· Eliminates the growth disincentives caused by high marginal tax rates now faced by expanding businesses.
· Eliminates the corporate Alternative Minimum Tax (AMT), which forces many businesses to calculate their taxes twice under two different methods. Reduces complexity in the taxation of multinational corporations. The flat tax only applies to domestic operations of all businesses, whether they are domestic, foreign, or mixed ownership. Only the revenue from sales of a product within the United States, plus the value of products at export would be reported.
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onomic Committee
How a Flat Tax Would Benefit Individuals
· Frees savings and investments from double taxation. After income has been taxed once at a low, flat rate, if it is saved or invested, the returns (interest and dividends) are not taxed again, as under the current system.
· Ends taxation of capital gains. An individual’s income investment in a home or small business would be free from the punitive double taxation of capital gains when sold.
· Ends estate and gift taxes that represent double taxation and unfairly transfer income from families to the government.
· Slashes the time, effort, and cost of complying with the tax code. Taxes could be filed on a form the size of a post-card.
· Reduces interest rates on home mortgages, credit cards, and auto loans. Since interest income is no longer taxable under the flat tax interest rates would drop to reflect the tax-free status of interest.
· Stops punishment of individuals and families who work longer or harder to improve their standard of living. With only one low tax rate, government would no longer take an increasingly larger bite of someone’s income. One tax rate means a spouse’s income could no longer push a family into a higher tax bracket.
· Increases individual freedom of choice and civil liberties. One low tax rate would allow people to keep more of their money as they earn it and would end government’s current micro-management of people’s behavior through the tax code. A simple flat tax would dramatically reduce the IRS’s infringements on privacy.
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t Economic Committee
The Flat Tax
Vital for America’s Future
A TAX SYSTEM GONE AWRY
There is a large and growing consensus among economists, lawmakers, and taxpayers that our current income tax system has become a tremendous obstacle to economic growth. After eight decades of misuse by lawmakers, lobbyists, special interests, and income redistributors, our tax system is unfair, complex, costly, and punishes work, saving and investing. Simply stated, our onerous income tax system is unfit to carry us into the 21st Century, and prevents us from ensuring a better future for ourselves, our children and grandchildren.
The only legitimate purpose of any tax is to provide revenue to cover the cost of government (see “Principles of a Model Tax System”). Taxpayers should be able to clearly see the cost of government spending and thereby determine how much government they are willing to pay for. Unfortunately, since its 1913 enactment, the income tax system has fallen prey to a multitude of unintended purposes including income redistribution, social engineering, and government micro-management of saving, investing, and spending decisions.
We have the right to demand that our tax system be equitable, efficient, and supportive of our nation’s greatest economic growth potential. Sadly, our current tax system treats individuals unfairly, exacts tremendous administrative and compliance costs, and hinders our economy from realizing its full productive potential. As a result, Americans’ opportunity to better their standard of living is jeopardized.
NEW THINKING REQUIRED
Mere tinkering cannot correct the enormous problems now codified in our current tax system. Partial reforms have been tried repeatedly, with limited success at best. We must fundamentally rethink the manner in which income is taxed in order to construct a system that is equitable, efficient, and pro-growth. In order to achieve genuine tax reform, the blinders must be taken off, special interests must give way to overriding national concerns, politically motivated class warfare must stop, and the defenders of the status quo must get out of the way of positive change.
The flat tax system, pioneered by Professors Robert Hall and Alvin Rabushka of Stanford University, encompasses the new thinking and fundamental change that is needed to create a fair, simple, and pro-growth tax system.
WHAT IS A FLAT TAX?
A flat tax would levy a single tax rate on all income subject to tax. Income would be taxed once and only once. The complexity and unfairness resulting from hundreds of exemptions, credits, loopholes and deductions now prevalent in the tax system would be eliminated to make the single tax rate as low as possible. Only a personal allowance and dependent deduction would be permitted.
Can A Flat Tax Be Revenue Neutral?
Yes. Any flat tax system can be designed to bring in exactly the same amount of revenue as the existing federal income tax. The specific tax rate that would result in revenue neutrality would depend on the size and number of allowances (deductions) permitted, creating a direct tradeoff between deductions and the tax rate. The higher the allowances are set, the higher the tax rate would need to be to bring in the same amount of tax revenue as the current system.
