Comparing flat tax to current federal tax system


The whole of the current federal taxes is a progressive system. With the current system the higher the household income the more taxes you will have to pay and the lower the household income the lower the amount of taxes you will have to pay will be. Not all taxes under this system are progressive, Estate tax is the most progressive, however, individual and corporate tax is also progressive. Pay-roll taxes on Social Security and Medicare are regressive taxes which means that they collect a higher share of income from lower income households than they do from higher income households (Rohaly, 2008). The Federal taxes include several different brackets to file from, these include: Married filing jointly, which starts at 10%, Head of household, which starts at 10%, unmarried individuals, which starts at 10%, Married filing separately, which starts at 10%, and Estate and trust which start at 15%, all of these start at a specific percent and go up depending on the amount of income brought in to the household. These brackets only include individual tax; there are many more complicated procedures and brackets when you get into the business aspect of filing taxes (

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What Happened To It

In 1986 Ronald Reagan signed the Tax Reform Act, this act reduced the top marginal rate of taxation to 28%, and this is down from a huge 70% in 1980. The Tax Reform Act got rid of $100 billion in wasteful tax shelters, it also improved incentives to work, save, and invest. This act only lasted about 4 years before George Bush signed the Omnibus Reconciliation Act in 1990 and Bill Clinton signed the Omnibus Reconciliation Act of 1993. Both of these act's proclaimed $500 billion in deficit reduction, so taxes got raised on the rich and lowered on the poor. In 1986 there were two tax brackets 15% and 28% and by 1995 there were five tax brackets 15%, 28%, 31%, 36%, and 39.6% (Rubushka, 1995).

What Federal Income Tax Costs the People

First, the Senate Finance Committee and the House Ways and Means Committee benefit the most from income tax. The members of these two committees collect twice as much in contributions as the Senate or the House. Second, the members of congress share the benefits of income tax with more than 70 thousand highly paid lobbyists in Washington DC and with several hundred lawyers, accountants, sellers of tax shelters, and software suppliers according to The Flat-Tax second edition. Two large costs that impose the American people are direct compliance costs and indirect economic losses from disincentives due to the complicated and high rate federal tax system. Studies of the Burden of the Tax System and the studies of Tax Burdens partially explains why every change in federal income tax is judged on who wins and who loses. The compliance burden of individuals 50 years ago was a mere 1.2 percent compared to 1985 when the compliance burden made a huge jump to 24.4 percent. In 1993 the IRS included a section in the instructions packets of the tax forms that told you how much time it should take you to fill out your paperwork, it concluded that with the most popular tax form the 1040A it should take you about six and a half hours to fill out your forms. The amount of time goes up from there when you have to add additional information. With the federal tax system we spend roughly $50 billion to file and pay people to process our taxes each year

(Rubushka, 1995).

Flat Tax

What Is It

Flat Tax is a more simple way of paying your taxes. Instead of all the different forms and paper work that comes along with traditional federal taxes, Flat Tax would require you to fill out one of two postcard size forms. The two forms are, a Labor income form and a business and capital income form. Flat Tax treats all tax payers the same, instead of having different levels of tax based on income, everyone would pay the same percentage of tax no matter what income level they are. Flat Tax would lower marginal tax rates and eliminate the tax bias against saving and investing. This would help to improve the economic performance in the global economy. There have been many proposals for a Flat rate tax and not one of them is the same but they all have similar points of interest among them. The points that the people writing the proposals find important are: A single Flat Tax rate that is less than 20%, Elimination of special preferences, no double taxation on saving and investments, territorial taxation, which says that people only be taxed on income earned inside the U.S., Family Friendly, which says that households would receive exemptions, such as the size of your family determines how much money you must make before the government can tax you, the amount of the exemption will be higher than it is under the federal tax system, Flat Tax would be consumption based. Flat Tax is based on income, only once at a low rate when it is earned. A Flat Tax is similar to a sales tax in the way it is collected when you purchase something but never again(Mitchell,2005).

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Advantages of Flat Tax

Some of the advantages of a Flat Tax system are that a Flat Tax system would improve the economic performance by lowering tax rates and ending the tax codes bias against saving and investing. The thing that most people find to be most persuasive about Flat Tax is the simplicity of the system, one set of instructions and two simple post card size forms. Flat Tax would increase the incentives to work, save, and invest and it would also spur increased productive economic behavior which would lead to a boost in the economies long term growth rate. "According to Harvard economist Dale Jorgenson, tax reform would boost national wealth by nearly $5 trillion. It would do this in part because of all income producing assets would rise in value since the Flat Tax would increase the after-tax stream of income that they generate." Fairness is another advantage of Flat Tax, people would all be charged the same percentage as everyone else, and for example a wealthy person that made a thousand times the taxable income would pay a thousand times more in taxes. The tax code would no longer penalize and discriminate based on income. A Brief Guide to Flat Tax by Daniel Mitchell Says "a Flat Tax gets rid of all deductions, loopholes, credits, and exemptions. Politicians would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy." Along those same lines, conflict between the tax payers and the government would almost be nonexistent. Other countries that have adopted a Flat Tax system are doing very well, former communist nations are leading a global tax reform revolution(Mitchell, 2005).

Direct Words from Daniel Mitchell

Daniel Mitchell says in the article A Brief Guide to Flat Tax" In a global economy, it is increasingly easy for jobs and capital to escape high tax nations and migrate to low tax nations. This means that the reward for good tax policy is greater than ever before, but it also means that the penalties for bad policy are greater than ever before. A Flat Tax will make America a magnet for investment and job creation."(Mitchell, 2005)


Federal taxes or a Flat Tax system, they both have good and bad points that come along with them. I think that a Flat Tax system would work better for the U.S because it would do so much good, not only would it be a more simplistic way of doing things but it would help keep our businesses alive and it would help our economy. Big companies are paying out the wazoo in taxes because they bring in so much money, but it isn't all their money. With a Flat tax system companies and individuals would only have to pay tax on the money they earned. There would be no more double taxation, for instance with a small business owner, sometimes they get double taxed on some things because the line between business and personal money is very thin. Finally, our government would stop getting rich off of our tax money.