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I am in the midst of “downsizing” i.e. selling old clothes, throwing out papers, sorting through various boxes, etc. In doing so, I happened to come across an old Accounting 431 essay I wrote about the benefits of a flat-rate income tax vs. a progressive-rate income tax. Under the first system, every taxpayer would pay a certain percentage of their income in taxes, regardless of how much they earn. Under the second (and current U.S.) system, taxpayers are placed into brackets based upon how much they earn and are taxed accordingly i.e. the more you earn, the higher your income tax rate is.

Americans spend more time complying with our federal income tax code than they do building every car, van, truck, and airplane manufactured here in the USA (Armey). Surprised? You shouldn’t be: Our federal income tax code has grown to an incomprehensible 54,000 pages long and costs an estimated $200,000,000,000 yearly in compliance costs (Rabushka). Unfortunately, a large portion of Americans don’t see comprehensive tax reform as a high priority. This view is a result of a combination of two factors: a lack of understanding related to our current Byzantine tax structure and the statistical fact that a minority of Americans shoulder the majority of the tax burden (the top 50% of all wage earners pay 96% of the total bill) (Locke). Not only are Americans shrouded in a system they find incomprehensible, half of them have little vested interest in learning how their taxes are calculated.This apathy towards our current tax code is understandable to a certain extent. Through revisions to the code over the past 40 years, economically liberal members of Congress have effectively shielded a significant portion of the voting-age public from paying income taxes. With their votes bought and their sustenance now conveniently mailed to them, cries made by these same members of Congress of “tax cuts for the rich” ring true with this group simply because they pay hardly any income taxes. This group could care less about the plight of American businesses who are moving their operations or their charters overseas in an effort to find sane tax laws. Mention “outsourcing,” however, and this same group will demand that these businesses (and the wealthy individuals who create and manage these businesses) be forced to remain in America in order to subsidize the welfare state they so graciously live off and suffocate under a tax code unfairly tilted against them (Mitchell). With such an increasingly dire situation on our hands, the solution has never been easier: A flat-rate income tax. Americans deserve a system they can easily comprehend and one that treats all citizens fairly. Freed from the progressive Swiss cheese tax system we now have, Americans will finally have equal treatment under our tax code in an easy-to-understand format. A personal flat-rate income tax of 10% with a $10,000 standard deduction ($20,000 if you are MFJ) and no other deductions of any kind coupled with a business flat-rate income tax of 10% on gross revenues after expenses would free up the above-mentioned $200,000,000,000 and the countless hours of time spent on compliance costs (Chett). Imagine the gains in all sectors of our economy as money and people are unleashed from under this oppressive and costly burden of tax compliance! Imagine a tax code that encourages rather than discourages people to become rich and be more productive! Imagine virtually every citizen having a vested interest in the cost of government programs because they can clearly see and understand their taxes! This should be the first and foremost policy of our government; one in which the individual keeps a constant proportion of the wealth he creates rather than being forced to give up a larger percentage of his wealth in the name of altruism.Unfortunately, “An End To Altruism” is not the catchiest campaign slogan and a politician espousing such a slogan would not stand a chance of winning. Opposing this pro-flat-rate income tax politician would be those who are in favor of our current progressive income tax structure and can easily spout out such catch phrases as “regressive” and “tax cuts for the rich.” Thankfully, none of these verbal barbs regarding a flat-rate income tax are true. In fact, such a tax could be viewed as progressive when you apply some basic math to the personal flat-rate income tax proposal mentioned above (Chett). Under the proposal, a person earning $10,000 would pay no income tax because of the standard deduction. Someone earning $20,000 would effectively pay 5% or $1,000 in income tax and someone who earns $100,000 would effectively pay 9% or $9,000 in income tax. If taken to two-tenths of-a-percentage point, a person would have to earn $4,000,000 to reach a point at which he is taxed at the full 10% rate (Chett). Not only is such a flat-rate income tax proposal progressive up to a certain point because the taxpayer is paying a larger percentage of his income as he earns more up to the $4,000,000 ceiling, the cost and time to comply with the tax code are exponentially reduced. For such a flat-rate tax code to efficiently work, all deductions except for the standard deduction of $10,000 must be eliminated. Such