Flat TaxEverywhere you look these days, it seems as though someone is suggesting a flat tax. Our complex tax code is under fire, and many demand a simpler structure. The flat tax seems to fit the bill exactly. However, there is a great debate as to exactly what form a flat tax would take.

Here is a look at both sides of the argument:

Arguments in Favor of a Flat Tax

Many cite the complexity of our current system, and the existence of loopholes that make it possible for many people to not pay any taxes at all. A flat tax, some argue, would eliminate these loopholes, and require that everyone pay the same percentage of their income to the government.

As part of a flat tax, many proponents expect that cuts in spending would be made so that the revenue from taxes would allow for a balanced budget. This is a requirement, since many flat tax suggestions top out at a lower tax rate than the current highest marginal tax rate.

Flat Tax Structures: Not All Flat Taxes are the Same

It sounds fairly straightforward at first. However, it is important to note that not all flat tax structures are the same. In fact, because so many people are used to the current progressive structure, and because a 10% straight flat tax would lead to larger burdens on low-income people that it would on high earners, a number of different flat tax plans have evolved.

Indeed, some flat tax structures look a lot like the current system – just simplified. Some flat tax proposals include any combination of the following features:

  • Deductions: While the plethora of deductions seen now would be eliminated, some flat tax plans allow for deductions. These deductions include a standard deduction for everyone, charitable donation deductions, and mortgage interest deductions. In some plans, though, some deductions would only be available to those under a certain income threshold.
  • Tax Brackets: With a flat tax there is normally one tax bracket but in some plans, there are more (usually two or three). These would be wider tax brackets, such as those making $500,000 a year or more, and those making less.
  • Exemptions: Additionally, there are proposals that allow some households to continue avoid paying taxes. Thresholds include the Federal poverty level, or a household income amount, such as $20,000 a year or $30,000 a year.
  • Business Taxes: Some flat tax plans have one rate for all businesses, while others divide businesses according to profits, or according to gross income.
  • Capital Gains: Another consideration is capital gains. Some flat tax plans refuse to tax capital gains at all, while others believe that capital gains should be taxed, but at a uniform rate across the board. Some would even keep the current capital gains tax rate in place.

Clearly, even though a flat tax would likely be simpler than the current code, a great deal of wrangling would be needed to settle some of the different approaches to a flat tax. It’s also important, as you consider your stance on a flat tax, to understand the particulars of the plan offered, since not all flat tax structures are the same.