How does a flat tax work?

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Flat tax is not entirely my thing, but simplifying the system would not be a bad thing.

In the Netherlands we have (high) progressive tax rates, but there are all sort of tax reductions. An effect of the progressive tax is also that the tax reductions are also progressive. So the more you earn, the higher your tax reductions are. At the end there is not an entirely flat tax, but a 'flattened tax'.

To avoid unnecessary bookkeeping a 'flattened tax' with less exceptions and reductions would be a good start.


I like the idea for sales tax the best. More buying means more paying. The same with road taxes, just drop them and put it on the gasoline. When you want to drive more or have a big gas guzzling car, then you pay more. If you drive a modest car, you pay less (gasoline).

My short answer, as a CPA / tax specialist, to the question of "how does a flat tax work?" is "it doesn't."

Because every proposal to date has had enough holes to run a giant truck through. Which could be why they don't become law. CPA's look at the proposals and have fun figuring out all the ways we'll keep our clients from paying any tax. That is our job, after all.

The long answer is, it depends on the proposal. In the most literal sense, "flat tax" refers to the tax rates, and the rates alone. As a matter of public policy, proponents also include an attempt at a simplified version of the tax code, in which there would be no deductions or credits. The basic starting point being that money that comes in is all the law cares about, and that gets taxed. If everyone was an employee, that could make some sense: the money they get is also what they earn, and a flat tax rate is applied to it. But everyone is not an employee, and that is where it gets complicated. As a CPA, much of my life is devoted to deciding exactly what income is, and a flat proposal won't get rid of that pesky need. So, each proposal must and does make an attempt to define what income will be for the new law, and that is pretty much where anything short of the length of the current tax code ends up with a hole giant enough to drive a truck through.

The retail sales tax proposals theoretically mostly have the advantage of simplification. It will be harder to use the system as a political force, but still not impossible, and easier to enforce, but still not perfectly. The biggest argument against a sales tax is that a sales tax is, by it's nature, regressive (ie, the burden falling heavier - in relation to income - on those with the least ability to pay). The attempts to address that create complexity and room for manipulation - basically working against the main selling point of the option.

Reality is that both political parties believe too much in the power of the tax code as a economic and political tool to EVER scrap it and start over. Even if they did, it would only be a matter of time before the new system looked a lot like the old system.

Sounds exactly WHY we should do just that...scrap it.

Taxation ultimately is more about power than money when you look at how it works.

Except a Fiat monetary system requires taxation.

Of course, a flat tax would actually raise the rate on the most wealthy, who make most of their income from capital gains that are presently taxed at a lower rate. That's the whole point of the flat tax - share the tax burden equally over all classes, rather than privileging special interests.

It works fine in Massachusetts.

Leonard Da Vinci got an education and the government did not provide it.

ruveyn

A couple of points:

First, it isn't a "pure" flat tax. There are deductions, and credits, and "optional" capital gains rate system.

Second, most of the lines on the tax return skip all thorny issues by saying, "from line X of your federal tax return." At the federal level, it still has to be defined.

It's kind of amusing to me to say MA has a flat tax when it still publishes a tax table and the tax package for individuals doesn't seem to be any thinner than the one we've got in California. It's like a pretty political ploy that means higher tax for the lower earners without having achieved any of the stated goals of those who advocate for a flat tax. I've prepared quite a few MA tax returns over the years and, to be honest, I had no idea it was a "flat tax" until you mentioned it, for the simple fact that nothing I do with the tax return is really different there. My computer calculates the tax flawlessly; I work on making sure "income" is right.

My biggest problem with trying to put in place a flat tax that is only a flat tax rate is that it ends up being regressive. The "flat tax" doesn't exist in a vacuum. It lives side by side with payroll deductions for social security and medicare, employer contributions for unemployment, and sales taxes. When ALL the taxes are piled together in a bucket, it isn't flat at all. In fact, the burden falls heavier on those making less income. And you haven't "simplified" anything; no one has trouble calculating their tax. What they have trouble calculating is their income subject to tax, and until MA puts out a two line tax form (which they are pretty well far from), and gets rid of all other forms of tax, they haven't met the vision people have when they hear the words, "flat tax."

Last edited by DW_a_mom on 27 Oct 2010, 3:46 pm, edited 2 times in total.

To me, that is a sound bite that carries no real weight.

Modern society has a vested interest in making sure ALL it's citizens are educated. Gone are the days when the majority of people worked with their hands using skills passed down from their parents, and society had the luxury of allowing large percentages of its populace to go without formal education. As a practical matter, the existence of public education is driven more by the need to have skilled and educated workers than by a sense of altruism to the lower classes. My sister is a PR exec at a major corporation, and they do would NEVER advocate for cutting state education. They want an educated employee base, and they want infrastructure to deliver employees and goods to the right places. These things don't exist without a tax system.

If that is true why does our government do such a p*ss poor job of schooling our upcoming generation?

The purpose of our public schools is to provide baby sitting for the parents and jobs for the teachers.

ruveyn

You are conflating the issues of the public's interest in universal, compulsory education that is free at the point of delivery with the government's competence in delivering that service.

Perhaps government could do this better. Perhaps government should buy this service from private agents. These are all legitimate arguments. But it is not the same thing as saying that government should not be collecting tax in order to pay for this service to be provided.

Agreed, there may be issues with the quality of service delivery, but that doesn't mean the concept is flawed.

And, seriously, ruveyn, while I know some schools fail miserably, and that even good schools can fail unique individuals, I have two children that are seriously getting a good, solid education in the public school system. I wish it was a little more enriched, but it is solid. My 8th grader has a solid grasp of Algebra and, after years of struggle due to the co-morbid issues in his hands, can create really nice essays on his computer. He knows history, he knows science, and he could probably come onto these boards and hold his own. My husband and I have helped with that, but most of the credit goes to a solid school system and dedicated teachers. I challenge you to spend a week in my children's classrooms and still call it a babysitting service.

After thinking it through, I'm in total agreement. At first, I thought a consumption, retail, fair tax, or whatever it might be called sounded ideal, but only on paper really. In order to make it fair, meaning somehow reducing the burden on lower incomes, you'd either still have to continue some sort of individual accounting to claim breaks, or decide that maybe certain basics shouldn't be taxed, but then you open up a whole can of worms about what constitues the basics.

I'm no CPA, but I do my family's taxes and know my way around 1040 long form. There really is no way to avoid all of the complexities of the tax code. It may be possible to simplify it a little by bringing about a radical change, but that's very unlikely to happen, for political and practical reasons.

I agree with this too. My kid goes to a great school. It's usually only the poor kids who get the shaft on public education. We're not far from poor ourselves, but we purposefully sacrifice a lot in order to pay more for housing so that our kids are in a good district.

The government can pick our pockets at will. They have no incentive to do better.

ruveyn

They have incentive. Parents vote. And there are lots of us. Government still messes it up quite a bit, but they don't ignore the outcry; there is constant movement in the system, and response to issues.