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Our Tax System Needs Changing Essay, Research Paper
Our current tax system is complex, costly, and unfair. Surely, America can do better for our children than redistribution and regulation. Our nation is over four trillion dollars in debt. It is time to act instead of letting lawyers and politicians play with our money. A flat tax plan is a simple solution to remedy the stagnant apathy our nation has been so accustomed to for the last seventy years.
A flat tax would make calculating and collecting tax simple. According to 1996 studies, Americans devote 5.4 billion dollars a year to Federal Tax related paperwork. The IRS estimates that that it takes about 27 hours for the average family to keep records and prepare an itemized form 1040 with a few schedules. With the Armey-Shelby flat tax plan, everyone well above the poverty line will pay seventeen percent of your income. No credits or exemptions unless you have dependants and no taxes on saving or investments. The tax form will be the size of a postcard.
An argument for A FLAT TAX FOR THE U.S.: THE ADVANTAGES AND
DISADVATNTAGES OF A FLAT TAX
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Purpose and Procedures
Background of the Flat Tax
Tax Facts Basic Structure of the Falt Tax
Individual Wage Taxation
Argumentsforthe Flat Tax
Lower Compliance Costs
ArgumentsAgainstthe Flat Tax
Benefits the Rich
The Flat Tax is Unfair
The Effects of the Flat Tax on Americans
Overhaul in Allowed Deductions
Flat-Tax Effects on Investment
Flat-Tax Effects on Employee Benefits
An intensely debated topic during the last two years has been the issue of tax reform. The principal voices of tax reform call for a flat tax to be the foundation of a new tax system in the United States.
Supporters of the flat tax argue that our current tax system is filled with too many loopholes and contains so many complications that people spend way too much time and money filing taxes. These supporters also claim the current tax system is not fair. Opponents of the flat tax reason that a flat tax is quite unfair to low and middle income families and argue that a flat tax would drastically inflate the deficit.
Purpose and Procedures
The purpose of this issue paper is to discover how using a flat-tax system in the United States would affect most citizens. More specifically, the following questions will be answered:
1. What is the flat tax?
2. What are the pros and cons of a flat-tax system for America?
3. How would the implementation of a flat tax affect the lives of Americans of all economic circumstances?
Background of Flat Tax Proposals
The flat-tax issue is a fairly new issue for most Americans. The first major flat-tax proposal was written by Congressman Dick Armey and Senator Richard Shelby. This proposal calls for a 17 percent flat tax. Since the time of Mr. Armey and Mr. Shelby’s proposal, many other people have proposed their own flat-tax plans. These alternate plans vary little from the proposal by Dick Armey and Richard Shelby. (Armey & Shelby)
During the last part of 1995 and the first part of 1996, Steve Forbes made the flat tax part of his primary campaign platform as a candidate for the Republican nomination for president. The Forbes flat-tax proposal is based on a 17 percent tax rate and is very similar to the proposal by Dick Armey and Richard Shelby. (Forbes)
A look at several current tax facts is needed to understand why so many Americans seem ready for major tax reform. Several of these statistics are the following:
Americans devote 5.4 billion dollars a year to federal tax-related paperwork.
A volume of 293,760 trees are felled yearly to print the Federal Tax Regulations alone. This does not include the paper used in tax forms.
The IRS estimates that it takes about 27 hours for the average family to keep records and prepare an itemized form 1040 with a few additional schedules. (Armey-Facts)
Basic Structure of the Flat Tax
The flat tax proposed by Congressman Armey and Senator Shelby would replace the income tax with a 17 percent flat tax. Individuals would pay 17 percent of their wages and businesses would pay 17 percent of business income. (Armey & Shelby)
Individual Wage Taxation
Each individual pays 17 percent of total wages, salaries, and pensions. The calculation is to be made after deducting family allowances. The family allowances are $11,350 for a single person and $22,700 for a married couple filing jointly with an additional deduction of $5,300 for each dependent. Mortgage interest payments would no longer be deductible. The flat-tax system eliminates the estate tax, the capital gains tax, and the tax on interest and dividends. The flat tax would not tax social security benefits and would have no effect on current Medicare payroll taxes. (Armey & Shelby)
All businesses pay a 17 percent tax on the difference between revenues and expenses. Under the flat-tax system, businesses can immediately deduct all expenses-including structural expenditures and equipment. Businesses would not be allowed to deduct fringe benefits, interest, or payments to owners. (Armey & Shelby)
Arguments for the Flat Tax
Supporters of a nation-wide flat tax give many reasons for their position. These supporters maintain the flat tax upholds freedom, fairness, and trust. Supporters of the flat tax also claim the new, simple tax system would stimulate the economy.
The 17 percent flat tax is fair because it offers no special tax breaks going to politically favored groups-everyone pays the same rate. Senator Armey argues the flat tax is also progressive because of the family allowance.
