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Flat tax: The good, the bad and why it won't happen

Wish taxes were so simple you could file them on a postcard? Some say a flat tax could make that possible.

By MSN Money Partner Feb 11, 2014 2:21PM

Uncle SamBy Maryalane LaPonsie, Money Talks News


Money Talks News on MSN MoneyWith tax season upon us, you may be wondering why the government has to make things so complex.


According to the CCH Standard Federal Tax Reporter (.pdf file), the tax code clocks in at an astounding 73,954 pages as of 2013. It includes seven tax rates, four standard deductions and at least a dozen tax credits for individuals. Then there are the exemptions, the itemized deductions and the special tax rules.


And when you think you're starting to understand how the system works, the government likes to throw in a few curveballs, like the alternative minimum tax.


Wouldn't it be easier if we eliminated 73,950 pages of hoops and simply taxed everyone using the same percentage?


Well, that depends on who you ask.


Basics of our progressive system

Before delving into the pros and cons of a flat tax, let's go over how the current system works first. The current federal income tax system is progressive, meaning the more you earn, the higher percentage of taxes you pay.


Here are the brackets for your 2013 taxes (those would be the ones you're working on right now):

  • 10 percent
  • 15 percent
  • 25 percent
  • 28 percent
  • 33 percent
  • 35 percent
  • 39.6 percent
Your tax bracket is determined by both your income and your filing status. Your bracket can also depend on your exemptions and deductions, which bring your taxable income down.


In addition, it's important to know that the tax rates above are marginal. That means, if you fall into the highest tax bracket, you aren't paying 39.6 percent on all of your income. You only pay that rate on the portion of your income that falls into that tax bracket. For a single filer, that means you would pay 39.6 percent in taxes on any income in excess of $400,000 for 2013.


To help put it into perspective, here's an example published in Forbes last year that assumes you earn $100,000 and are in the 28 percent tax bracket:

You would owe 10 percent of $8,925, 15 percent of $27,325 (the difference between the top and the threshold of the second tax bracket), 25 percent of $51,600, and 28 percent of $12,150 (the difference between your income and the threshold of the third tax bracket). That calculation results in $21,293, or an effective (not marginal) tax rate of 21.2 percent.

Why having a flat tax would be awesome

If that all seems about as clear as mud, then you have stumbled upon one of the key reasons some people advocate for a flat tax: simplicity.


A flat tax would make taxes easy. No matter what you earn, you would pay one rate for all your income. A pure flat tax would also eliminate deductions and credits to further streamline tax filing and payment. In arguing for his flat tax proposal three years ago, Texas Gov. Rick Perry said taxes would become so simple that taxpayers would be able to "complete their returns in minutes and submit them on a postcard."


Proponents of the flat tax also say that beyond being simple, it's also fair. Since everyone would pay the same tax rate, all would be contributing an equal proportion of their income to the maintenance of government services.


Finally, flat tax supporters say a simplified, uniform tax rate would encourage economic growth. They say that many fast-growing economies are found in countries that have flat, rather than progressive, tax systems.


Why having a flat tax would be awful

Opponents of the flat tax say supporters are blowing smoke and are actually intent on creating a system that favors the wealthy.


While flat tax supporters point to former Soviet countries as examples of nations that saw tremendous economic growth after enacting a flat tax, opponents say the success in Eastern Europe has been overblown. In addition, some countries that had enacted a flat tax are now repealing those laws.


What's more, opponents say a flat tax may simplify the tax code, but it would do so at the expense of lower- and middle-class families. Most flat tax proposals set taxes in the range of 17 to 20 percent, meaning low earners could pay more while wealthy families get a break. This may be especially true if a pure flat tax is enacted -- that is, one that includes no deductions or credits.


Not only would a flat tax widen wealth inequality in the country, opponents say it might allow the rich to duck paying taxes on a large portion of their income. Many proposals exempt investment income, which can be a major source of money for some affluent households. Small businesses may also suffer under a flat tax if they are unable to deduct expenses that cut into profits.


