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Wednesday, April 19, 2006

Flat Tax: Is it better?

After mentioning my new blogroll to d.a.n. of One-Simple-Idea, I started looking into the flat tax idea he recommends on his site.

A tax system based on a very simple 17% Flat Income Tax Percentage Rate, where:
  • only personal income is taxed; corporations pay NO income tax;

  • it is the ONE and ONLY federal tax that may apply to each eligible tax payer;

  • there is NO tax for those with an income less than N times the established poverty level;

  • N is a multiplier determined by the government, that could be higher, but never less than 1.0;

  • the poverty level for 1 person, married couple, family of 1,2,...,8+ dependents will be determined by a government agency, will be recalculated annually, and may vary by state;

  • the same income tax percentage rate applies to all tax payers with an income above N times the established poverty level for that state;

  • starting 01-January of each year, no one starts paying any income tax until their annual income exceeds N times the established poverty level, and only on income above N times the established poverty level ; the total income to date will be maintained by the government (since some people may have multiple sources of income); employers determine tax to be paid (if any) based on the total income to date;

  • there are NO graduated income tax rate percentages;

  • there are NO upper-level income caps;

  • there are NO tax loop-holes;

Well, I like the sound of "NO tax loop-holes," though I find it difficult to imagine. With the Fair Tax there's the obvious loop-hole of black markets, especially if the tax is too high (like 25%, which is currently being pushed), which is why d.a.n. has difficulty supporting it. More back-room deals are, after all, NOT what we need.

Last year about this time, the Economist had a piece on the flat tax that exemplifies that it can work.

The answer is yes: there is indeed an alternative, and experience is proving that it is an eminently realistic one. The experiment started in a small way in 1994, when Estonia became the first country in Europe to introduce a "flat tax" on personal and corporate income. Income is taxed at a single uniform rate of 26%: no schedule of rates, no deductions. The economy has flourished. Others followed: first, Latvia and Lithuania, Estonia's Baltic neighbours; later Russia (with a rate of 13% on personal income), then Slovakia (19% on personal and corporate income). One of Poland's centre-right opposition parties is campaigning for a similar code (with a rate of 15%). So far eight countries have followed Estonia's example (see article). An old idea that for decades elicited the response, "Fine in theory, just not practical in the real world," seems to be working as well in practice as it does on the blackboard.

Not only does this article offer evidence of the flat tax working in the real world, it also offers reasons why it would be advisable for us to embrace the flat tax.

So much for the two main objections. What then are the advantages of being very simple-minded when it comes to tax? Simplicity of course is a boon in its own right. The costs merely of administering a conventionally clotted tax system are outrageous. Estimates for the United States, whose tax regime, despite the best efforts of Congress, is by no means the world's most burdensome, put the costs of compliance, administration and enforcement between 10% and 20% of revenue collected. (That sum, by the way, is equivalent to between one-quarter and one-half of the government's budget deficit.)

Not only do we find errors in even professionally prepared tax forms in our current tax system, but we spend a lot of money on it, too! Think of how much money could be saved by the United States of America if we could cut out all or even most of the IRS out of our budget. Think of how much money we, the citizenry, could save if we didn't have to hire people to figure out our taxes for us. Then, think of how much money the United States of America would save if people weren't cheating on their taxes. The numbers we're talking about here are almost as mind-boggling as our national debt!

In the end, I like how the Economist put it. "The flat-tax idea is big enough and simple enough to be worth taking seriously."

Now, this doesn't mean I don't support the Fair Tax; as I've said many times, just about anything would be better than what we have now.

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At 4/19/2006 8:53 PM, Blogger Me4Prez said...

I would like to see how it would affect an economy similar to ours. When you compare our military spending, trade deficits, and aid we provide to other countries, I would think we spend a lot more than the countries mentioned

At 4/19/2006 11:25 PM, Blogger Stephanie said...

We also have a lot more people who "fund" our tax system, i.e. taxpayers. We also have more money running through our economy, and thus we can "afford" to spend more (obviously not as much as we are, but that's not something a tax system is designed to address either way).

I don't really see that our bigger economy would make that much of a difference.


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