The Flat Tax Myth

 

The concept of a flat tax bears some explanation. There are three main types of taxes: the progressive tax, the regressive tax, and the proportional tax. a progressive tax taxes the wealthy more than the poor, a regressive tax taxes the poor more than the wealthy, and a proportional tax uses the same percentage across the board regardless of income.

Many of the taxes you pay today are flat taxes. When you get a drivers license or library card, you pay the same as everybody else. Sales tax is a flat tax.

The idea of a flat tax for federal and state income tax appeals to many conservatives. Almost every year in congress bills are introduced that directly relate to the concept of a flat tax. Steve Forbes ran for president in 1996 on a platform of a 17% flat tax.

In talking about the flat tax it is important to note that there is difference between the flat tax in theory and in the real world. When assessing the validity of any proposed flat tax one must think about the context within which it is being applied, as well as how the author is defining the term "flat tax." With a flat tax, all taxpayers would pay the same rate.

Under a flat tax system for federal and state taxes, paperwork would be largely eliminated as taxes could be filled out on a single sheet of paper, but that there would also be a huge public outcry if the government don't have deductions for charitable contributions, mortgages interest, real estate taxes, etc.

Remember that once you allow anything like deductions for real estate or child support then it is not a flat tax anymore. for example, students that have to pay interest on their tuition loans get a tax credit. If that were removed, students would lose that incentive. But if you left it in, then it would no longer be a flat tax. This would affect many areas, including charities and the disabled.

The popular conception of a flat tax is that it would lower taxes for the wealthiest and raise taxes for the poorest - unless you lowered all taxes to the lowest level, but this would (of course) generate insufficent revenue for the state and federal government.

If the United States were to adopt a proportional tax system, that is to say a tax rate that averages the rates paid by the upper and lower classes, the tax rates for those with lower and higher incomes would have to change in proportion to generate the same income.

Our present tax system is by definition largely progressive, which means that how much you pay in taxes is based on how much you earn.

For example, the average federal tax rate for the bottom 50% of taxpayers in 2003 was 2.95%, while the average federal tax rate for the top 50% of taxpayers was 13.35%.

in a proportional tax system, the tax rate for the top 50% would go down, and the average federal tax rate for the bottom 50% of taxpayers would go up. If the tax rate for the lower percentage of taxpayers goes up, this would give them less available income to spend. The top 50% would have a larger percentage of their available income to spend.

The subject is actually far more complex than the scope of this small article, but there are economists that say as a nation, we are already paying a flat tax. According to an article in the New York Times, the different effects of payroll, state and local taxes the tax burden is probably the same or higher on the poor than the rich.

An article in Slate magazine, Tax Rates Are Already Flat, digests some of the material in the New York Times and states: "the Times has provided a more precise accounting that shows that those in the bottom quintile (people earning on average $7,946) pay almost exactly the same percentage of their income in taxes as people in the top quintile (people earning on average $116,666). The bottom fifth pays 18 percent, the top fifth pays 19 percent, and the three groups in between pay between 14 percent and 17 percent—which is to say, roughly the same. Obviously there's some individual variation, but on average Americans pay approximately 17 percent of their income in taxes, no matter what income they earn."

This would indicate that if you are an American citizen and all of the factors are considered, you are already paying a flat tax. The concept of a progressive tax in the United States is something of a myth.