business/investment form would be based on the same idea, although instead of a personal deduction, business expenses would be deducted instead.

Besides being pro-growth and the fairness of the system, simplicity is one of the great benefits of the flat tax. With such a simple system, mistakes on tax returns would be greatly diminished. As a result, the IRS would need a much smaller staff to conduct audits, and the audit process would not be the long, agonizing process it is today. In the case of individuals, it would simply be the case of a math error or typo, and would easily be fixed. Businesses would not spend as much time and money on tax prep, and business decisions would no longer be based on tax consequences.

The United States needs to reform its tax code, and it needs to do it now. I can see no better system than the flat tax.

I hope you have enjoyed this article. Please feel free to leave comments below. Be sure to stop by my blog at TheThriftyNation.com for great money-saving advice!

CATO video on flat tax

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      akrongarber 

      5 years ago

      I know there are only 2 forms of "Fair Taxation" one is a consumption (or Sales Tax) and the other is a flat Rate (my personal favorite). I have even stated that ALL forms of income (including welfare) should be taxed at the same rate. However, I am not sure about the exemptions & refunds. If people get a refund they are NOT paying the same share of their income, but even so, it is a plan I could support.

    • profile image

      dani5302 

      5 years ago

      It makes too much sense, therefore it will never happen

    • AJReissig profile imageAUTHOR

      Alex J. Reissig 

      7 years ago from New Richmond, Ohio

      Jed,

      Thanks for the comment. At one time we made it on just tarrifs and land sales....yes, it can be done!

    • Jed Fisher profile image

      Jed Fisher 

      7 years ago from Oklahoma

      Hey, I found something I can agree with. An across-the-board flat tax, no excuses, no loopholes. That would do it. The revenues would be immense. And I hate the "admnistrative supervision" of having to file taxes, the whole process is just way too nosey, a real intrusive invasion of my privacy.

      As a side note, in South Korea, (I lived there for a while) there is no income tax. Their government seems to be doing all right with just import tariffs and corporate taxes.

    • LRCBlogger profile image

      LRCBlogger 

      7 years ago

      This is a vote up for me, well done. I agree that eliminating deductions and moving to a simpler flat tax rate is the way to go.

      All Tax forms should literally be one page.

    • AJReissig profile imageAUTHOR

      Alex J. Reissig 

      7 years ago from New Richmond, Ohio

      A sales tax would be great in that we could eliminate the IRS; that would be a pretty big savings to the tax payers. I think we can agree that either a national sales tax or a a flat income tax system would be an improvement over what we have now.

    • Harlan Colt profile image

      Harlan Colt 

      7 years ago from the Rocky Mountains

      I agree with AJReissig in part. I don't trust our politicians either, however, I would strongly support a national sales tax or flat tax, and the elimination of the IRS etc. I would love that.

      - Harlan

    • AJReissig profile imageAUTHOR

      Alex J. Reissig 

      7 years ago from New Richmond, Ohio

      I agree with you on a national sales tax. My only issue with the national sales tax has to do with trust. Once a Constitutional Amendment to allow a national sales tax passed, I think the politicians would find some excuse to keep the income tax as well. The only way I could see it working is if the Constitutional Amendment granting the right to a sales tax also repealed the 16th Amendment. So, I agree with you that it would be an even better system, but I don't have the level of trust in our politicians to implement it.

      Thanks for the comment!

    • poorconservative1 profile image

      poorconservative1 

      7 years ago

      I like your attitude toward paying taxes. But think about this, if we eliminate income taxes altogether and create a national sales tax, we only pay taxes on what we buy and not what we earn. Which in turn gives tax payers/consumers more earning power. And by national sales tax I don't mean a V.A.T. (Value Added Tax) that was introduced by the democrat super majority in the last election cycle. With it's multi level taxation concept it would potentially harm our economy. I enjoyed this Hub. I voted it Up. Thanks

      Chuck

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)