Flat tax, no tax, sales tax, or same tax?
Taxes are almost back in season. It’s almost time to secure yourself a CPA and get all your paperwork in order and succomb to yet another tax man cometh moment.
I think we can all agree that the current tax system needs a little work. It’s become so complicated that even trained tax professionals can’t seem to keep it all straight. The big question is how do we re-do the tax system. JLP at AllFinancialMatters asked about a Flat tax in his question of the day yesterday. Here are my thoughts.
When speaking of flat tax systems there are two that seem to be popular. The first is a flat sales tax. Basically, the only taxes you pay are sales taxes. Sounds pretty good eh? Especially if you live in a state that already has a sales tax. Well, don’t go voting for it just yet. Experts agree that in order for a flat sales tax to equal the current revenue from taxes, it would need to be somewhere in the range of 24%. Ouch is right.
The second flat tax, and the kind that JLP is speaking of is the flat income tax. A flat % tax on all income. If a flat rate tax system were to be implemented, this is the one I would choose. It does have a few problems. Who gets taxed for what income seems to be the biggest. Take dividends, the example that JLP uses. Currently, the Corporation pays taxes on the dividends. The shareholder receiving the dividends does not. This is very nice for those who receive a large amount of income from dividends. They belong to a class of income called passive income. Passive income is income that you don’t need to work for. It just keeps coming in with relatively little to no work on your part.
If a flat income tax were to be implemented, dividends would need to be counted as income. Corporations would no longer shoulder the burden as it wouldn’t be income for them. In fact, it would be a redistribution of income already taxed.
With and talk of tax code change or even tax system change, arguements break out. I personally do not believe that a flat tax of any sort would work. I think that the current system needs a major overhaul to weed out redundancy and confusion. Any changes to the system or a new system would incite politicians to find or create loopholes that would create new tax shelters for their income. The cycle would start all over again and we end up right back where we left off.
A simpler tax code is needed if for no other reason than it would make it more transparent. If there aren’t any complicated codes, there are less rules to manipulate to create shelters for tax evasion.
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josephwalter said,
Wrote on September 11, 2006 @ 1:17 pm
flat tax should be a dollar amount per person, not a percentage based on income. then we’d all share the burden of goverment squanderings equally.
thatedeguy said,
Wrote on September 11, 2006 @ 1:48 pm
I don’t think that would work very efficiently. Bill Gates makes millions a year, I make thousands. For the sake of arguement, lets say that there are 2 billion people in America. That means that the budget would get split 2 million ways. That would be 10’s of thousands of dollars a year each. I don’t think that would fly very well.
David Bradley said,
Wrote on September 23, 2006 @ 5:24 pm
A flax tax on personal and corporate income would work - if properly structured. What evidence is there that it would fail? Look around you and you just see stunning success and economic growth: Hong Kong, Jersey, Estonia (and most of E Europe)…
A good starting point for a flat income tax (in the UK) would be to abolish 13,000 pages of tax breaks, reliefs, allowances etc. outlined in Tolley’s yellow book.
In return for forsaking those, the rate would come down, say to around 20%. It would apply on all earned income, but there would be the principle of FAIR taxation - namely that you can only be taxed once. Therefore all capital, dividend and inheritance taxes would go. Once shareholders pay corporation tax, that would be it. And to keep matters simple, corporation and personal income tax would be at the same rate.
Plus, to the benefit of all, the first £1,000 per month could be tax free - of both tax and national insurance. (Indeed the two would be merged into one.)
Now I can just hear all the cries from readers “how can this all be paid for??” Well, through economic growth. Plus what economists refer to as the “Laffer effect”.
Now one can argue subjectively about the amount of growth being caused by greater incentive to work, less tax avoidance, less investing off shore, more inward investment, better capital formation (no 100% tax breaks for financially useless investments such as films) etc. But the important point is simply to look at the shear SIZE of evidence to support that a flat tax would generate massive economic growth and… collected tax.