The Pros And Cons Of A Flat Tax System
Flat Tax
A flat tax is a system that applies the same tax rate to every taxpayer regardless of income bracket. Typically, a flat tax applies the same tax rate to all taxpayers, with no deductions or exemptions allowed, but some politicians such as Ted Cruz and Rand Paul have proposed flat tax systems that keep certain deductions in place. Most flat tax systems or proposals do not tax income from dividends, distributions, capital gains and other investments. Supporters of a flat tax system propose that it gives taxpayers incentive to earn more because they are not penalized with a higher tax bracket. In addition, flat tax systems make filing easier. Critics of flat taxes argue the system places an unfair burden on low-wage earners in exchange …show more content…
for lowering tax rates on the wealthy, and claim a progressive tax system is more fair.
Russia is the largest nation in the world to use a flat tax. Russia imposes a 13% flat tax on earnings, but the nation has considered moving to a progressive tax to boost tax revenue.
In the United States, the payroll tax is a type of flat tax. As of 2016, the IRS levies a 12.4% payroll tax. Employees pay 6.2%, while their employers also pay 6.2%. Self-employed individuals pay the full amount on their own, as they are their own bosses. This tax is considered flat because it imposes the same percentage on all wage earners. However, only earnings below the $118,500 threshold are subject to payroll tax. As a result, this tax is effectively regressive, although it only uses one rate.
Progressive
This is the system that we have now. A progressive income tax is exactly what it sounds like: the rate of tax increases as income (however measured) increases. Technically, you can create a progressive income tax system even when stated tax rates remain flat by using personal exemptions, tax credits and tax deductions to alter the effective tax rate. Although our current system isn’t very popular at home, it’s perhaps the most common tax system used in developed countries around the world. Countries that use a progressive income tax system include China, Japan, Australia, France, Germany, Italy, Canada and the United Kingdom.
People like a progressive tax because it raises revenue by taxing those who can most afford to pay.
Offering tax breaks for those at the bottom should, in theory, give those taxpayers the opportunity to increase their wealth and work their way out of poverty. And, of course, progressive tax should encourage the distribution of wealth. People don’t like a progressive tax because it treats people differently: those at the top are charged with paying more, as a percentage of income, than those at the bottom. While it’s true that some taxpayers - like Warren Buffett - pay a lower effective tax rate than many in the middle class, the U.S. still has one of the most progressive systems in the world, collecting the largest share of taxes from those at the top. According to the Tax Foundation, the top 1% of taxpayers have consistently paid more in federal income taxes than the bottom 90% since 2003 and that share has increased almost every year since 1980 . This is true even when paying more in taxes does not necessarily result in increased services. Progressive taxes are also considered more complicated than other forms of …show more content…
tax.
Fair Tax It is a formal proposal rather than a generic term.
It differs from both the progressive income tax system and the flat tax in this way: it is not a tax on income. The Fair Tax would replace all existing income taxes - as well as payroll taxes - with a single consumption tax. The tax, as proposed, would be a 23% tax on purchases of new goods and services, excluding necessities due to a "prebate." The "prebate" is akin to a refund and is offered at the beginning of each month so that certain purchases are essentially tax-free. People like a Fair Tax because it eliminates taxes on payroll and income: taxpayers get to keep their entire check and won’t have to make those dreaded estimated payments. It’s considered more fair than a progressive income tax since taxpayers are taxed on consumption of goods and services which are, on some level, expenditures that can be controlled at will . Additionally, since certain kinds of goods and services are always going to be in demand, a tax on consumption is considered more stable than a tax on wages.People also like a Fair Tax because, since retailers would collect and remit taxes directly to the Treasury, the IRS could be eliminated. People don’t like a Fair Tax because it has never been tried in any other country in the world causing some to fear that it is too experimental (a transitional hybrid system combining income and Fair Tax has been floated). The Fair Tax is also considered by some to be regressive since necessities are
still subject to tax. Additionally, since the burden for collection shifts from the federal government to individual businesses, some of which are not currently collecting taxes (those which sell exempt goods, businesses in states where there are no sales taxes and businesses currently not subject to taxes on providing services), there’s a concern about the added burden that would place on those businesses, specifically small businesses.
