What do you guys think of a flat tax in the US?

[Oblesklk]

Well tax time is over for many of us. I've seen the debate show up in various places about the implementation of a flat tax in the United States. In fact, it was Forbe's main platform points years back when he ran for president.

Ironically enough, what brought all this up (for me) was the fact that Russia is using a flat tax system...kind of ironic for a country that used to be the pinnacle of "diseased, communist plots" is now using a capitalist system of taxation, while the US, the supposed bastion of capitalism in the free world, is using a socialist one. History has a nice way of mocking us I think 😉

Anyway, I already hold my very strong opinion on the matter, but I'm curious to hear what you folks think. This isn't just for Americans, naturally, I'd like to hear what other international folks are thinking about it.

Basically, one of the proposals they were kicking around worked something like this:

Throw out most of the IRS code as it stands now. Every American pays 17% on their income, regardless of how much you make in a year (as opposed to the graduated tax rate system we now use). Every person gets a set standard deduction, and personal exemption, like they do now. There wouldn't really be any deductions you could take other than the standard one. They were trying to make taxation so that "the average American" could file their own taxes and know what the hell they were doing by April 15th.

So the question is, would something like this work? I mean in practice, not in theory. If congress were to change all the federal income tax laws in 2003, to be implemented in 2004, what would you guys think of it?

Or alternatively, what do you think would be a good modification to the flat tax system to make it work right?

 

[TicklingDuo]

While a flat tax is a nice idea on paper, I'm not sure it would work in practice. The main reason for that is that there are so many people working full time who are STILL below poverty level. They would be in even worse shape if they got 17% of what already didn't pay the bills taken away.

I don't have any ideas that are more practical. But, something definitely needs to be done. The current system stinks!

Ann

 

[omega]

17%? God asks for only 10%

It's called a tithe. I guess that's Old English for tenth.

I live in a house, so as far as I'm concerned they can tax flats all they want.😕

 

[asutickler]

IMHO, a flat tax is a damn fine idea. The USA currently has just about the most moronic taxation system I have ever seen. It is DESIGNED to be punitive towards people who are successful, which is stupid and wrong. The loopholes built into the system, however, make it so that successful people with the know-how actually pay LESS than many others (namely the middle class), on a percentage basis. This is also stupid and wrong.


Ann raised a very valid point about folks who are poverty-stricken, but I think I might have a solution: Raise the "single" & "married filing seperately" personal exemptions to $15000, raise the "married, filing jointly" personal exemption to $30,000, and create a new "single parent" exemption for $20,000. I think that would cover most poor folks... unless they had a TON of kids. I think EVERYONE could live with those sort of exemptions. 😀 And if this leaves a little less for the government... well, tough. It's high time government tightened its proverbial belt, anyway.


Just my 2c


ASUTickler

 

[Oblesklk]

At the risk of being in the minority, I actually think the IRS and the United States does a pretty damn good job at collecting money from its citizens. No really, no sarcasm this time 🙂 I've studied tax laws for several years, and I'm actually fascinated by the stuff. The IRS is the single biggest collection agency in the history of mankind, and they do a pretty decent job, when you see what they're up against. I think our tax code, as it exists today, will reveal more about our society than we would ever want any future archeologists to discover...

I'd like to see congress let go of the leash that they have the IRS on now. I do think the "kindler, gentler IRS changes" implemented last decade were a good change, but I would personally like to see more audits done out there. Keep in mind that audits are designed to catch the crooks in action. If the IRS has their hands tied by congress and popular opinion, they can't really do their job well. And let's keep in mind this is NOT a good thing. That we, the honest folk, have to pick up the slack for all the evasion that goes on out there.

I'm getting a little off topic, but I like the responses so far. I won't actually talk about the flat tax itself yet, I'd still like to see if anyone else has any thoughts at the top of their head.

 

[Deleted member 2452]

it's long over due

i'm in favor of the flat tax, have been since dick army from arizon proposed it back in the early '90's.

10to 15% max. with personal deductions, and home mortgage interest deduction only.

that is an imminently fair system. and if the goverment can't live with that, then we need a new government!

steve

 

[Haltickling]

Wanna come to Germany? We never have to write checks for tax. The money goes directly from the employer to the State. We never see it, except as a figure on our payment sheets.

Our present tax system has different percentages, related to income, family status, number of children, etc. The average rate is about 30%, the maximum is 53%! And as we also have a rather voluminous system of social security (medical insurance, pension funds, unemployment insurance, compulsory for every working person), the average net payments show less than 50% of the actual income. Nice, isn't it?

In addition, we have an impenetrable maze of deduction regulations, which sums up to the fact that average employees have to pay the full taxes, whereas the multimillionaires can arrange to have the bigger part of their money in Switzerland or Monaco, where no taxes apply.

