A Flat Tax Isn't Simpler, Right?

[TromboneAl]

In and of itself, a flat tax isn't any simpler than the current system, right? That is, the returns could involve exactly the same 1040 forms, schedule A's, schedule C's, etc., but in that last step, everyone multiplies their AGI by the same percentage.

I realize that many flat-tax proposals would also involve other simplifications. I'm guessing that "flat-tax" has come to mean "flat and simplified" in the same way that "fixed income" often means "fixed and low income."

 

[samclem]

Yes, I think you are right. "Flat tax" has come to be understood as "flatter and simpler" in common use. "Flat Tax" just refers to the number and spread of the tax rates--they are "flat" (usually a single rate).

IMO, the greatest complexity with our current system (and where the greatest amount of fraud is, and where the policymakers most seek to manipulate behavior) is in the calculation of taxable income. Once that is accomplished, having one bracket or several is relatively minor thing.

Interesting that the press has so much coverage of taxation systems and changes to the tax code in the last month. This GREAT issue largely lay dormant until just recently, and now candidates have seen that it's an issue they can exploit to gain support. I wonder why this didn't come up earlier, with all the money they spend on focus groups, etc.

 

[thefinancebuff]

Flat means no special treatment on types of income or expenses. Take all income, make no deductions, multiply by a rate, subtract a credit.

 

[MichaelB]

In and of itself, a flat tax isn't any simpler than the current system, right? That is, the returns could involve exactly the same 1040 forms, schedule A's, schedule C's, etc., but in that last step, everyone multiplies their AGI by the same percentage.

I realize that many flat-tax proposals would also involve other simplifications. I'm guessing that "flat-tax" has come to mean "flat and simplified" in the same way that "fixed income" often means "fixed and low income."

Flat tax is one of those ill defined terms that means different things to different people, much appreciated by media and candidates because it is so flexible. I'm guessing that responses on this thread will reflect that.

 

[ziggy29]

Realistically a "flat" tax is just that -- the same tax rate on all income. Some of them may have a "baseline" exemption for the first $X of income, but beyond that most flat tax proposals don't have multiple brackets.

Of course, one complicating factor is that even if the *rate* is always the same, everyone will lobby for exemptions which are in their own self-interest (whether for dependents, mortgage interest, charitable deductions, et cetera).

 

[l2ridehd]

An individual flat tax has the potential to be much simpler, at least until all the special interests get involved. It could be as simple as gross earnings times a pre determined %. With no deductions for anything. No charity, home mortgage, medical, and any other current deductible. It could even be simpler and scalable. $0 to $30000 at 5%, $30000 to $100000 @15%, $100000 to $300000 at 20% $300000 to $1000000 at 25% and > then $1000000 at 30% or something along those lines.

The value to a flat tax should be everyone contributes something and special interest is eliminated or greatly reduced. The impact is CPA's, IRS agents and tax lawyers would be almost eliminated. However they add no productive value to the economy today.

I would support one if it it is simple and everyone has skin in the game. Today I would not eliminate the primary home mortgage, but it could be phased out as the home market improves.

 

[lowflyer]

Al – Thanks for prompting me to think more about this. The concept of “flat” generally conjures up the idea of simpler, cheaper, easier to administer, better, etc. Regardless what the tax rate is, the complexity is in coming up with your taxable income, so it’s not the rate that makes the system complex. As soon as one of these plans is pitched to the public and the press, the inequities are quickly pointed out, modifications made and then the complexity starts all over again.

It will be interesting to watch as things develop....or not.

 

[rescueme]

As far as DW/me? We have quite a substantial amount in tax-deferred holdings.

If a flat tax was enacted, it would be an immediate impact to our current tax rate (9% FIT overall) but it would allow us to convert our tax-deferred holdings at a lower rate, at one time, at a lower tax rate than what we could do under the current tax code.

While we're lucky to have more than we need for our retirement expenses and the "excess" will be going to charity after our passing (e.g. none/limited tax due), this may encourage us to convert a bit more than we need at this time.

 

[ERD50]

I realize that many flat-tax proposals would also involve other simplifications. I'm guessing that "flat-tax" has come to mean "flat and simplified" in the same way that "fixed income" often means "fixed and low income."

Yes, in general usage, 'flat-tax' is taken to mean one rate, with far fewer deductions/credits, etc. But w/o those words specifically, it could mean just one rate, with all the complexities intact.

I'll take it a step further. Unless you state it as a 'flat income tax', I could say that a 'flat tax' means everyone pays the same flat amount, like a flat fee for a meal, versus different fees for different entrees. That's usually called a 'head tax' (when applied to taxes, not meals ).

-ERD50

 

[photoguy]

An individual flat tax has the potential to be much simpler, at least until all the special interests get involved. It could be as simple as gross earnings times a pre determined %. With no deductions for anything. No charity, home mortgage, medical, and any other current deductible. It could even be simpler and scalable. $0 to $30000 at 5%, $30000 to $100000 @15%, $100000 to $300000 at 20% $300000 to $1000000 at 25% and > then $1000000 at 30% or something along those lines.

This would be a simplified progressive tax system. The more you earn, the greater your tax rate. As people have mentioned, most people I think interpret "flat" to mean a single tax rate on all income, but have also associated "flat tax" schemes to be simplified as well. However, simplification is not required.

 

[Animorph]

Yeah, different numbers in the tax tables is hardly simpler.

The flat tax should make it easier to plan for taxes, with no need to consider what your income level was going to be. The take home amount of a 4% SWR might be easier to calculate. Come to think of it, it might make Roth accounts the go-to retirement account over the 401k/IRA. If there weren't a bunch of low-income exceptions we might squeeze through to lower the tax rate of our first few dollars out of the Roth.

