Should There Be an INdividual Flat Tax
Should there be an Individual Flat Tax? Is the Current Income Tax System a ‘Good’ System? While there are a number of different ways to debate the appropriateness of an income tax system, most academicians would agree that there are four broad categories that encompass the basic principles of a good tax system – fairness, ease, minimal interference and conduciveness to economic growth, and adequacy. Clearly, the majority of Americans have issues with one or more aspects of the current income tax system. ... Fairness in the basic sense suggests that all taxpayers in similar circumstances should pay similar taxes. The numerous tax breaks throughout the current tax code make it commonplace for families with equal incomes to have very different tax liabilities in a given year. Many will argue that these tax breaks contribute to fairness since income is not always a reliable indicator of one’s ability to pay. For example, given the personal exemptions and medical expense deductions, a family of four with a chronically ill child will pay less in tax than a healthy family of four earning the same gross wages. Conversely, some tax breaks appear to contribute to a lack of fairness in one’s tax liability. ... Under our current tax code, the taxpayer with capital gains will have a much smaller tax liability than the wage earner. ... Consider the following statistics: In 1913, the initial tax code was 14 pages; today the code and regulations together consist of 7. ... The current income tax code contains five separate conflicting definitions of a child, ranging in age from 13 to 24. In 1997, Money Magazine invented a tax scenario of moderate, but not difficult, complexity and asked a number of professional tax return preparers to compute a tax liability. ... Forty-two percent of all taxpayers file a single page tax return, whether 1040A or 1040EZ, and spend, on average, less than ten hours per year on income tax matters. Despite this percentage, most Americans continue to resent the tax code for its complexity due to the widespread perception that only the rich, through accountants and lawyers, can take advantage of the various tax breaks, shelters, and loopholes in the code. ... Our current tax system is inherently non-neutral since it changes taxpayers’ incentives to engage in various activities. First, an argument can be made that a progressive tax disincentivizes workers who are successful in their efforts to earn more money by taxing higher incomes at a higher rate. ... Second, there is little doubt that the tax code influences the choice and composition of taxpayer investment portfolios. A taxpayer in the 35% tax bracket, when faced with a choice between a corporate bond earning 8% and a tax-free municipal bond earning 6% would choose the municipal bond, ceteris paribus. ... deficit, most Americans would either argue that the tax system is inadequate or that government spending is excessive, or both. As the above history of our income tax system shows, tax rates have generally been increased to finance wars. ... economy with a large-scale tax reduction even in the face of huge deficit spending resulting from the Iraq War. ... Other issues often cited as reasons for the need to replace our existing tax system include the straying from American values, the undue influence of lobbyists on Congress, and the lack of enduring principles. ... Many Americans today argue that the current tax code promotes immorality, and cite the fact that a man and a woman with dual incomes will pay less tax by living together than by getting married. Political Action Committees (“PACs”) and other interest groups continually lobby Congress for favorable tax treatment for their constituents; treatments that exacerbate the tax code’s complexity and lack of fairness. In 1995, for example, members of the Congressional tax writing committees comprised only 10% of Congress, but received over 25% of PAC money contributed. Finally, opponents of the current tax system cite a lack of enduring principles as a major objection to the system. To be effective, the tax code should be stable and reliable, not subject to revision and rewriting every year. Alternative Tax Systems My research considered the pros and cons of alternative systems – consumption taxes (retail sales taxes, value added taxes (“VAT”), and personal consumption taxes). Under a consumption tax, on the positive side, individuals would generally no longer be required to file tax and significant dollars would be saved in tax preparation and advice. ... Savings would be encouraged under a consumption tax. On the negative side, administration of sales tax/VAT plans would be high because of the need for sales tax verification.