Just a less well-known fact about Europe's economy... 🙂

 

[toyou444]

I've always preferred a national sales tax. Its seems more fair to me. You want can afford to buy a $100,000 car? You can pay the tax on it too. Can't afford that and can afford a $10,000 car? Then you can probably afford that tax instead. It won't stop people from purchasing and it will allow them to pay taxes they can afford instead of taxes based on some system or formula It has to bvee a helluva more fair than the system in PA where its based on property!! Random assessments based on similar houses and land on what you could sell it for on the open market then taxed at THAT amount, no matter what you really paid! It's just lovely.

~ toyou

 

[Oblesklk]

Wanna come to Germany? We never have to write checks for tax. The money goes directly from the employer to the State. We never see it, except as a figure on our payment sheets.

The German system works just like the American then. If you can be considered an employee by someone else, you usually just have a set amount of money withheld from your paycheck, and then do an annual reconciliation at year end to come to the right number (which, for individuals, is due April 15th each year). Otherwise, you make estimated quarterly payments.

I just love giving our federal government an interest free loan for an entire year... 🙄

 

[Oblesklk]

I've always preferred a national sales tax. Its seems more fair to me.

After dealing with several state sales tax returns, I do agree with you on this. I would like to see all the states do more to merge their rules for these kinds of things.

But you didn't mean to implement a national sales tax instead of an income tax, did you? That would be WAY too easy (read: tempting) to evade taxes.

 

[Strelnikov]

I'd like to see several major changes to the US Tax Code:

(1) Stop pretending that Social Security is a pension program It's an intergenerational welfare program - run it like one. Cap Social Security benefits at current levels, adjusted for inflation. Take the cap off the tax, so that people like Bill Gates pay 15.3% of their total income into the system, not just 15.3% of the first $80,000 or so.

(2) Substitute a flat rate payroll tax for the personal income tax. No deductions and no personal exemption - the employer just cuts it out of your check and sends it to the IRS. Everyone pays 18% or whatever, from the first dollar earned to the last. Everyone should pay taxes, even the poor. Otherwise, some people get the idea that things that come from the government are free.

(3) All income or other benefits received from an employer should be treated as ordinary wage income. No special rules for executive perks, bonuses, stock options, etc.

(4) Do away with income taxes on businesses. Substitute something rational, like taxes on gross receipts or physical plant - something that's comparatively easy to measure, and difficult to evade.

(5) Do away with taxes on interest and dividends. The business that sends you your dividend check will have already paid taxes. You shouldn't have to pay taxes on the money a second time.

Strelnikov

 

[Oblesklk]

Some nice responses here, Strel.

I'd like to see several major changes to the US Tax Code:

(1) Stop pretending that Social Security is a pension program It's an intergenerational welfare program - run it like one. Cap Social Security benefits at current levels, adjusted for inflation. Take the cap off the tax, so that people like Bill Gates pay 15.3% of their total income into the system, not just 15.3% of the first $80,000 or so.

You're one of the first people I've seen that's made this observation outside the accounting and legal professions 🙂 That's exactly what SS is, a welfare program, our safety net. Which is why the current administration's attempt to privatize it is so laughable. OK, if I get to invest my own SS funds, I'll sink it all into Enron stock. Oops, that was dumb, now I'm screwed, with no SS. So basically we're back to starting an entirely NEW SS fund, but call it something else, for those that lost their "newly privatized" retirement funds in the markets. And yup, I do agree we should remove the 84k cap. Not any good reason I've heard that we have it there.

(2) Substitute a flat rate payroll tax for the personal income tax. No deductions and no personal exemption - the employer just cuts it out of your check and sends it to the IRS. Everyone pays 18% or whatever, from the first dollar earned to the last. Everyone should pay taxes, even the poor. Otherwise, some people get the idea that things that come from the government are free.

This is basically a flat tax, simplified. I won't get into it here too much, but it would never work. The simple fact is that our tax code is complicated and excessively long for a reason. That reason is over 100 years of tax courts decisions and IRS and congressional rulings/changes. The more simplified you make the parameters for taxation, the easier they are to classify to something else. Only earned income taxed? Switch all your investments to rentals...etc.

The reason it won't work is that it's way too easy to evade.

If you throw out all the current code, and start over from just tax wages. OK fine, as your advisor, I'd tell you never to hire employees and just call wages something else. There's a million ways to funnel money to someone, it's just a matter of calling it the right thing, sheltering it the right way, and all of a sudden, you'll see the lower and middle class workers shouldering all the tax burden, simply because they couldn't afford to hire someone to help them avoid their tax burden. Whether we like it or not, that's the reality of the situation. But after awhile, people are going to catch on, and the easy ways to avoid tax will get caught and abolished by the courts. OK, no problem, they closed one up, there's about 2000 more ways to weasel around it. By the time you close up all the loopholes and ambiguous wording, you're exactly where we are today 🙂 No better off than when you started.

(4) Do away with income taxes on businesses. Substitute something rational, like taxes on gross receipts or physical plant - something that's comparatively easy to measure, and difficult to evade.