a law concerning deductions is necessary for two reasons:: 1) it would eliminate Congress’ ability to engage in social engineering via the tax code and 2) it would widen the base of taxpayers, thereby raising awareness (and, hopefully, animosity) towards the spending actions taken by Congress. Congress’ sacred cows of mortgage interest, child credits, and charitable giving would cease to exist along with the so-called “marriage penalty” because a MFJ couple would receive a $20,000 standard deduction ($10,000 per person) (Chett). The flat-rate tax structure would also eliminate the double-taxation of business income that currently exists. All business income, no matter what the source (i.e. corporate, partnership, sole proprietorship, farm and rental profits, and royalties) would pay a 10% flat-rate income tax on the gross revenues of the business less expenses incurred in that year. Qualifying expenses would be limited to purchases of goods and services, structures, land, capital equipment, and wages. In keeping with the basic and strict rules concerning deductions found in the individual flat-rate structure mentioned above, no business deductions would be permitted for fringe benefits, interest, or payments to owners (Armey). To make sure all of the income in the economy is taxed, business income earned by individuals would be taxed and collected at its source, i.e., the business. An employee’s income would fall under the individual flat-tax rate structure whereas a business owner’s income or a shareholders’s dividends would be taxed under the business flat-tax rate structure, both of which are 10% of income. In comparing this flat-rate income tax proposal against our current progressive-rate tax structure on the basis of which would serve as a better tax, it is clear that the flat-rate income tax structure is superior on multiple counts. In terms of convenience, the flat-rate structure conveys a clear percentage of tax, regardless of income, while also giving Congress the ability to slightly increase or decrease the rate(s) without undermining the taxpayer’s preparation and planning. Contrast this ideal situation with our most recent change in our progressive-rate structure which resulted in further complication of the tax code along with a multitude of Congressional giveaways to different “manufacturing” businesses (i.e. any business with a good lobbyist on Capital Hill) and it is easy to see why a flat-rate structure is superior.In terms of convenience, an individual’s entire flat-rate tax return could easily fit onto a postcard and could be accurately completed within an hour. In contrast to this quick and easy computation is our current progressive-rate structure which is filled with a myriad of forms an individual must complete depending on a whole host of different tax classifications and, having completed these forms, is still unsure if his tax return is correct.In terms of the costs associated to administer the two different tax systems, the flat-rate structure is clearly superior to the progressive-rate structure because the compliance costs under it are dramatically reduced and the amount of time necessary to comply with the tax code is also dramatically reduced. Both of these (i.e. saving the taxpayer time and money) should be at the forefront of the minds of our Congressmen when writing tax law, however, under our current structure that is not the case.The flat-rate income tax is clearly in the best interest of the American people. It promotes fairness, simplicity, and ease-of-use; items which are currently missing from our progressive-rate system. Those critics who charge that a flat-rate income tax is “regressive” or “inherently unfair” either do not understand the basic economics or choose to play off the American people’s ignorance about our current horrid tax structure. America was not built on Socialism or Communism and we should not have a tax structure that reflects these corrupt philosophies. Capitalism is the only philosophy which protects the individual freedoms our country was founded upon (Locke). Therefore, our government should strive to protect, not encroach upon, these freedoms. The flat-rate income tax is a great starting place because it will protect our fundamental right to keep what we earn without the social engineering via the tax code that Washington is so enamored with and it will raise awareness about the spending decisions of our government. With the replacement of the progressive-rate income tax structure by the flat-rate income tax structure, a better standard of living will be had not only by the demonized rich in America but by every American striving to realize his or her American Dream (Armey). Armey, Richard K. “The Flat Income Tax: A Road To Fairness.” USA Today 1 Nov 1995. 7 Nov 2004 . Chett. “One Perspective On The Flat Tax - It’s Actually Progressive!” The Internet Party 25 June 2003. 7 Nov 2004 Locke, Edwin A. “Tax Injustice Day: Altruism vs Americanism” Capitalist Magazine 15 April 2004. 7 Nov 2004 Mitchell, Daniel J. “Fixing A Broken Tax System With A Flat Tax.” Capitalist Magazine 23 April 2004. 7 Nov 2004 Rabushka, Alvin. “The Flat Tax Revisited” Hoover Institute 2 June 2003. 7 Nov 2004

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