Flat Tax: An Advantage and a Disadvantage

Many persons support replacing the current federal income tax, with its numerous forms, etc., with a flat tax. As I see it, a flat tax has one big advantage and one big disadvantage compared to our current federal income tax.

The Big Advantage
A huge advantage of a federal flat tax is its simplicity. If everyone paid the same percentage of our income in taxes, it would eliminate the need for millions of people to fill out many complex tax forms, as well as eliminate the need for a lot of record keeping for various tax deductions. It also could eliminate most of the pages of federal tax code--thousands of pages that few ever read entirely and probably no one fully understands!

With a flat tax, it would not be necessary any more for a typical person to either pay another person to fill out a federal income tax form or to devote hours to doing it himself or herself. I hold an MBA, but I still find filling out my annual tax return a time consuming task that is unnecessarily complex under the current system.

Under a federal flat tax, for wage earners whose only income is from paychecks that their employers withhold taxes from, filing a federal income tax return might be unnecessary. The employer would simply withhold the appropriate percentage of income from one's paycheck and the employee's taxes would be paid by the employer.

For example, here in Lexington, Kentucky (where I live), we have a city payroll tax. Those of us working for an employer get a certain percentage of our income (2.25% currently) taken out of our paychecks each pay period. Employers pay this amount to the city government, and employees do not need to file a tax return at all for this. Those of us who are self-employed do need to file a short form and pay the 2.25% if our net income level is large enough. But that form takes little time to fill out--the hardest part is filling out the federal tax forms necessary to get information for it under the current system. And persons running businesses will need to keep records of income and expenses under any tax system.

Above is a picture of form 1040, its 104 page instruction booklet, and some of the schedules that many persons needed to fill out their 2014 federal income taxes. Though many persons could fill out a shorter form with fewer instructions, others needed additional schedules and instructions. I am not convinced that the 2015 tax forms were easier or that the 2016 ones will be.

The Big Disadvantage
A huge disadvantage of a flat tax for most people is that under a flat tax most people will pay more federal income tax than they do now. You may ask why?

Under the current system, due to the "standard deduction," the "earned income credit," and numerous other deductions, the majority of citizens pay no federal income tax at all. In fact, many of us workers currently get a "tax refund" back from the federal government that is larger than the amount withheld from our paychecks. Eliminating all the deductions (which would happen with a flat tax) would raise taxes for the majority of taxpayers.

The relatively few persons who would pay less under a flat tax are primarily those with high net incomes who are currently in a high tax bracket. Therefore, those earning hundreds of thousands of dollars a year (or more) would pay far lower income taxes than they do currently under a flat tax, assuming that they don't have some type of deductions or other "loopholes" to reduce their taxes--which many do.

A Fair Compromise?
Perhaps the best approach would be neither the current system nor a flat tax. Instead, create a progressive tax with no deductions or only a few deductions. This would be similar to the current progressive federal income tax, but much simpler due to eliminating most deductions.

For example, perhaps persons would pay 0% in taxes on their first $5,000 in earnings (or some very small percentage just so they were contributing something), then pay a gradually escalating percentage as income increases. Persons earning over $1,000,000 a year might pay a marginal tax rate of 50% on income over $1,000,000. You may think 50% is exorbitant, but I am old enough (58 years old) to remember when the top marginal rate on the federal income tax was 70% (in the 1970s, and no I wasn't in that bracket). I think 50% is a nice medium between what I consider the too high rate some decades ago and the too low rate now.

Personally, I think it is a shame that so many persons devote so many hours each year to filling out tax forms and accompanying papers, reading the instructions for them, and assembling the records for the process. I strongly support simplifying the current federal income tax system.

But, I dislike the idea of a totally flat tax. Do we want a person making only $5,000 a year to pay the same percentage of their income in federal income taxes as a millionaire? I think some type of compromise is right. What do you think?

NOTE: This article is adapted from one I published January 1, 2012 on Newsvine titled "Flat Tax -- Good Idea or Bad Idea? POLL"