There's already something like this in Washington state. Instead of a state income tax, our B&O taxes are based on gross receipts. I can't say whether it's an awful or wonderful system, all I know is we're having the same budgetary crises as most other states are right now 🙂 Anyway, gross receipt taxation is usually not a good idea, especially for newly started businesses. Startup businesses tend to accumulate a lot of expenses their first year. And even though they top a million bucks in sales (which looks impressive), they have may in reality, spent about 1.5 million getting there, including a personal mortgage on their home to get it off the ground. And I don't know what kind of rate you were looking at, but any tax off a million in sales would most likely force them to make an appointment with a bankruptcy attorney. Not good. So that's why we generally use net income as a good indicator of taxable base.

As for physical plant, we already have property taxes. There's some gray areas here with ownership. Again, you can set up all kinds of leasing arrangments or contracts which may or may not give you ownership of the property, hence there may or may not be a tax. If this is going to be your main source of taxing revenue, that would be a problem, I'd think, just because of all those ways around it.

(5) Do away with taxes on interest and dividends. The business that sends you your dividend check will have already paid taxes. You shouldn't have to pay taxes on the money a second time.

Subchapter S corporations don't generally pay taxes on dividends (although there's several exceptions to this, as you might imagine). The main reason for the double taxation of "regular" corporations is mostly because of the states. In theory, even if you owned 1 share of stock in IBM, Cisco, or Microsoft, you would have to file a state income tax return in EVERY state those businesses conduct business in (yes you'd have to report that 1 whole dollar to the state of Oklahoma...after spending about 20 hours of your life figuring how where to get an Oklahoma form, and reading all the instructions. Then repeating that for the other 49 states). Instead, we thought it would be easier if the corporation did that instead, so each owner wouldn't have to. So yea, there's a double taxation going on, but it's usually because it's more cost effective in the long run, and much easier to raise capital than other forms of business.

Nice thoughts on the matter though. You've certainly done your homework.

 

[toyou444]

After dealing with several state sales tax returns, I do agree with you on this. I would like to see all the states do more to merge their rules for these kinds of things.

But you didn't mean to implement a national sales tax instead of an income tax, did you? That would be WAY too easy (read: tempting) to evade taxes.

Actually I was! LOL! I can see you're point, but aren't there many many people who manage to avoid paying the income tax too? Wouldn't a more effcient system be to have a government agency tracking sales figures, which they do anyway, then the maze of agencies keeping track of income. Where I live we have TWO organizations that collect the loacl income tax...they get .5% each!

~ toyou

 

[Strelnikov]

Oblesklk, your objections are valid but I'm not sure that the problems are insoluable. Put me in charge of the IRS with authority to make real changes, and I'd have it straightened out in about 6 months. We just have to apply the duck test:

"if it quacks like a duck, waddles like a duck, swims and dives like a duck - call it what you will, it's still a duck."

Complexity allows lawyers and accountants to game the system, as you said. That disadvantages the majority of us who can't afford them. It has to be kept simple. Joe Blow can understand that if you work for someone, then you're an employee. The compensation you get in return is a wage. But it would take hard-nosed enforcement, and examples would have to be made of violators.

Strelnikov

 

[Oblesklk]

Ahhh, the old duck test 🙂

I agree that if you had a dictatorship going, then you have some valid points. There's definitely several things in this country we'd all like to have cleaned up in a ruthless and efficient manner.

However, the dark, cold reality is that we are now, and probably will be for several more centuries, a republic. So we have checks and balances, and all that good stuff. And unfortunately the duck test doesn't always work there. When it comes to something as important as taxes, there really isn't any such thing as "common sense" (under the current system anyhow). You can arrange things any manner of ways, and when there's very real money at stake here, it just seems silly not to take advantage of a simplistic system.

It's the trade off, I imagine. I will admit to you right now that sometimes I do yearn for a king in this country. Problem is no matter how benevolent your new ruler is, you will always have the problem is succession, and have to deal with the crazy nut that followed your "perfect king." Oh well 🙂

As Americans, we've chosen the bureaucracy over the alternatives for a reason.

 

[Strelnikov]

The IRS has imperial powers already, and Tax Court is the only judicial system in America where the accused is guilty until he proves himself innocent. OTOH, if they were nice guys, no one would pay.

Strelnikov

 

[shark]

I think the flat tax is the best system.Everyone benefits from our existence here to varying degrees,and a flat rate will have everyone paying into the system an amount proportional to their level of benefit.

I would allow deductions for charitable donations,and might allow for phasing out the mortgage deduction....don't buy what you can't afford.
On average,you only get 30% of your deduction back,but charitable causes might well suffer without some form of incentive for donating.

A change like this would be pretty involved,so it might take some time to implement.

Legal complexities would be nonexistent,as any income is income.The current IRS code will be history, and everyone will support the system
according to their level of benefit from it.