on the Flat Tax

“The flat tax would be so simple; you could fill it out on a post card.  A post card that would say, in effect, ‘Having a wonderful time; Glad most of my money is here’ .” Steve Forbes, editor-in-chief of Forbes magazine and CEO of Forbes, Inc.

This week I want to examine one of those proposals proposed to simplify the tax code, the flat tax. While there are several different versions out there, they all basically draw on the same principal premise of a simple flat tax rate charged to individuals and businesses. Gone would be the complicated IRS forms, documents and manuals to read. All your tax data could fit onto one simple postcard.

For regular taxpayers, if they were to use the flat tax, all they would need is their W2 income. They would fill the form out, subtract a certain amount based on family size, and then pay a flat tax percentage on the remaining amount. Business taxes would be very similar, only they would subtract off wage, input, and investment costs from their total revenues and then pay a flat percentage on the remaining amount. Under this tax, everyone, including businesses, would be treated the same.

Gone would be the tax loopholes, the complexity, the shelters, and the preferential treatment given to certain types of businesses. All income would be treated equally, and double taxation (taxation on growth earned with after tax dollars) – such as the death tax and capital gains – would be eliminated. There would no longer be special penalties on certain types of income (such as Big Oil paying billions in taxes and GE paying none).  Instead, the economy would boom as all businesses and individuals that focus on growing their money would no longer be penalized for doing so. Entrepreneurship and its associated risks would be rewarded, and people would be encouraged to not only improve themselves but their businesses too. Only those that stagnate would lose out.

The reduction in compliance costs alone would not only save Americans $338 billion dollars and 7 billion labor hours per year, but it would also save us the $12 billion tax dollars spent annually to support the bureaucratic IRS. Keep in mind, despite all the money and hours we taxpayers spend on our tax returns, it does not guarantee that we would avoid an audit.  After all, the IRS was the first government entity where the constitutional principle of “innocent until proven guilty” does not apply (the second was the TSA, but I digress). Considering that the IRS employs more people than the CIA & FBI combined, does it surprise anyone that so many Americans live in such fear of them? A flat tax would not only shrink the despotic power of the IRS, it would end the micromanaging and intrusiveness into our financial lives by the government. It would stop politicians from using the IRS as a tool for political favoritism (or punishment) and an agenda-driven economy. It would institute a simple fairness, as well as transparency, into the tax code. It would allow companies to spend their money on growing their business, instead of employing lobbyists and lawyers just to get special tax treatment.  Not only that, it would allow American companies to finally compete on a more level playing field within this global economy.   

I believe that a more simplified tax code would also do another thing that would benefit everyone – it would force the federal government to shrink and put pressure on the state governments to follow suit. I know that there are some that feel that those who make more money should pay a higher percentage of their income, but the very mathematical nature of a flat tax does just that. If someone makes a 1000 times more than I do, then they would also pay 1000 times more in taxes under the flat tax. Some also may feel that they may end up paying more in taxes by no longer having a mortgage or charitable deduction, or that both of these institutions would suffer under a flat tax. I dispute that for the following reasons: first, I believe that the financial benefits of a robust economy will more than offset any IRS refund and the paperwork prostrating we have to do in order to get it. And second, Americans will not stop buying houses or giving to those in need just because they will no longer have a tax deduction when doing so. I trust the American people to always know better than our Congress on what to do with their own money.

Under a more simplified tax code, like the flat tax, we would no longer have a stealth police force of IRS agents acting as the enforcers of Congressional incompetence at best, and political corruption at worst. We could do our taxes in 5 minutes and April 15th would become just another spring day. Wouldn’t that be great?

“The purse of the people is the real seat of sensibility. Let it be drawn upon largely, and they will then listen to truths which could not excite them through any other organ.” Thomas Jefferson, 3rd President of the United States

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