Taking a Look
at the Case for
a Flat Tax

March 10, 2014

So far we’ve discussed tax issues including different types of taxes, fairness in taxes, and the effect of taxes.  This week we look at the flat tax.

Our existing tax system is tiered and mired in political/social based deductions/credits.  It’s complicated.  The tax code is now 3 million words.  Nobody reads it.  Last year most of us spent about a week preparing our tax returns. Over the years, “trial tax returns” were sent to professional tax preparers to test their knowledge.  Rarely did a single preparer submit a perfectly completed return.  Deeply troubling to us is the power government has to seize our money/property without due process.  For example if the IRS claims you owe back taxes, it can garnish your wages without going to court.  If you want to stop them you must take legal action against them and suffer the economic consequences (court costs, legal fees, etc.) almost like you are guilty until proven innocent!

A flat tax means that all citizens pay the same percentage or one tax rate with that rate being significantly lower than the current highest rate.  This approach means your taxes would be easy to understand and file.  Errors and fraud could be significantly reduced.  The gained simplicity significantly would reduce the need for professional tax preparers and personnel at the IRS.  Additionally a flat tax would completely eliminate the Alternate Minimum Tax (AMT).  We cannot stress enough how important eliminating the AMT will become.  If there will be a politically-driven force behind overhauling our tax code, it will be the AMT which is about to start applying to an ever-increasing and larger number of taxpayers. 

On the surface, a flat tax appears simple, but in application defining income for businesses adds significant complexity.  Running and operating businesses means defining expenses.  The question about taxing income versus capital suddenly becomes important.  Should capital earnings be treated the same way as actual income?  Is a different rate appropriate?
   
In our opinion, there are two powerful immediate benefits of the flat tax.

• First, it removes political and social engineering from the tax code and the hands of Politician’s leaving citizens free to choose their own paths and destiny. 
  
  
• Second, if you have one flat tax rate that does away with deductions for this and credits for that, people will make decisions based upon what makes economic sense for them or their business and not upon whether they can avoid or take advantage of tax incentives or loopholes.  The result will be economic growth.

One of the drawbacks to a Flat Tax is that it is still income-driven.  This means not everybody participates in funding our government.  For example, those who are paid in cash and don’t report it can avoid paying a flat tax. On the other hand, if all income earners -- regardless of their economic status -- were liable for the tax, it would give every wage earner a stake in how taxpayer funds are spent.  

Margret Thatcher once said to her cabinet when they objected to taxing those who were less fortunate…  “Nonsense! This is a simple proposition.  If you live in this county you must pay for the privilege, something, anything, if you pay nothing you care nothing.”   By her comment the “Iron Lady” was suggesting that if all paid at least something they would start to care about how it is spent and used.  A Flat Tax might move us in that direction.

Mark and Bill and John