The chart below shows a hypothetical set of flat tax rates and allowances that would result in revenue neutrality. This model, produced by the Congressional Budget Office shows that all federal income tax revenues could be fully replaced by a system with a flat tax rate of 13.1 percent and no deductions. Allowing total deductions for a family of four to reach $36,800 (more than double the amount allowed in 1995) would require a 19.9 percent rate.
Revenue Neutral Tax Rates Table
Principles of a Model Tax System
Why Do We Need A Flat Tax?
Comparison of the Current Income Tax System to the Flat Tax
Frequently Asked Flat Tax Questions
How a Flat Tax Would Benefit Individuals
How a Flat Tax Would Benefit Business
CONCLUSION
Since the passage of the Sixteenth Amendment in 1913, the income tax system has been incrementally reformed and tinkered with for eight decades. Tinkering has only compounded the complexity and distortion of the tax system. The time has come for a flat tax system that is simple and equitable.
Levying a flat tax is not a radical idea. In fact, except for the income tax, flat taxes abound. The Social Security tax, Medicare tax, sales taxes, property taxes, government licenses and user fees all use a single-fixed rate regardless of income.
The flat tax would end the inherent unfairness, complexity, government micro-management, and economic damage caused by the current income tax system. Replacing the current income tax system with a flat tax would foster increased economic growth and opportunity while providing all Americans a higher standard of living.
Prepared by Paul G. Merski, Economist, and Jeffery W. Styles, General Counsel.
Economic Committee
Why Do We Need A Flat Tax?
7. Problem. Our current tax system is unfair, often levying different tax burdens on people with the same incomes. For example, higher taxes are levied on some senior citizens with Social Security income. The tax code allows only certain individuals to take advantage of special tax loopholes and tax breaks, while others are forced to pay higher taxes.
Solution. The flat tax, with its single low-rate, would both ensure that all taxpayers pay their fair share, and eliminate special tax loopholes that can only be used by a select few.
8. Problem. Our current tax system is needlessly confusing and complex. It takes Americans six billion hours each year, at a cost of $200 billion, just to comply with the tax code.
Solution. The flat tax eliminates confusion and complexity by replacing hundreds of deductions and multiple tax rates with one low tax rate. Taxes could be filed on a form the size of a post-card, and all taxpayers would clearly see exactly how much income tax they are paying. The cost of complying with tax rules and regulations would be reduced tremendously for both individuals and government. These savings could be used to lower taxes even further.
9. Problem. The current tax code punishes people who work hard or take risks to improve their standard of living. Citizens automatically forfeit more of their money to taxes when they are pushed into higher tax brackets cutting Uncle Sam in on a larger share of their earnings. Our current system’s steep increases in tax rates crush work incentives and entrepreneurial spirit. Because of high tax rates, many people find themselves working longer and harder and ending up with nothing to show for it.
Solution. The flat tax would not punish hard work and success. Under the flat tax, the more you make, the more you pay. However, Uncle Sam would not demand a disproportionately larger, punitive share of your income as you earn more.
10. Problem. The current tax code discourages saving and investing by taxing these activities more than once. This can make it much more attractive and rewarding to consume rather than to save. As a result, the savings and investment needed for economic growth are eroded, and every American’s chance for a higher income and improved standard of living is diminished.
Solution. The flat tax eliminates double and triple taxation. Americans, regardless of how they make their money, would pay taxes when their income is earned. However, the returns (interest and dividends) on after-tax income that is saved or invested would not be taxed yet again. All but those in the lowest income groups would pay taxes on their income, but they would pay once (and only once) at a single low rate. Unlike the current system, people who save and invest for their future would not be punished with higher taxes.
11. Problem. Because of current high tax rates and the tax code’s multitude of deductions, investment decisions are often based on tax consequences instead of economic merit. This stifles economic growth.
Solution. A low-rate flat tax would eliminate special subsidies, loopholes, and tax shelters, allowing investment decisions to be based solely on their economic merit, not their tax consequences. Investment in unproductive tax shelters would shift to more productive endeavors and economic growth would improve.
12. Problem. The current tax code allows government to micro-manage behavior, jeopardizing individual liberty and the freedom of Americans to decide how best to use their own money. Currently, the government takes a huge chunk of people’s income and then bribes them with their own money by giving some of it back with deductions and tax credits.
Solution. A low-rate flat tax would allow taxpayers to keep more of their own money as they earn it, and shield them from the changing whims of Uncle Sam. Simply stated, if individuals were given the lowest tax rate possible under a flat tax, their need for special deductions would be eliminated.