The plan is progressive because the less you make, the more the family allowance is worth. For example, a family of four making $36,000 would pay zero percent of its income in federal income tax. The same family making $50,000 would pay five percent of its income, and if its income was $200,000 would pay 14 percent of its income. I estimate the plan takes about ten million low-income taxpayers off the rolls entirely. This is the definition of progressive. (Armey)
Proponents of the flat tax trumpet the call for a simple tax system-one with no loopholes and few deductions. Humberto Cruz, a columnist for the Fort Lauderdale Sun-Sentinel newspaper, writes, “The tax code is a mess, a morass of 437 tax forms, most of them filled with incomprehensible jargon. The Internal Revenue Service is a useless bureaucracy, often unable to answer a simple tax question.” (Cruz, 22) Steve Forbes used the simplicity issue to further the popularity of the flat tax. He declared, “The flat tax would be simple. You could fill it out on a postcard. Millions of people would be off the federal income tax rolls.” (Forbes)
Many business economists believe the flat tax would generate some type of growth for the economy. According to the Bureau of National Affairs, “Some 55 percent of the 156 analysts polled by the National Association of Business Economists think the economy would benefit from some type of flat tax . . . .” (Columnist, 358)
Advocates of the flat tax argue that the tax allows a business to invest more than it currently does. A study conducted by the Texas Citizens for a Sound Economy Foundation, a nonpartisan research organization, revealed many pro growth benefits of the flat tax. The Austin-American Statesman said of the study, “Under a flat tax, businesses could deduct the full cost of capital investments, labor costs and business expenses from gross revenues in the year the money is spent, rather than depreciating the purchases over several years. The study asserts that businesses would have more money to invest on capital and labor.” (Breyer, D1) Congressman Dick Armey insists, “[T]he flat tax will produce higher productivity and economic growth, leading to higher employment and wages.” (Armey) Advocates of the flat tax also argue that after-tax income would go up for nearly all households; thus, the flat tax would increase the savings of almost all individuals and reduce the deficit. (Lambro)
Lower Compliance Costs
Proponents of the flat tax stress the fact that the compliance costs of the flat tax are much lower than those of the nation’s current tax system. Flat-tax promoters equate the amount of money saved by using a flat tax system as a $100 billion tax cut for the American people.(Foster) The study by Texas Citizens for a Sound Economy Foundation found that the flat tax would “dramatically” reduce compliance costs. The Foundation believes the amount of money saved by scrapping the 7,817 pages of tax code will be approximately $131.6 billion a year. (Breyer, D1) Senator Armey estimates the current tax system’s compliance costs are $232 billion a year. This cost equals $900 for every individual in the economy. (Armey)
Supporters of the flat tax emphasize the new tax system would lead to higher compliance with our tax laws. Under the Armey and Shelby proposal, taxpayers would sit down and write out a check to the government once a month. Congressman Armey stated the following in response to concerns about whether Americans would pay taxes on their own without having taxes automatically withheld from their paycheck:
The question arises: Would people still pay their taxes? I am confident they would since the Armey flat tax eliminates the three primary excuses for noncompliance. These are first, the current system’s maddening complexity; second, the low likelihood of getting caught; and third, the feeling that today’s system is somehow rigged to favor special interests “at my expense” which, for the most part, it is. Stripped of these rationales for noncompliance, the great majority of taxpayers will find it much easier to pay their taxes, and much harder to elude detection were they to cheat. The underground economy will shrink. After all, if you give the American people a tax system that is honest, direct, simple, and fair-something they have not had in more than 70 years-does it not stand to reason they would be more inclined to pay their fair share? (Armey)
Champions of the flat tax believe many wealthy Americans would pay more in taxes at the 17 percent rate than under the current tax system. The underlying idea is that rich Americans could not search for every little loophole to escape taxation because those loopholes would not exist anymore. Americans would be assured everyone pays taxes. (Cruz, 22)
Arguments Against the Flat Tax
Plenty of people argue the flat tax is not good for America. These opponents indicate the economy would take a nose dive under the flat tax, and people would not be treated fairly in how they are taxed. (Gose, B2)
Benefits the Rich
The leading argument against the flat tax is that the new tax system would benefit mainly the rich. A Treasury analysis of Congressman Armey’s flat-tax plan reveals that under the 20 percent tax rate, the tax rate for the first two years under Dick Armey’s plan, taxes would increase an average of $1,000 a year for families in every income group except those families earning more than $200,000 each year. (McIntyre, A35) Ross Stephens, a professor at the University of Missouri-Kansas City, states, “In many ways the flat tax allows the wealthy to abdicate the responsibility to pay taxes. Its [sic] a system of fiscal Darwinism-let the rich survive.” (Gose, B2) Bob Dole, the leading candidate for the Republican nomination for President, has stated that, “The one thing I will not do is shift the tax burden from the superrich to the middle class.” (McIntyre, A35)
The reasoning opponents use to claim the new tax system would only benefit the rich lies in the new tax breakdown. Under the flat tax the rich and superrich pay a lower percentage of their income to the government than they currently pay. Also, the rich typically make a sizable portion of their money through interest, dividends, and capital gains; therefore, because the rich would deduct unearned income from their tax base, much of their real wealth would not be taxed.
