The Flat Tax

The Flat Tax

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The Flat Tax

TITLE: THE WRONG WAY TO SELL A NEW IDEA

Many people would like you to believe that flat tax is so named
because it will flatten your finances. That at the least is the
intended conclusion. By eliminating personal deductions like
mortgagee interest payments, the study claims, the flat tax would
reduce housing values in this country by upwards of 10 percent.
The study's methodology is shaky at best, and the jury on
housing values is still o ut.

Despite the forces allied against the flat tax, tax reform has
grown steadily because the current tax system is so unpopular
and the alternatives promise so much. But in addition to the
possibility of lower housing values, the flat tax poses several
other serious problems too easily dismissed by its advocates.

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Businesses may be the flat tax's second biggest obstacle. By
reducing the cost of compliance with the tax laws and removing
uncertainties about the tax situation, the flat tax would eventually
benefit businesses. However, they would see their tax burden
rise by about two-thirds, on average, from 31 percent of the
total tax burden to around 50 percent. This tax increase on
businesses would result from the loss of deductions for state and
local taxes and for employee fringe benefits, among other things.

Though businesses will try to pass on these costs to consumers
and employees-by raising prices and trimming fringe benefits, for
example-shifting the nations tax burden to the business
community will not produce successful tax reform. Next, the flat
tax initially would raise taxes on the middle class by 20 percent.
On average, a family with between $40,000 and $50,000 in
adjusted gross income would see there taxes rise about $700 to
about $7.500.

The flat tax also appears to have a major fairness problem. For
example consider two families. The Jones have a combined
salary of $50,000 in wages. Under the flat tax, a 20 percent rate
would cost this family $3,700. Now consider the Smiths, who in
r etirement consume every dollar of their $1 million in dividend
income. Under the flat tax, the Smiths owe no tax at all because
capital income is excluded from the tax base. To be sure, their
dividend income was taxed at least once at the business level
before they received it. But the perception would persist that a
high income family would pay no tax. Will tax fairness be defined
so that individuals consuming significant amounts of capital
income would pay little or no tax?

Though difficult issues, they are not impossible to resolve.
Moreover, the system's advantage could well outweigh it's
drawbacks. The flat tax could prove a boon for the economy by
eliminating a passel of convoluted tax disincentives to saving and
inve sting. Economists will quibble over exact estimates, but
there can be no question that savings and investment will
improve in both the short and long run under a flat tax.
Advocates are correct to insist that the flat tax would be much
simpler than the current tax system. The new system would tax
only the income derived from individual labor, after allowing for
personal exemptions. There would be no deductions. The fla t
tax would tax businesses' net cash income at the same rate that
applies to individual income, while eliminating all the apical tax
provisions that penalize some businesses while benefiting others.

One big problem with the current system is that it costs from
$150 billion to $300 billion annually to operate. The flat tax, by
contrast, would cost about 1/5th as much once fully phased in.
These cost savings are equivalent to more than a $100 bil lion
tax cut for the American people.

No tax system is perfect, and no tax reform proposal is without
flaws. In the end, the flat tax's greatest strength is that it would
remove the current tax system's depressing effect on the
economy. This over time, could make up for all the problems me
ntioned above. But before it can pass the problems must be
addressed.
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