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Flat tax? Not so fast

By Kay Bell · Bankrate.com
Friday, October 21, 2011
Posted: 11 am ET

No one likes paying taxes. But would a flat tax make more of us tolerate the task more?

Republican presidential hopefuls Herman Cain and Rick Perry are betting their path to the White House is along a flat tax route.

A tax system in which all taxpayers pay the same percentage rate obviously would be simple. And if the flat tax is implemented in its purest form, all existing tax deductions and tax credits would be eliminated, making filing that much easier.

But the issue of tax fairness, which is one of the drivers behind the Occupy Wall Street protests, is another thing.

Obviously individuals with higher incomes would pay more tax. However, they have more discretionary income.

The rest of us tend to walk a finer line when it comes to money to spare, be it for an occasional splurge or to pay Uncle Sam.

And the poorest folks usually use up all of their income to meet their needs, what my grandmother called living hand to mouth. Sure 10 percent of $20,000 is "just" $2,000. But that's $2,000 that a family depending on the full $20,000 needs to pay for or buy utilities, transportation costs and groceries.

Meanwhile, a person making $200,000 would owe $20,000. But they still have $180,000 left compared to $18,000 for the taxpayer at the other extreme of the earning scale.

Yes, this example is simplistic. That's the point.

As much as we'd all like to make taxes simpler, personal financial and tax situations never are.

The Tax Policy Center, a Washington, D.C., tax and economic policy think tank, conducted a distributional analysis of Herman Cain's 9-9-9 plan and found that it would raise taxes for 84 percent of the population, primarily affecting low- and middle-income families.

Cain and other flat tax proponents say they'll offer exemptions for lower-income workers, although the former Godfather's Pizza CEO isn't offering any specifics yet.

Some flat tax plans of the past proposed retaining popular tax breaks, such as the mortgage interest deduction. But when you start adding back tax breaks, there goes the simplicity factor.

Then there's the rate itself. For illustrative purposes, I chose 20 percent, but Treasury Department calculations in 2005 found that a flat rate of 34 percent would be needed to replace the income tax -- and that included leaving the payroll tax in place.

The top income tax rate in our current progressive tax system -- that is, tax rates start at 10 percent and increase as taxpayers earn more money -- is 35 percent.

Of course, some say that the flat tax is simply a back-door way to spending cuts. If you institute a flat tax at a rate too low to adequately fund the federal government, then Congress would be forced to make spending cuts.

Politicians wouldn't be that sneaky, would they?

Do you support a flat tax? At what rate? Would you surrender your current tax breaks for a flat tax?

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10 Comments
Randy
October 25, 2011 at 2:21 pm

Today's tax structure provides some "welfare benefits" in the form of EITC. This is money that is given to low income individuals and couples to help pull them up in society. The amount increases as income goes up, reaches a max and then decreases. Past presidents called this "workfare, not welfare."

I've yet to see a flat tax plan that adequately addresses the EITC. Either they have another method to incorporate this welfare, or they are eliminating it. Either way, they should explicitly say what they are doing.

I'm not saying I support EITC or that I don't. Today, it is the law of the land. Cain's plan ignores it. Haven't read Perry's plan yet.

John C
October 24, 2011 at 3:05 pm

I'm sorry but by Business Deduction, I mean the Job Related Expenses deduction. I did't mean to cause any confusion.

John C
October 24, 2011 at 2:59 pm

I see some real problems with the Flat Tax idea, especially regarding the Home Mortgage Deduction. Without that deduction, what benifit would there be to own a home. Most people purchase a home for the tax deduction and the home of increased equity. Take away the deduction and you are left with the hopes of equity. Now consider that many people will drop their hopes of home ownership for the security of renting a home instead. No headaches associated with home repairs and costs and a set amount to pay each month (no surpirses). This will kill the housing market (worse than it already is) and drive home prices down (more loss of equity). It will also stop people from buying homes to rent. Without the tax benifits, owners will have to push up rent amounts to make up for the amounts they are losing. As a result, we will all be paying more to rent and once again, hurting the working class.
Instead of looking to a Flat Tax, how about doing away with some of the more abused tax deductions that are now on the books. The Business Deduciton comes to mind for me. How do most rich people hide from paying their fair share in taxes? The Business Deduction. This is used primarily by the top 5 percent earners. If that is who you want to pay more taxes, then take away that deduction. Plain and simple resolution for a complex problem.
Just a thought.

Travis
October 24, 2011 at 10:46 am

How about the fact that no matter what the presidential hopefuls are promising, none of them would be able to enact such a policy within the Oval Office? Why don't we talk about that?

kking
October 23, 2011 at 1:14 am

Boo! Hoo!

Anne
October 21, 2011 at 5:36 pm

There are two issues that need to be addressed. One is that a consumption tax that makes cash earners, drug dealers, pimps, the entire underworld pay their fair share. most of them are not filing at all, forcing the rest of us to pay more to keep the country afloat. The other thing is that the "flat tax" only changes the rates and removes "personal" exemptions and deductions. But if you have a business, or rental property, you still have to have all of those interest, depreciation, taxes, bookkeepers, repairs, maintenance, etc. expense deductions that people always did, making the tax code almost as complex as it is now. What about the income exclusions? Are you for a flat tax that eliminates employer reimbursements for travel? That is Section 62, what about fringe benefits that are excluded under Section 132? What about the exclusion for gifts at Christmas, that's Section 102. Are you really going to have your child's $200 bike show up on his income tax return? There are very few sections of the Code that relate to personal deductions, there are a lot more that relate to income exclusions. Insurance reimbursements. How are we going to decide WHAT to tax in this new flat tax system?

Tom
October 21, 2011 at 3:24 pm

@Jay: If there are any exemptions it wouldn't be a true flat tax, though. It would again be a tax bracket system with the first bracket $0 to $30k: 0 % and the second bracket $30k+: xx %

Jay
October 21, 2011 at 2:37 pm

You forgot under a true flat tax system that there is typically an exemption for the first $30k or so in income. So you're example of someone making $20k doesn't work because they would owe $0 in taxes, like they do now.

Tom
October 21, 2011 at 12:26 pm

Flat tax rates always affect lower to middle class much more negatively than higher income households, which tend to benefit from them. Sales tax already is a flat tax and at least when it comes to food affects each of us the same, whether we earn minimum wage or a million a year. I'd consider myself upper middle class and I could care less whether my groceries are taxed 3%, 6%, 20%, or even 50%. The tax burden would be a drop in the bucket for me. But for someone making minimum wage it probably makes a big difference whether they pay 3% or 6% tax on food. Same applies to taxing income of course, except that the effect is much greater.