The Flat Tax is Unfair
Opponents of the flat tax use the same principle to make their case as do the supporters of the flat tax-fairness. Closely related to the argument that the flat tax benefits mainly the rich is the rationale that the flat tax is unfair for Americans. J.D. Foster, executive director and chief economist for the Tax Foundation, says the following in relation to whether the flat tax system is fair:
The flat tax also appears to have a major fairness problem. Consider two families. The Joneses have a combined salary of $50,000 in wages. Under the Armey flat tax, a 20 percent rate would cost this family $3,700. Now consider the Smiths, who in retirement 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 could pay no tax. Will tax fairness be defined so that individuals consuming significant amounts of capital income would pay little or no tax. (Foster)
Many Americans see the flat tax as a way to eliminate a big part of the current tax base for the rich. These people are not convinced the untaxed unearned income will stimulate the economy and increase the wealth of all. Opponents of the flat tax are quick to point out the failure of the Reagan tax breaks to create more wealth for all Americans. Many Americans simply believe the flat tax to be unfair. (Wester, 11)
Those who oppose the flat tax have no doubt the tax will hinder economic growth. The basic presumption is that if everyone’s taxes were cut, as maintained by flat-tax supporters, then federal revenues would drastically fall and the deficit would sky rocket. (Yoder, 6A) Most adversaries of the flat tax hold that the flat tax raises lower and middle- income families’ taxes while still losing at least $30 billion a year in revenues as a result of the colossal tax cuts in the highest income group. (McIntyre, A35)
Another major reason many people believe the economy would suffer as a result of the flat tax is the effects the new tax system would have on businesses. Many people are worried the new tax system would encourage businesses to produce in foreign countries. One element of Congressman Armey’s proposal is the repeal of foreign and international rules. Edwin Hood, a professor of tax law, is concerned about this element of the proposal. He said, “That would effectively exempt from taxes money made by U.S. companies outside the country. While those companies now must pay taxes on income they return to the country, HR 2060 would allow firms to return the money as dividends and escape taxation.” (Gose, B2)
The Effects of the Flat Tax on Americans
Opinions differ about how the flat tax would affect the lives of Americans of different economic circumstances. Many Americans feel the flat tax would be a simple and effective way to tax people, yet others feel the tax will create serious problems in the typical American’s financial life. (Crumpley, F1)
Overhaul In Allowed Deductions
Charles R.T. Crumpley, a columnist for The Kansas City Star, writes, “Indeed, everything that’s been patted on the head and handed a tax deduction over the years would be kicked in the shins by a flat tax. That would include health-care benefits, which could be a candidate for the endangered species list, some think.” (Crumpley, F1) The most visible and talked about deduction laid on the flat-tax cutting board is the home-mortgage-interest deduction. Under the 17 percent flat tax, Americans would no longer be allowed to deduct interest payments on their home mortgage. A study released by the National Association of Realtors asserts that, by eliminating deductions on mortgage interest payments, the flat tax would reduce housing values in the U.S. by about 10 percent. (Foster)
Supporters of the flat tax are mostly unaffected by the possible reduction in housing values if the flat tax were to become law. One strong advocate of the flat tax argues, “Opponents of the pure flat tax say home values would drop if the mortgage interest deduction is eliminated. They say homeowners would be hurt if they had to sell their home. But wouldn’t home buyers benefit? They say taxing agencies would have to raise property tax rates to compensate for falling values. But wouldn’t homeowners still pay the same total amount of tax?” (Cruz, 22)
A flat tax would benefit taxpayers who do not currently take large tax deductions. Renters, for example, would be on the same level as homeowners because homeowners would not be allowed to deduct interest payments on their mortgage. (Crumpley, F1)
Flat-Tax Effects On Investment
The flat tax would have serious consequences on investment and investors’ decisions. Those who derive much of their income from investments would benefit greatly under the flat tax plan because investment earnings would not be taxed. Many people feel the current tax system’s double taxation of savings is unfair and believe investment income should be taxed only once. Flat-tax supporters firmly believe the new tax would stimulate investment and economic growth. (Crumpley, F1)
Flat-Tax Effects On Employee Benefits
Employee benefits end up taking a beating under the flat tax. Employers would no longer be eligible for a tax deduction for providing health insurance and other benefits to their employees. The flat tax would probably give employers an incentive to cut benefits or even eliminate benefits altogether. Flat-tax advocates say employers would probably give the money normally spent on benefits to employees in the form of additional wages because employers would still be allowed to deduct the cost of wages. Employees could buy whatever insurance they need. (Crumpley, F1)
After carefully studying the criteria of the flat tax and the effects of the tax on Americans, several important conclusions can be assumed. These conclusions are the following:
1. Advocates of the flat tax express their desire for a tax system that is fair, simple, and beneficial to the economy.
2. Opponents of the flat tax argue the flat tax would be unfair because it benefits the rich and harms middle and lower-class Americans.
3. The flat tax is generally known as a 17 percent tax rate for all Americans, regardless of economic circumstances. The flat tax eliminates most of the current, standard deductions while introducing new, generous deductions based on the number of individuals in the household.
4. The flat tax ends the double taxation of savings by eliminating interest payments, dividends, and capital gains from the tax base.
5. The most visible of all deductions eliminated by the flat tax is the deduction on interest payments on home mortgages.
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