Flat-Tax Effects On Employee Benefits
Employee benefits end up taking a beating under the flat tax. Employers would no longer be eligible for a tax deduction for providing health insurance and other benefits to their employees. The flat tax would probably give employers an incentive to cut benefits or even eliminate benefits altogether. Flat-tax advocates say employers would probably give the money normally spent on benefits to employees in the form of additional wages because employers would still be allowed to deduct the cost of wages. Employees could buy whatever insurance they need. (Crumpley, F1)
Conclusions
After carefully studying the criteria of the flat tax and the effects of the tax on Americans, several important conclusions can be assumed. These conclusions are the following:
1. Advocates of the flat tax express their desire for a tax system that is fair, simple, and beneficial to the economy.
2. Opponents of the flat tax argue the flat tax would be unfair because it benefits the rich and harms middle and lower-class Americans.
3. The flat tax is generally known as a 17 percent tax rate for all Americans, regardless of economic circumstances. The flat tax eliminates most of the current, standard deductions while introducing new, generous deductions based on the number of individuals in the household.
4. The flat tax ends the double taxation of savings by eliminating interest payments, dividends, and capital gains from the tax base.
5. The most visible of all deductions eliminated by the flat tax is the deduction on interest payments on home mortgages.
Recommendations
The above conclusions offer several important recommendations about the flat tax. These recommendations are as follows:
1. Americans should give the flat tax serious thought as a viable way to create an economically sound tax system.
2. Americans should support the flat tax because the flat tax is a much simpler form of taxation than the country currently uses.
3. Americans should support the flat tax because the flat tax taxes all Americans equally and fairly.
4. Americans should support the flat tax because the flat tax would create an incentive to invest, increasing the economy’s capital stock.
Armey, Dick. “Why a Flat Tax?,” World Wide Web.
Armey, Dick & Shelby, Richard. “Flat Tax Summary,” World Wide Web.
Armey-Facts, Dick. “Tax Facts,” World Wide Web.
Breyer, R. Michelle. “Flat Tax Would Benefit Texas, Study Maintains,” The Austin American-Statesman, 21 February 1996, D1.
Columnist. “Business Economists Say Some Type of Flat Tax Would Benefit Growth,” Bureau of National Affairs Banking Report, 4 March 1996, 358.
Crumpley, Charles R.T. “Would a Flat Tax Help or Hurt You?,” The Kansas City Star, 28 January 1996, F1.
Cruz, Humberto. “Flat Tax Benefits More than the Rich,” Sun-Sentinel, 29 January 1996, 22.
Gose, Joe. “Flat Tax Would Benefit Wealthy Most, Professors Say,” The Kansas City Star, 4 March 1996, B2.
Forbes, Steve. “Steve Forbes on The Flat Tax and How Much Your Family Saves,” World Wide Web.
Foster, J.D. “A Friendly Critique of the Flat Tax,” World Wide Web, 11 August 1995.
Lambro, Donald. “Flat Tax Would Benefit America’s Middle Class,” The Atlanta Journal and Constitution, 20 February 1996.
McIntyre, Robert S. “A Flat Tax Would Benefit the Fat Cats,” Newsday, 24 January 1996, A35.
Wester, Dave. “Yes, Flat Tax Plans are Shallow,” Milwaukee Journal Sentinel, 14 February 1996, 11.
Yoder, Edwin. “Forbe’s Basic Spiel Sophomoric.” The Montgomery Advertiser, 6 February 1996, 6A.
Last modified May 27, 1996
Send Comments to flint@itsnet.commailto:flint@itsnet.com
This document was created with the assistance of
WebMania!? 1.2 (Unregistered) – ?1995,96 Q&D Software Development – http://www.q-d.com
This document was created with the assistance of
WebMania!? 1.2 (Unregistered) – ?1995,96 Q&D Software Development – http://www.q-d.com
Why America Needs a Tax Cut
Chapter 8 | Previous Chapter | Next Chapter | Contents
THE FLAT TAX: THE FINAL STEP
Daniel J. Mitchell
McKenna Senior Fellow in Political Economy
The Heritage Foundation
Although cutting taxes will begin to simplify the current tax system and help the economy meet its growth potential, more fundamental changes are needed. And the answer is the flat tax.
There has been a surge in support for a flat tax in recent months, thanks largely to the efforts of House Majority Leader Richard Armey (R-TX). Many Americans see the current tax system as a complicated failure that hinders the nation’s growth while allowing the politically well-connected to manipulate the system to get special breaks not available to average workers and businesses. The flat tax, on the other hand, is simple, treats all taxpayers equally, and greatly increases incentives to work, save, and invest.
WHAT IS A FLAT TAX?
