Simplify the Tax Code? Yes – Flat Tax? Hell No

income tax - photo by Laurie McGregor

I believe those advocating a flat tax are taking advantage of the collective frustration we all feel when it comes to the complexity of our tax code. They call it a simpler and fairer tax system. Well, at least one of those things is correct.

A flat tax means one tax rate applied to all tax payer income. It also usually means no loopholes or deductions, like the mortgage interest deduction. There are variations of the flat tax idea that do allow for some exceptions like the exemption of income up to a certain level – all income above that level is subject to the flat tax rate. If anybody is proposing a flat tax that is progressive – meaning income tax brackets – it’s not a flat tax. It may be a new proposed tax system, but it’s not a flat tax.

Flat tax advocates are taking advantage of our collection frustration because their tax system proposal is increasingly unfair the less income you make but they sell it as a solution to simplify our tax code so it appeals to a broad audience. Let’s face it, nobody likes filing their taxes in April. A simpler tax system would remove this yearly headache, right?

The problem is that a flat tax is a regressive tax system. When you point this out, advocates of a flat tax say “it’s fair because it’s one rate paid by all.” They will turn it around and ask you “how is that not fair?” They will ask you “why is it fair to tax higher incomes at a higher rate?”

Flat tax advocates will also point out that we can generate the same revenue that we generate now with our current tax system with a flat rate somewhere in the neighborhood of 15-20%. They fail to mention that the deductions, exemptions and loopholes not present in a flat tax system make up much of that revenue gain. They also fail to mention that the remainder of the revenue is made up by those with the lowest incomes who typically pay a higher rate in most any proposed flat tax system compared to what they pay now.

If removing the deductions, exemptions and loopholes is able to generate so much revenue then why not just remove those deductions, exemptions and loopholes from our current tax system? We could keep the tax brackets in place and it will generate MUCH more revenue. That will allow us to balance the budget immediately and pay down our long-term debt. OK, maybe that would be too much of a burden on tax payers. So maybe each bracket could be lowered to bring revenue back to current levels or slightly above current levels.

Why do I say a flat tax is increasingly unfair the less income you make?

Your income does not dictate cost of living. Cost of living is the same for everyone – minus regional variations – whether you make $30 thousand a year or $30 million a year. Anyone that makes more than the basic cost of living may choose to spend above cost of living but that is a choice made available due to having more income than required to survive. Someone making significantly more than cost of living – like $30 million – may choose to spend significantly above cost of living, but again this is a choice. The basic cost of living did not change because income increased.

With a flat tax, as income decreases, the gap between income and expenses shrinks. Of course the opposite is true as income increases. This gap could be referred to as the discretionary part of your income.

Since the discretionary gap grows as your income grows – again, because cost of living doesn’t change with income – it means the more money you make the greater the ability to pay higher tax rates without suffering any greater burden than someone with a lower income paying a lower rate. This is the idea behind a progressive tax system with multiple tax rates based on income brackets. It’s fair to tax higher incomes at higher rates because it puts no greater stress on those making higher incomes in comparison to those making lower incomes and paying lower rates. Those making higher incomes still have a greater discretionary income compared to someone with a lower income, it’s just not as big a gap as would exist with a flat tax system. A progressive tax system, like our current system, ensures those that can afford to pay more taxes – with no greater burden – do so.

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  • I read today that Rick Perry has proposed a 20% flat tax. I cringed because as you stated, this would be a regressive tax and not a good solution.

  • It amazes me how these bad ideas continue to be embraced within certain circles.