The 9-9-9 System
The basis of the 9-9-9 Plan is to eliminate the current, complicated income tax system -- with its series of tax credits and deductions and its variety of tax rates based on income -- and to replace it with a flat income tax. Cain's flat 9 percent income tax also would replace payroll taxes, which all workers pay and that fund Medicare and Social Security, and would end the estate tax, which is a tax on inheritances. Currently, about 49.5 percent of all tax filers pay no income tax at all. Income tax would be collected equally for workers with two exceptions -- taxpayers could claim a deduction for charitable contributions and taxpayers could earn a type of tax credit for living in an "empowerment zone," which is basically inner cities needing revitalization. While the result of this part of the plan would affect taxpayers differently, the flat income tax and the elimination of payroll taxes would result in shifting some of America's tax burden, making some poorer Americans pay more into the system while many middle- and upper-class Americans would pay less. The national sales tax would attempt to make up for the reduction of federal revenue by creating the 9 percent income tax. The national sales tax, which would help fund the federal government, would be on top of state and local sales taxes, which fund state and local government. Most economists agree that a national sales tax would raise the relative tax burden on low- and middle-income earning taxpayers. The 9 percent corporate income tax now stands close to 40 percent, so on the surface this plan would be a huge reduction. The current tax structure includes credits and deductions that often reduce the rate at which businesses pay income taxes. Businesses on average pay an effective tax rate of 27.6 percent. The planned changes to the personal income tax structure would include eliminating many of the credits and deductions businesses now enjoy.
My Opinion
I believe that the progressive tax is the best option for America because all the other options do not suit the needs of America as well. Advocates of progressive tax often say “Rich people can afford to pay more.” What they really mean is that $500 means more to a person making $25,000 a year than it does to a person making $500,000 a year. This means that allowing poor people to keep a larger share of their income will result in a happier society than making everyone pay the same rate. If people deserved most of their income, there would be a good case that they should be able to keep it. However, people don’t morally deserve their income because almost everyone’s income results largely from factors beyond their control. Because Americans have access to a superb set of institutions and a grand scale of specialization and trade within our borders. The knowledge and technology we have that allows us to make more money is the result of a human project and social cooperation. Other factors such as our genes, parents’ income, our order of birth, year of birth, and even month of birth have enormous impact on our future earnings. Because people don’t morally deserve their income, it means that society can fairly ask the wealthy to pay more. Doing so allows us to produce more public goods and services that benefit everyone, while creating a more happy and just society than if we asked everyone to pay the same. But, we still need to be concerned about incentives. We don’t want to make rates so progressive or so high that they make it unattractive for people to be productive. Fortunately, this is an empirical question, and all the evidence suggests that the wealthiest among us are doing quite well, and their lot is improving.
A flat tax is a system that applies the same tax rate to every taxpayer regardless of income bracket. Typically, a flat tax applies the same tax rate to all taxpayers, with no deductions or exemptions allowed, but some politicians such as Ted Cruz and Rand Paul have proposed flat tax systems that keep certain deductions in place. Most flat tax systems or proposals do not tax income from dividends, distributions, capital gains and other investments. Supporters of a flat tax system propose that it gives taxpayers incentive to earn more because they are not penalized with a higher tax bracket. In addition, flat tax systems make filing easier. Critics of flat taxes argue the system places an unfair burden on low-wage earners in exchange …show more content…
for lowering tax rates on the wealthy, and claim a progressive tax system is more fair.
Russia is the largest nation in the world to use a flat tax. Russia imposes a 13% flat tax on earnings, but the nation has considered moving to a progressive tax to boost tax revenue.
In the United States, the payroll tax is a type of flat tax. As of 2016, the IRS levies a 12.4% payroll tax. Employees pay 6.2%, while their employers also pay 6.2%. Self-employed individuals pay the full amount on their own, as they are their own bosses. This tax is considered flat because it imposes the same percentage on all wage earners. However, only earnings below the $118,500 threshold are subject to payroll tax. As a result, this tax is effectively regressive, although it only uses one rate.
Progressive
This is the system that we have now. A progressive income tax is exactly what it sounds like: the rate of tax increases as income (however measured) increases. Technically, you can create a progressive income tax system even when stated tax rates remain flat by using personal exemptions, tax credits and tax deductions to alter the effective tax rate. Although our current system isn’t very popular at home, it’s perhaps the most common tax system used in developed countries around the world. Countries that use a progressive income tax system include China, Japan, Australia, France, Germany, Italy, Canada and the United Kingdom.
People like a progressive tax because it raises revenue by taxing those who can most afford to pay.
Offering tax breaks for those at the bottom should, in theory, give those taxpayers the opportunity to increase their wealth and work their way out of poverty. And, of course, progressive tax should encourage the distribution of wealth. People don’t like a progressive tax because it treats people differently: those at the top are charged with paying more, as a percentage of income, than those at the bottom. While it’s true that some taxpayers - like Warren Buffett - pay a lower effective tax rate than many in the middle class, the U.S. still has one of the most progressive systems in the world, collecting the largest share of taxes from those at the top. According to the Tax Foundation, the top 1% of taxpayers have consistently paid more in federal income taxes than the bottom 90% since 2003 and that share has increased almost every year since 1980 . This is true even when paying more in taxes does not necessarily result in increased services. Progressive taxes are also considered more complicated than other forms of …show more content…
tax.