And why you may never see a flat tax

While the debate regarding the flat tax can be interesting and heated, it's largely theoretical at this point. Consider how many politicians and economists have advocated for a flat tax during the past 30-plus years. Here's a sampling, compiled by NPR:

  • 1981. Hoover Institution economists promoted a 19 percent flat tax that would exempt lower-income households, such as families of four earning less than $25,500 annually.
  • 1992. California Gov. Jerry Brown, a Democrat, proposed a 13 percent flat tax with limited exemptions. He also suggested we scrap the Social Security tax.
  • 1996. Republican Steve Forbes made a flat tax one of the centerpieces of his presidential bid. His plan would allow standard and dependent deductions while instituting a 17 percent flat tax.
  • 2011. Several Republican presidential candidates embraced the flat tax that year. Herman Cain recommended it be set at 9 percent while Rick Perry proposed an optional 20 percent tax.

However, these proposals and others like them have failed to gain traction. It’s not necessarily because people love the current tax system. Even those who oppose the flat tax say our current tax code is broken.


However, when our Congress can't even agree on an annual budget, it seems unlikely it will be able to crack open the tax code and make meaningful changes, whether that would be to simplify the current version or replace it altogether.


So for now, it appears we are stuck with 73,954 pages of tax time fun.


As for the flat tax, what do you think? Do you prefer the simplicity of a flat tax or do you think those with more money should pay more taxes?


More on Money Talks News

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540Comments
Feb 11, 2014 4:07PM
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It won’t happen because it will take away the power of congress.

 

They get donations and support from corporations, PACS and special interest groups in exchange for favorable tax treatment in the form of tax credits, tax breaks or other favored status.

 

If we went to a flat tax or national sales tax they would not be able to offer those favors in return for donations and other goodies.

Feb 11, 2014 3:47PM
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Whoever wrote this article left out the most important tax bracket:  0%.  Just about half of all people who file Federal income tax returns do not pay any tax at all . . . that's right, zippo!  In fact many in this category actually file in order to get money back by claiming tax credits.

So, with about half of tax filers---most of whom are potential voters---not paying any Federal income taxes under the current system, it there really any expectation that politicians would disturb their comfort zone by forcing a flat tax on them ??

No way this will ever happen.
Feb 11, 2014 4:11PM
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The real reason that we won't see a flat tax is the same as why we won't see term limits.....the fking congresspersons are too beholden to themselves, the lobbyists, and all the lawyers and accountants and government workers who would lose their jobs.
Feb 11, 2014 4:50PM
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How about an article on less Govt spending.
Feb 11, 2014 4:41PM
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Flat tax wont work because bleeding heart liberals wont have enough money for their countless social programs.
King Obama wont allow flat tax because that makes the gov't smaller.
Feb 11, 2014 4:56PM
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GET YOUR BILLION BACK!...... That's why we can't get a Flat Tax or The Fair Tax Plan....  we would no longer need to pay for someone to do our taxes or buy expensive software to do it ourselves. We pay more then a billion dollars in that ad to just get our taxes done!


Tax prep outfits, CPA's, accountants etc.... = huge lobby to keep the tax code a big mess so no one can fill out a post card to do their taxes, or just pay a national sales tax on every thing they buy to replace the income tax code.


One of the other biggest problems is that the current tax code makes it far to easy for people to not report income.... I will bet EVERY single person that reads this knows someone that works for money under the table or does not report all their income (waitresses) let alone all the illegal things that some people do to make money.... ie Sell Drugs........ The Fair Tax plan would get everyone of them to pay their share of taxes.

Feb 11, 2014 5:07PM
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Flat tax won't happen because it makes too much sense for liberals. Liberals hate the thought of it because they wouldn't get to beat up on the wealthy any more.  Poor people should pay tax to. Every one should have the same percentage of skin in the game.
Feb 11, 2014 5:03PM
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We won't see a flat tax because of the Democratic party and their love for power.  They rely on taxing the middle class to death, so that they can still get campaign contributions from the rich and votes from the poor paid for by middle class tax money.
Feb 11, 2014 5:01PM
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H&R Block & Turbo tax will never allow their businesses to vanish in the name of a simpler tax code.  If they had their way the tax code would be 100,000 pages longer and only published in Latin.
Feb 11, 2014 5:23PM
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The simple fact is the rich in this  country pay most of the taxes..under a flat tax everyone would pay. the best part of a flat tax it would be very difficult for the Goverment to raise taxes because ( EVERYONE) would be paying....A flat tax  would be self restricting on more tax revenue..... an added plus it would help keep the govt from always getting bigger... PEOPLE ARE NOT AS LIKELY TO RAISE TAXES IF IT INCLUDED THEMSELVES
Feb 11, 2014 6:17PM
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the problem is not how we are taxed.

the problem is how it is all pissed away.