13. Problem. Tax rates are too high. Marginal income tax rates that were set at 15 and 28 percent just a few years ago, now reach as high as 45 percent. High marginal tax rates damage economic growth by reducing the incentives to work, save, and invest. Marginal tax rates largely determine whether people save or spend, invest prudently or seek out tax shelters, and work or just stay home.
Solution. Under a single, low-rate flat tax, people could earn more without being pushed into higher tax brackets. The savings from the efficiencies of a flat tax system would provide relief and encourage individuals to earn as much as they can without being penalized.
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LOW-INCOME FAMILIES AND THE FLAT TAX
The greatest benefits of a flat tax would go to lower-income families. Thus, those who say they are concerned about helping the less fortunate should be among its strongest supporters.
Among the immediate, direct effects of implementing a flat tax:
· Since all income would be taxed, there would be no loopholes for the rich, and a person with 10 times the income of another would pay a tax at least 10 times as high.
· Deductions and exemptions, most of the benefits of which accrue to the wealthy, would be eliminated.
· The tax burden would shift from poor and middle-class wage earners to those with higher incomes.
· Simplifying the tax code would eliminate the main business of special interest lobbyists in Washington — getting preferential tax treatment — and politicians could not exploit the tax code to generate campaign contributions.
· The working poor would pay no tax until well above the poverty line — thus a family of four would pay no tax until its income reached $33,300 (under the Armey-Shelby plan).
· lBecause of the personal allowance and dependent allowances, the flat tax would be progressive.
In addition, a flat tax would have long-term benefits for low-income wage earners and the unemployed: The economy would grow faster, which would raise wages and create more jobs; and it would be easier for people of modest means to accumulate savings, since the flat tax would eliminate the tax on interest earned by savings made from already-taxed wages.
Source: Daniel J. Mitchell, “Why Liberals Should Support the Flat Tax,” F.Y.I., No. 85, February 7, 1996, Heritage Foundation, 214 Massachusetts Avenue, NE, Washington, DC 20002, (202) 546-4400.
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Tax
Flat Tax Systems Popular Abroad Recently the Alexis de Tocqueville Institution examined 258 tax systems — for personal income, corporate income and capital gains — in 86 countries. It found that the flat tax is the single most common arrangement in the 258 tax codes studied.
Here are some other findings:
· Eighty percent of corporate income tax systems are flat — with an average rate of 30.5 percent.
· Almost half of capital gains tax rates are flat — with an average rate of 28.2 percent.
· However, wage earners pay a flat rate in fewer than one in five countries.
· Half of the 86 nations apply steeply progressive tax schedules, with effective top rates taking 50 percent to 90 percent of personal income — the average being 42.8 percent.
The researchers found that countries with flat personal income taxes grew at an average annual rate of 2.1 percent over the 15-year period ending last January. This compares to 1.1 percent for all countries in the world during that period.
Economies of developing countries with a flat personal income tax grew at an average rate of 2.7 percent — versus 0.7 percent for developing countries as a whole.
The study’s authors advocate a flat tax in the United States lowering rates across the board while strictly avoiding any exceptions.
Source: Gregory Fossedal (Alexis de Tocqueville Institution), “What the Tax Reformers Are Missing,” Wall Street Journal, November 13, 1997.
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? 1997 NCPA
FLAT TAX CASE IS COMPELLING
The flat tax — an income tax with a single tax rate — is the subject of a lot of criticism since Steve Forbes made it the central issue of his presidential campaign and Jack Kemp’s tax reform commission issued its report in January.
Some of the opponents are spreading misinformation–wrongly claiming the flat tax must worsen the budget deficit and isn’t progressive. However, flat-tax supporters hurt their own cause when they refuse to deal with some of the legitimate public-opinion challenges the idea faces. For example:
· Although some supporters, counting on faster economic growth and reductions in government spending, claim everyone will get a tax cut, some middle-income taxpayers will pay more — how many and how much depending on fine-tuning the plan.
· The flat tax would benefit the wealthy, a fact which is politically inconvenient but beside the point, since the purpose of tax reform is to make the system more efficient and pro-growth.
Supporters need to deal with these objections, because the case for a flat tax is compelling, based on its simplicity and — more importantly — its effect on investment. By reducing the tax on investment to zero, the flat tax would produce a huge surge in investment and capital formation.
Source: Rob Norton, “The Wrong Way to Sell a New Idea,” Fortune, February 19, 1996.
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