Fair Tax It is a formal proposal rather than a generic term.
It differs from both the progressive income tax system and the flat tax in this way: it is not a tax on income. The Fair Tax would replace all existing income taxes - as well as payroll taxes - with a single consumption tax. The tax, as proposed, would be a 23% tax on purchases of new goods and services, excluding necessities due to a "prebate." The "prebate" is akin to a refund and is offered at the beginning of each month so that certain purchases are essentially tax-free. People like a Fair Tax because it eliminates taxes on payroll and income: taxpayers get to keep their entire check and won’t have to make those dreaded estimated payments. It’s considered more fair than a progressive income tax since taxpayers are taxed on consumption of goods and services which are, on some level, expenditures that can be controlled at will . Additionally, since certain kinds of goods and services are always going to be in demand, a tax on consumption is considered more stable than a tax on wages.People also like a Fair Tax because, since retailers would collect and remit taxes directly to the Treasury, the IRS could be eliminated. People don’t like a Fair Tax because it has never been tried in any other country in the world causing some to fear that it is too experimental (a transitional hybrid system combining income and Fair Tax has been floated). The Fair Tax is also considered by some to be regressive since necessities are
still subject to tax. Additionally, since the burden for collection shifts from the federal government to individual businesses, some of which are not currently collecting taxes (those which sell exempt goods, businesses in states where there are no sales taxes and businesses currently not subject to taxes on providing services), there’s a concern about the added burden that would place on those businesses, specifically small businesses.
The 9-9-9 System
The basis of the 9-9-9 Plan is to eliminate the current, complicated income tax system -- with its series of tax credits and deductions and its variety of tax rates based on income -- and to replace it with a flat income tax. Cain's flat 9 percent income tax also would replace payroll taxes, which all workers pay and that fund Medicare and Social Security, and would end the estate tax, which is a tax on inheritances. Currently, about 49.5 percent of all tax filers pay no income tax at all. Income tax would be collected equally for workers with two exceptions -- taxpayers could claim a deduction for charitable contributions and taxpayers could earn a type of tax credit for living in an "empowerment zone," which is basically inner cities needing revitalization. While the result of this part of the plan would affect taxpayers differently, the flat income tax and the elimination of payroll taxes would result in shifting some of America's tax burden, making some poorer Americans pay more into the system while many middle- and upper-class Americans would pay less. The national sales tax would attempt to make up for the reduction of federal revenue by creating the 9 percent income tax. The national sales tax, which would help fund the federal government, would be on top of state and local sales taxes, which fund state and local government. Most economists agree that a national sales tax would raise the relative tax burden on low- and middle-income earning taxpayers. The 9 percent corporate income tax now stands close to 40 percent, so on the surface this plan would be a huge reduction. The current tax structure includes credits and deductions that often reduce the rate at which businesses pay income taxes. Businesses on average pay an effective tax rate of 27.6 percent. The planned changes to the personal income tax structure would include eliminating many of the credits and deductions businesses now enjoy.
My Opinion
I believe that the progressive tax is the best option for America because all the other options do not suit the needs of America as well. Advocates of progressive tax often say “Rich people can afford to pay more.” What they really mean is that $500 means more to a person making $25,000 a year than it does to a person making $500,000 a year. This means that allowing poor people to keep a larger share of their income will result in a happier society than making everyone pay the same rate. If people deserved most of their income, there would be a good case that they should be able to keep it. However, people don’t morally deserve their income because almost everyone’s income results largely from factors beyond their control. Because Americans have access to a superb set of institutions and a grand scale of specialization and trade within our borders. The knowledge and technology we have that allows us to make more money is the result of a human project and social cooperation. Other factors such as our genes, parents’ income, our order of birth, year of birth, and even month of birth have enormous impact on our future earnings. Because people don’t morally deserve their income, it means that society can fairly ask the wealthy to pay more. Doing so allows us to produce more public goods and services that benefit everyone, while creating a more happy and just society than if we asked everyone to pay the same. But, we still need to be concerned about incentives. We don’t want to make rates so progressive or so high that they make it unattractive for people to be productive. Fortunately, this is an empirical question, and all the evidence suggests that the wealthiest among us are doing quite well, and their lot is improving.