Feb 11, 2014 3:47PM
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When the Federal reserve System was enacted the income tax was established.  Our government gave up the right ot print their own money and gave it to the Federal Reserve which is a private banking cartel.  Our only purpose in paying income tax is to service the debt created by the Federal Reserve printing money out of nothing and in turn loaning it to the government.  We are all slaves to the banks and they own the government and the world for that matter.  We need a revolution and the bank cartel members should all be tried and executed for what they have done.  Ahhhh... When will America wake up?  It is already too late. We are on a path for a total collapse it is all over with.  Once it all collapses the banks will issue a cashless one world currency and then the world will be totally controlled by them.  It is only a matter of time.
Feb 11, 2014 4:49PM
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Since corporations are people, according to the Supreme Court, I suppose they should be taxed at the highest rate if they rake in over a certain amount of $$$. Of course this is not realistic and I am joking, but it would be nice if corporations paid their fair share if they are doing business in this country. The corporations that have moved their headquarters to Scotland to avoid US taxes should be taxed heavily if they want to continue to do business here. Fair is fair.
Feb 11, 2014 5:15PM
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As was mentioned in a previous post the Fair Tax Plan would be an economic boom and would be one of the fairest ways of financing our government.  If you've never heard of it, or don't understand it, I implore you to research the idea.  Not only would it do away with IRS, EVERYONE would be paying to run the country.  Unless there is an unrelenting push from the public this bill in Congress will never see the light of day since they won't get the payoffs from PACS and they will have to vote to raise the tax as outlined by the Fair Tax system.  Check it out!
Feb 11, 2014 3:26PM
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How about eliminating the income tax, period!  Federal taxes should be paid by tariffs, import fees, businesses doing interstate commerce, as spelled out in the constitution.  Add to that list people making money with money, i.e. investors....the tax burden becomes a cost of doing business passed on through price increases on goods and services, and people with money to invest in businesses can afford to pay taxes on their profits.  Fewer sources of tax revenue means greater control against fraud, and a much cleaner system for everyone with fewer prying eyes looking at ordinary citizens.
Feb 11, 2014 3:42PM
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the income tax  wasn't designed to be fair it was designed to raise money to run the government. Also all the exemptions, filing status, deductions and so on are there from the  political parties  pushing their domestic agenda.  You want people to buy houses you give a deduction for mortgage interest. You want people to donate to charity then you give a deduction for that . So the sooner you realize that the sooner you will understand flat tax is never coming.  Also all 73,954 pages are not for individuals. It is the entire tax code including corporations, partnerships ect and it includes the regulations which are there to explain the code.  
Feb 11, 2014 6:18PM
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Primary reason the fair tax won't happen is because it is a fair tax and government don't want anything to do with honesty and fairness....
Feb 11, 2014 6:04PM
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I'm a pretty liberal guy and I don't have any problems with a flat tax.  
You make $10,000 that's too bad - 17%.
You make $300,000 great - 17%
You make all your money off investment, fantastic - 17%
You have no investments and make everything in an hourly job, good - 17%
You decided to have 7 kids, good for you - 17%
You decided to have 0 kids, great - 17%
You pay $60,000 / year in mortgage interest, nice to be able to afford that- 17%

A flat tax doesn't change how much money the government has, it only changes who they are getting it from.  Now if congress wants to insensitive certain behaviors, they can do that, but the money needs to come back in the form of a rebate.  That way, it's totally transparent how much they are giving up for whatever they want to give money to.   
Feb 11, 2014 6:21PM
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If you read the Constitution designed by our forefathers, it says that tax revenues were primarily designed to provide for military security and should be derived from three sources:


1.sales tax on consumption (the more stuff you buy the more tax you will pay to acquire your toys)

2.excise tax (on harmful but not illegal goods like liquor and tobacco)

3. tariffs


The intention was that we would NEVER pay taxes on our income earned made or our property owned.


Boy has the genius spirit of those original men been shamed with the current system we have.


Feb 11, 2014 5:27PM
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If everyone had skin in the government game, the US would be in better shape and citizens would actually care.  It would become my money versus someone else's.
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