There have been several flat tax proposals over the years. While they differ in important ways, almost invariably they contain three features, each designed to fix a major problem with the current tax code. The major features of a flat tax are:
· A single flat rate. All flat tax proposals have a single tax rate that applies to all income subject to tax. Flat taxes also usually include provisions to ensure that all income is taxed just once. The actual tax imposed varies, with rates in some plans as low as 10 percent and in others approaching 20 percent. The low, flat rate solves the problem of high marginal tax rates by reducing penalties against working, saving, investing, and entrepreneurship.
· Elimination of deductions, credits, and exemptions. Flat tax proposals eliminate provisions of the code that bestow preferential tax treatment on certain behaviors and activities. Examples of such preferential treatment include deductions for home mortgage interest, charitable contributions, and state and local taxes. Eliminating these special provisions solves the problem of complexity, allowing taxpayers to file their tax returns on a postcard-sized form.
· No double taxation of savings and investment. Flat tax proposals are designed to reduce or eliminate the tax code’s bias against capital formation by ending the double taxation of income used for savings and investment. Simply stated, these plans often have the equivalent of a “super IRA,” which means essentially that taxpayers would be taxed only on the portion of income that is consumed. This reform to ensure that income is not subject to a second level of taxation is needed since today’s tax code penalizes future economic growth by discouraging capital formation.
ADVANTAGES OF A FLAT TAX
There are two principal arguments for a flat tax: growth and simplicity. Many economists are attracted to the idea because the current tax system, with its high rates and multiple taxation of savings and investment, reduces growth, destroys jobs, and lowers incomes. A flat tax would not eliminate the damaging impact of taxes altogether; but by dramatically lowering rates and ending the tax code’s bias against savings and investment, it would boost the economy’s performance when compared with the present tax code.
For many Americans, however, the most attractive feature of a flat tax is its simplicity. The complicated documents and instruction manuals taxpayers struggle to decipher every April would be replaced by a brief set of instructions, and the lengthy forms by a simple postcard-sized return. This radical reform appeals to citizens who not only resent the time and expense consumed by their own tax forms, but also suspect that the existing maze of credits, deductions, and exemptions gives a special advantage to those who wield political power and can afford expert tax advisers.
If enacted, a flat tax would yield major benefits to the nation, including:
· Faster economic growth. A flat tax would spur increased work, saving, and investment. By increasing incentives to engage in productive economic behavior, it also would boost the economy’s long-term growth rate. Even if a flat tax boosted long-term growth by as little as 0.5 percent, the income of the average family of four after ten years would still be as much as $5,000 higher than it would be if current tax laws remained in effect.
· Instant wealth creation. According to Harvard economist Dale Jorgenson, a flat tax would boost national wealth by some $1 trillion.1 The reason: All income-producing assets would rise in value since the flat tax would increase the after-tax stream of income they generate.
· Simplicity. All taxpayers, from General Motors to a teenager flipping hamburgers, would be able to fill out their tax return on a postcard-sized form, and compliance costs would drop by tens of billions of dollars. According to a study conducted for the Internal Revenue Service, the current tax code requires taxpayers to devote 5.4 billion hours each year to their tax returns.2 Yet even this commitment of time is no guarantee of accuracy. The code is so complex that even tax experts and the IRS often make mistakes.
· Fairness. A flat tax would treat people equally. A very wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes. No longer, however, would the tax code penalize success and discriminate against citizens on the basis of income.
· An end to micromanagement and political favoritism. The flat tax gets rid of all deductions, loopholes, credits, and exemptions. Politicians would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy. According to Professor Alvin Rabushka of Stanford, co-author of The Flat Tax, $100 billion worth of uneconomical investments are made for tax purposes.3 Under a flat tax, those funds would be used to boost economic growth.
· Increased civil liberties. Under current law, people charged with murder have more rights than taxpayers dealing with the Internal Revenue Service. With a simpler, fairer tax code, infringements on freedom and privacy would fall dramatically.
· Friendliness toward families. Under the Armey proposal, a family of four would be able to shelter the first $36,800 of income from taxes. Other proposals include similar family allowances.
FREQUENTLY ASKED QUESTIONS
Q: Should the rich pay more?
A: Under a flat tax, the rich do pay more than the poor. A wealthy taxpayer with 100 times more taxable income than his neighbor will pay 100 times more in taxes. A flat tax, however, does not use punitive and discriminatory tax rates to penalize those who contribute most to the nation’s prosperity. For those who think the “rich” should pay a higher percentage of their income, the generous family allowance in, say, the Armey bill and others effectively creates a modest level of “progressivity.”
Q: Would a flat tax reduce the budget deficit?
