#405 The Income Tax vs the Flat Tax vs the FAIRtax Part 2

This means every individual pays the same tax rate no matter what is the income. But, its success depends on the tax rate proposed as it should take in enough revenue to fund the government. In addition to this, most flat tax systems let exemptions for those people who are living below the poverty line. Thus each Proposal fir this tax system should be evaluated very carefully in order to assess it’s true revenue producing potential.

That can be fixed with a flat tax system that applies to capital gains and other earned income. A truly fair tax is a tax that first and foremost doesn’t burden the poor, next infringes on liberty as little as possible, next contains no loopholes and funds no special interest projects. It’s a tax that benefits people and leaves no room for exploitation by big business or politicians.

Looking at our current tax system we would lighten the burden from a lot of lower-middle to middle-high income families while also forcing the “rich” to pay the same share. This is to say, the federal income tax is only one part of a given American’s tax burden. A progressive tax (those who make more pay more) is generally “more fair” than a flat tax (everyone pays the same rate). Tax brackets in progressive systems are determined by income levels. Policymakers set income thresholds for each bracket, and the income within each bracket is taxed at the corresponding rate.

The Global Tax Deal, Tax Cuts, and Tariffs—5 Major Tax Debates

For any kind of investment taxation, it’s important to keep another point in mind. Let’s just look at interest income, where it is only taxed once as interest income. That is still in a sense an extra tax because if you imagine two people who both earn the same wages, one of them chooses to spend today and one of them chooses to save for the future and earn interest income on that savings. But then, the one who saves is also going to pay this extra tax on the interest income. And so that’s really an additional tax that penalizes the decision to save, which puts an extra burden on the person who decided to prepare for the future instead of spending today. We know that decisions about how much to work are somewhat responsive to tax rates.

I find it a lot easier to sit back and offer my thoughts on what should happen, but I’ll take a stab at your question. You know, I think there is – I would like to see the progressive consumption tax option adopted. I think, though, that the X tax – you know, it’s hard to explain to people it doesn’t really have a footing in our political debate right now. And yet, at the same time, the government still pulls in revenue from businesses. It raises some money from the investments that were made before the new tax system was adopted. It also pulls in some of the extra high returns that businesses may get on some of their investments, the real blockbuster investments that businesses pull in, you know, big returns on.

Stay informed on the tax policies impacting you.

• The page is a little long, as we cover every point and possibility in detail, so let’s start by looking at the bottom line on a flat tax vs. a progressive tax.
• Second, I have never believed that either of these tax reform proposals had a snowball’s chance of making it into law.
• In 1999, during the 106th United States Congress, Linder proposed a 133 pages fair tax reform, which aimed to replace various taxes, including payroll taxes, corporate taxes, gift taxes, and others, with a single national sales tax.

As for my personal opinion, I have to say the jury is still out on the Flat Tax. While it sounds good on its face, a detailed examination of the various proposals shows that some of the very same complexities of the current system are already embodied in the Flat Tax. Perhaps my biggest reservation comes from the knowledge that politicians will find it very hard to leave any level of flat taxation alone in the future.

• The concept of a flat tax system is often lauded for its administrative simplicity.
• And so even though the taxes we do collect are skewed more to be collected from the high-income groups, we’re still not actually taking as much from them simply because our overall tax burden is smaller.
• This simplicity can be appealing, but it also raises questions about fairness and equity.
• This is often illustrated by comparing the discretionary income before and after tax between different income groups.

Limitations of Progressive Taxes

They’re proposing a 30% sales tax rate and that’s not enough to replace revenue. And I think, given our deficit environment, obviously a tax reform is not going to be viable if it lowers revenue. The tax rate is presented as being 23% of the cost of goods, but this is a bit misleading.

Quickly Considering All the Different Taxes

Detractors, however, contend that a flat tax fails to account for the differing capabilities of taxpayers to pay taxes. The greatest criticism is that lower-income individuals could find themselves disproportionately affected by the uniform rate, where the same percentage impacts a lower wage earner more severely than a high-income individual. Last, critics also point out that the simplicity of flat taxes, while appealing, might oversimplify the intricacies of people’s financial situations.

In What Ways is a Progressive Tax More Fair Than a Flat Tax? – Further Justifications

The ongoing debate reflects differing priorities and values, with each system having its own set of advantages and challenges. The ultimate decision on which system to adopt depends on the societal goals and economic philosophies of a country. The flat tax system presents a compelling case for economic efficiency through its potential to simplify the tax code, reduce compliance costs, and encourage investment and work incentives.

For the bottom 50% of earners it isn’t the income tax, but payroll taxes, excise taxes, sales taxes, and property taxes that comprise their tax burden. In fact, the progressive tax brackets actually help those with lower incomes, because they can use credits and deductions to lower their marginal tax rate (AKA what income tax bracket they are in). Comparing progressive taxes to flat taxes is an ongoing debate, with both systems having supporters and critics.

With all that covered, let’s dig in and look at all the aspects of flat and progressive taxes. The page is a little long, as we cover every point and possibility in detail, so let’s start by looking at the bottom line on a flat tax vs. a progressive tax. Both of these systems may be considered “fair” in the sense that they are consistent and apply a rational approach to taxation.

I – politically, as a matter of realistic – realistically what can be achieved, I don’t see us adopting those Social Security and Medicare cutbacks without tax increases. You know, certainly no bipartisan agreement could do it just on the spending side because the Democrats would not agree to that. And I just find our current tax v the flat tax v the fair tax it hard to imagine Republicans ever doing that either.

I don’t think that necessarily is the worst thing in the world if we adopt a more sensible tax system. Yes, of course, all else equal, the tax system is going to have a bigger drag on growth at, say 20% of GDP or 21% than it would at 17 or 18%, all else equal. But if you have a better tax system, you could raise 20 or 21% of GDP and have less economic damage than you had raising 17 or 18% with a really bad tax system, so I think that also needs to be put into the mix.