A closer look at the flat tax
Another form of taxation that has gotten greater attention during the last two presidential election campaigns is the flat tax.
A flat tax is a plan that will apply the same rate to every taxpayer, regardless of the income they have earned.
At present, federal taxes are calculated on a progressive basis beginning at the lower of six brackets — 10 percent up to 35 percent, depending on the increase in income.
A portion of income is taxed at ordinary income rates and other facets, such as dividends and capital gains, are taxed at another rate. By blending these two calculations, the total tax is determined.
The flat tax program would eliminate all deductions and exemptions that are presently allowed and work off of gross income only.
The proponents of this plan claim it would increase individuals’ desire to earn more because they eventually will get to keep more of their income.
It’s obvious that by accepting this strategy, the IRS code would be scrapped and fewer costs for administration would result in saving more money for the federal government.
Based on the complexity of the code, Americans spend more than 6 billion hours annually and there are more than 1,000 forms on the IRS website.
A former IRS commissioner has said, ”The tax code is so complex, I use a preparer.”
Another argument for this type of taxation is that it would eliminate the double taxation system we currently have on all income. Instead, the flat tax would only be applied to earned income.
As a matter of information, there are two types of income: earned and unearned.
Earned income comes from salaries, wages, commissions and self-employment. Unearned income comes from rents, annuities, pension dividends, capital gains and interest.
It is seen by many that eliminating tax on dividends, interest on savings and the capital gains on investments would stimulate investments.
This tax plan would encourage investments in new businesses and reward those who are risk-takers to pay as low a tax as possible.
As with any program, there are opponents who feel this tax system would cause the lower or even the middle class to pay more than they do under the progressive tax plan.
They maintain that by eliminating the unearned income portion, the working class would be supporting the wealthier class.
They claim there is more unearned income for the wealthier class that would not be taxed than there are exemptions and deductions for the lower group.
The opponents further state that the progressive tax system is fairer, as the rich would have more disposal income (income minus expenses) and therefore a greater ability to pay taxes.
Since the middle class makes up the larger part of the population, it is believed that the economy would be better stimulated if this group had more disposal income to spend on goods and services.
Everyone seems to be in agreement that the current tax system is broken, but discarding it for “what” is the unknown.
There is no one solution that will appease everyone. So rather than put in a new plan, which will come with its own set of problems, should we just look at what we have and begin a complete overhaul?
To put the issue into perspective, in many cases we have to first define income.
For example, if a corporation makes a profit and pays its taxes, then the dividends are paid out to shareholders, should they be taxed a second time?
Or if a person deducts mortgage interest from previously taxed income, should the interest received by the mortgage company be taxable ?