A: It depends on the tax rate, what happens to spending, and how much faster the economy grows under a flat tax. Even taking supply-side effects into consideration, at some point lower rates do translate into less revenue. The size of the personal exemption or family allowance also plays a key role since the decision to protect a certain amount of income generally means the rate on income above that level has to be higher. The Armey proposal probably would lead to lower tax revenues, particularly in the short term. But it also includes spending provisions that would cap the growth of government, so the long-term effect would be to reduce government borrowing.
Q: What would happen to charitable contributions and housing markets?
A: Some worry that the transition from the current system to a new one would create problems for charities and homeowners. History suggests these fears are exaggerated. During the 1980s, the top tax rate was reduced dramatically, falling from 70 percent in 1980 to 28 percent in 1988. The effect was to reduce the value of itemized deductions by the same amount, yet the value of housing did not drop. Similarly, charitable contributions actually rose sharply during the 1980s. This does not mean itemized deductions have no importance; it simply indicates that the benefits generated by a robust economy more than offset any costs associated with lost deductions.
Q: Is there not a risk that politicians will raise tax rates in the future?
A: Recent events (for example, base broadening in 1986 followed by tax rate increases in 1990 and 1993) demonstrate that this is a real danger. But this is not an argument against the flat tax; it is further evidence of the need for a constitutional amendment that requires a supermajority to raise taxes.
Q: Should the income tax simply be abolished and replaced by a sales tax?
A: A flat tax does not eliminate the harmful aspects of income taxation; it only reduces them. Some have suggested that the better approach is to replace the income tax with a national tax on consumption. While attractive in theory, however, the danger is that Americans could end up not with a sales tax instead of the income tax, but with a sales tax and an income tax. A sales tax should be considered only as part of a campaign to repeal the Sixteenth Amendment (which allowed the income tax). Otherwise, such an effort could play into the hands of those who want to impose a national sales tax or value-added tax (VAT) as one more way for politicians to get new money to spend.
Q: Does a flat tax eliminate the marriage penalty?
A: It all depends on how the flat tax is structured. The marriage penalty refers to the increased tax a couple face if they choose to get married. A flat tax automatically solves part of this problem since it would no longer be possible for one spouse’s income to push a couple into a higher tax bracket. The penalty also arises, however, if the personal exemption for a married couple is not twice the size of the exemption for those filing singly. By giving a married couple twice the exemption of a single filer, the Armey proposal solves this problem.
Q: What counts as taxable income under a flat tax? Fringe benefits? Capital gains?
A: A key principle of most flat tax proposals is that all income be taxed, but only once. Capital gains would be taxed at the business level, but the tax would not be applied a second time at the individual level. Dividend income would be taxed in similar fashion. Fringe benefits are not taxed at all under the current system, but they would be subject to tax, typically on the business level, under most flat tax proposals.
Q: How does a flat tax affect business and payroll taxes?
A: Most flat tax proposals, including the Armey plan, reform the corporate income tax as well as the personal income tax. Most, however, do not address payroll taxes. Both Social Security and Medicare face significant long-term structural problems. But while flat taxes could be designed to include substantial reform of Social Security and Medicare financing mechanisms, most lawmakers believe that problems of the income tax code should be addressed separately from those faced by retirement programs.
CONCLUSION
The current income tax system punishes the economy, imposes heavy compliance costs on taxpayers, rewards special interests, and makes America less competitive. A flat tax would reduce these ill effects dramatically. Perhaps more important, it would reduce the federal government’s power over the lives of taxpayers and get the government out of the business of trying to micromanage the economy. There will never be a tax that is good for the economy, but the flat tax moves the system much closer to where it should be: raising the revenues government needs but in the least destructive and least intrusive way possible.
Endnotes:
4. Telephone conversation with the author, February 1995.
5. Arthur D. Little, Inc., “Development of Methodology for Estimating the Taxpayer Paperwork Burden,” study conducted for the Internal Revenue Service, 1988.
6. Malcolm S. Forbes, “Happy Days Will Be Here Again,” Forbes, July 18, 1994.
Previous Chapter | Next Chapter | Contents
/hbut.map/hbut.map
onomic Committee
How a Flat Tax Would Benefit Business
· Ends punitive double taxation of business income and fosters increased savings and investment needed for development and expansion.
· Ends individual capital gains and dividends taxation, and would spur increased corporate investment.
· Allows 100 percent first-year expensing of new business investment (plant, equipment, and land), eliminating one of the biggest accounting nightmares-numerous depreciation schedules that can stretch up to 40 years for investments or purchases.
· Spurs new investment and increased productivity by quickly freeing up capital needed in fast growing businesses through immediate expensing.
· Eliminates the cost of keeping track of all interest and dividends paid out (1099 forms); because this income would only be taxed at the business level. Corporate income would not be taxed again when interest and dividends are paid to individuals.