Flat Rate Income Tax Definition
In 1962, economist Milton Friedman came up with the idea of a flat tax which would erase the tax brackets now in place and tax everyone's income at the same rate. A flat tax would not include any deductions. The Wall Street Journal brought the idea of a flat income tax into mainstream America with an article by Hoover Institution economists Robert Hall and Alvin Rabushka titled, "A Proposal to Simplify Our Tax System." However, the flat tax is more regressive than the current system.
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Flat Tax or Consumption Tax
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A flat tax would remove personal exemptions that exist in the current tax code with the taxes on wages being remitted by households rather than businesses. This would make the flat tax a consumption tax although it would look like a wage tax for American households and a value-added tax for most corporations.
Winners and Losers
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Low-income households would lose because they typically pay no income tax and are eligible for the Earned Income Tax Credit which is a refund of up to $3,370, as of 2010, with qualifying children or if the filer is over 63 years of age. A flat tax would provide huge gains for high-income households because their marginal tax rate would fall, and they are able to consume less of their income. The tax burden would then fall on the middle class.
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Fixing the Flat Tax Proposals
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There is a consensus among some opponents and proponents that any flat tax should protect the middle class and the working poor. Proposals include integrating Social Security (including Medicare), providing incentives to the working poor in the form of subsidies based on the non-utilized portion of their tax credits and a $1,000 per exemption tax credit. The tax burden would not be shifted, and the deficit would not increase.
Selling Points
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There is a conviction among some economists, tax specialists and government officials that the flat tax would make income taxes more equitable through the elimination of special preferences by only taxing income once.
Internal Revenue Service Efficiencies
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A flat tax would reduce compliance and administrative costs by streamlining the processing of tax forms due to a new and simplified tax code. The time it would take to process income taxes and disburse income tax checks to the public would be shortened as well.
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References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
