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#405 The Income Tax vs the Flat Tax vs the FAIRtax Part 2

The additional revenue generated is often used to fund social programs that aim to support lower-income individuals and address economic disparities. In theory, income inequality is reduced with progressive taxes as wealthier people support programs that are perhaps more useful to lower-income individuals. It is an income tax system that applies the same low tax rate across the board.

It makes the nation wealthy and doesn’t overburden its citizens. It prevents wealth and income inequality without sacrificing the principles of Democracy or Capitalism. It is a simple progressive tax with no loopholes that considers all income of all types. With all of that said, there are some valid lines of reasoning regarding the logic behind a flat tax and its fairness. For example, we can consider plans that flatten the income tax but address issues with other taxes, or muse on more ideological points like “is it fair that individuals with a negative tax rate have a say in tax policy“…. Although, that is a slippery slope, as the same could be said for corporations who need to take a loss in a given year for example.

Real estate and mortgage lobbyists said that deductions for interest and taxes had to be preserved to promote home ownership. Every deduction and tax benefit had its own lobbyists, and by the time they were all finished, we wound up with a tax code at least as confusing as the one it replaced, if not more so. Using our $100 example, the total price including the sales tax would be $130.

US politics & policy

• The federal government taxes a corporation’s profits in a similar way.
• For instance, should the IRS still offer tax credits under a flat tax regime, individuals will naturally fall into a progressive system as some will get credits while others won’t.
• For instance, consider a philanthropist who is deciding whether to donate to a charity.

Whereas the flat tax would tax all income at the same percentage, the FairTax wouldn’t tax income at all — it would instead institute a national sales tax. For instance, consider a philanthropist who is deciding whether to donate to a charity. Under a progressive tax system, the donation could significantly reduce their taxable income, leading to substantial tax savings. However, under a flat tax system, the incentive to donate for tax reasons diminishes, as the tax savings would be less impactful. I mean, it’s another one of those value judgments that are very tricky. But it’s not obvious to me that we do need bigger tax breaks in that area, especially if we know that providing them is going to come at the expense of having to impose higher tax rates on work and saving.

Services

Sure, you could modify a flat tax to make it more progressive a fair, but then, it is essentially, as noted above, a progressive income tax. Any income tax that shifts the burden onto those who are already over burdened with taxes and don’t have the ability to pay is generally not as fair as a system that accounts for differences in income and wealth. Below we’ll look at a number of different aspects of the United States tax system to help explain why progressive taxes are generally more fair than flat taxes. Individuals are taxed at rates ranging from 10% to 37% based on their adjusted gross income, with the higher rate applicable to individuals with more taxable income. Although they both have similar goals and would entail significant overhaul of the current system, the plans differ is some fundamental ways.

• His plan would have imposed a 10% flat tax rate, raised the standard deduction to 10%, and raised the personal exemption to $4,000.
• This is especially true for those who are reaping an 8-to-1 return on their tax dollars, based on the Tax Foundation study that I mentioned in my April 3 issue.
• Countries that have successfully introduced a flat tax often point to enhanced economic efficiency and competitiveness.

Tax Rate

Most of us think of sales taxes as being a percentage on top of the price of a good. For example, here in Austin we have a sales tax of 8.25%, which means that you pay $108.25 for a $100 pair of boots. In these terms, the Fair Tax is really a 30% sales tax, since that’s the percentage applied to the base price of the good or service. I have heard politicians say that the current income tax system is broken.

And then of course, as we just discussed a minute ago, if they do that saving in the form of corporate stock, there’s really two extra taxes being imposed there, once at the firm level and then once at the stockholder level. Well, I don’t know that I have a definitive answer to that, but I would say that redistribution is costly. It undermines incentives to save and invest, especially when you’re doing it through the kind of income tax system we have today. And then, of course, a significant part of the federal budget goes to transfer payments that are predominantly paid out to middle income and lower income households.

I agree that a larger family should pay lower taxes than a smaller family. I think that most people would agree that we should stop somewhere well short of that point because that really views a particular segment of society, the highest income groups, that their consumption and their private income has no value. And that we should view them essentially as just revenue generators for the government and to just keep taxing them up to that absolute maximum point, where we just can’t squeeze anything more out of them. Then there’s the issue of the approximately 44 million people who are not currently on the tax rolls. A Flat Tax or Fair Tax system may put them back on, at least to some extent.

Comparing a Progressive Tax to a Flat Tax

All my points said, when we are debating specifics, there is lots of room to debate fairness. I think our argument generally wins the day in broad terms with all taxes considered, I don’t think it wins on every point, nor does the article elude to this word-for-word. Like with Buffet, they don’t “pay more” they pay a higher percentage of total income all taxes considered. Any tax reform plan will have transition issues and these will have to be thought through carefully. That said, the long-term benefits of fundamental tax reform should far outweigh the short-term transition costs. A family of four with income below $36,000 would be exempt from taxes under this plan.

This simplicity can lead to a reduction in compliance costs and administrative burdens for both taxpayers and the tax administration. From the taxpayer’s perspective, a flat tax system is straightforward; there’s no need to navigate through multiple tax brackets or worry about shifting into a higher tax bracket with increased earnings. For the tax administration, it means less complexity in tax collection and processing, potentially leading to increased efficiency and reduced opportunities for tax evasion. From the perspective of high-income earners, a flat tax system could be seen as beneficial.

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First of all, a retail sales tax at that high of a rate is really likely to have a lot of enforcement and compliance problems. And countries that impose consumption taxes at that high of a rate, they tend to use a value added tax structure, which is really economically the same as a sales tax, but administratively is different because you collect it at multiple stages. Advocates of flat taxes argue that the simplicity and transparency of this system can reduce compliance costs, stimulate economic activity, and attract economic investment. By taxing the wealthiest a lower amount (compared to progressive taxes), more money from these people can theoretically be put into the economy to drive job growth and business development. One concern is that when the wealthy face higher tax rates, it might slow down the economy.

A Progressive Income Tax Vs. a Flat Income Tax: Which is More Fair? – Addressing Some Semantics of Fairness

Critics, however, raise concerns about the regressive nature of a flat tax. They argue that a uniform tax rate disproportionately affects our current tax v the flat tax v the fair tax low-income earners, who spend a larger percentage of their income on basic necessities. This could lead to a situation where the flat tax is fair in theory but unfair in practice, as it would increase the financial strain on those least able to bear it. The biggest problem with this grand scenario is that consumption taxes are considered to be highly regressive, in that they put more tax burden on those with lower incomes than those who are wealthy.

Add to this the hundred thousand-plus federal government employees whose jobs revolve around the administration and enforcement of the current tax code, and I think you start to get the picture. Even without state sales tax, it’s going to be tough for some individuals to pony up an additional 30% sales tax on top of the goods they purchase. The prebate is designed to offset the up-front cost, with low-income individuals getting a 100% relief from the sales tax. Supporters hope that this prebate feature will allay any concerns of the Fair Tax being viewed as regressive by the liberals among us. Still, how hard you work, and even a little luck, are reasonable factors in a free society.