I think mostly it's an attempt to lower taxes at the upper incomes.

 

[FinanceDude]

A flat tax means nothing unless tax REFORM takes place. We have the most cumbersome tax laws in the WORLD! While it keeps IRS agents and CPAs happy, the rest of us suffer...........

 

[Hamlet]

+1

We need tax reform like we had in 1986, not a "flat tax".

We need a much simplified tax system. We don't need it to be flatter.

Keep the progressive rate structure, and get the rates down some by removing most of the deductions.

I think at this point it would make sense to just scrap the corporate income tax entirely in exchange for setting the cap gains and dividend tax rates back to normal income rates. The share of revenues that the corporate income tax brings in has become fairly trivial now, since the big multinationals can avoid paying it almost entirely.

I think mostly it's an attempt to lower taxes at the upper incomes.

 

[george76]

Flat means no special treatment on types of income or expenses. Take all income, make no deductions, multiply by a rate, subtract a credit.

So, I wonder if 401ks, IRA's and ROTH IRA's would then, for all practical purposes, be eliminated since there no longer would be any special treatment on types of income.

 

[rescueme]

So, I wonder if 401ks, IRA's and ROTH IRA's would then, for all practical purposes, be eliminated since there no longer would be any special treatment on types of income.

You could leave a larger amount in the market and hopefully receive a better return, rather than pay the tax up front.

And if it didn't work out? You would pay less tax on a smaller portfolio, upon withdrawls, assuming income source did not matter.

Just one consideratoin.

 

[Nova]

Back when I was working, a cartoon was posted in the break. It was an IRS tax form which said "What did you make, send it in".

 

[FinanceDude]

So, I wonder if 401ks, IRA's and ROTH IRA's would then, for all practical purposes, be eliminated since there no longer would be any special treatment on types of income.

Doubt it.........

 

[Finance Dave]

IMO, the greatest complexity with our current system (and where the greatest amount of fraud is, and where the policymakers most seek to manipulate behavior) is in the calculation of taxable income. Once that is accomplished, having one bracket or several is relatively minor thing.

Great post, well said. I need to find the "recognition" button.

 

[M Paquette]

The tax rate is the trivial part of income tax complexity. The real fun comes into working through the thousands of rules related to what constitutes income, what's ordinary income, what bits fall into special categories (Payment for Widows of the American Civil War...), and what sort of things offset income, can be claimed as an expense, for a tax credit, or both.

Note that attempting to simplify the tax code will likely be represented as the "Job Killing Tax Act" by the Usual Suspects, representing tax accountants, tax law specialists, tax shelter construction agencies, and so on.

 

[Finance Dave]

Another great post. Very good insights from forum members on this topic.

Don't get me wrong, I don't feel sorry for any of the CPAs in the IRS, but there will be hundreds of thousands of people (not sure how many would be CPAs) dumped on the private markets for jobs if we could get rid of the IRS via tax simplification. This would represent a sizeable reduction in government spending, which in turn should result in lower tax rates.

I see the above as win-win, but the laid-off employees will need to transition to private positions to avoid using unemployment taxes for a lengthy period, and we need to keep special interests from bastardizing the tax simplification effort IMO.

The tax rate is the trivial part of income tax complexity. The real fun comes into working through the thousands of rules related to what constitutes income, what's ordinary income, what bits fall into special categories (Payment for Widows of the American Civil War...), and what sort of things offset income, can be claimed as an expense, for a tax credit, or both.

Note that attempting to simplify the tax code will likely be represented as the "Job Killing Tax Act" by the Usual Suspects, representing tax accountants, tax law specialists, tax shelter construction agencies, and so on.

 

[frayne]

The tax rate is the trivial part of income tax complexity. The real fun comes into working through the thousands of rules related to what constitutes income, what's ordinary income, what bits fall into special categories (Payment for Widows of the American Civil War...), and what sort of things offset income, can be claimed as an expense, for a tax credit, or both.

Note that attempting to simplify the tax code will likely be represented as the "Job Killing Tax Act" by the Usual Suspects, representing tax accountants, tax law specialists, tax shelter construction agencies, and so on.

Bingo, give that man a cigar. I don't see any major changes to our tax code in my lifetime. Just too many tentacles of special interest groups/lobbyists that have written the code and have a vested interest in not simplifying it. Politicians can run off at the mouth till the cows come home but the code ain't gonna change substantially, regardless. Does make for good political rhetoric though.
Just my two cents.

 

[Texas Proud]

Also, the people who think that the IRS would go away with a simple tax.... or that tax attorneys would not look hard for loopholes and stay employed are fooling themselves...

Even back when Reagan simplified the tax code, there was no reduction in employement in these sectors...

Simplifying it also means getting rid of all those refundable tax credits that is basically welfare.... that is not going to go over well with a certain party either....

To really simplify the tax code, you need to fundamentally change how taxes are charged and collected.... IOW, if you get a payroll check, interest, dividends etc. etc., you collect a tax on that amount and do not worry about other income... you can have a flat amount for the interest etc. and a graduated scale for salary if you want... or just a flat amount for all income... the problem is that there becomes a class warfare that the rich don't pay their fair share.. and on it goes...

Heck, the IRS could probably fiqure out the tax return for at least 50% of people out there with just the info they get... and probably closer to 75%... except for the people who cheat, there is not much out there that is not being reported...

 

[M Paquette]

Heck, the IRS could probably fiqure out the tax return for at least 50% of people out there with just the info they get... and probably closer to 75%... except for the people who cheat, there is not much out there that is not being reported...

Absolutely correct. For the majority of income tax payers, the annual rites of tax form preparation represent an opportunity to overpay taxes compared to what the algorithms implementing the tax code within the IRS computers say is permitted. That is, folks are likely to do things like just take the standard deduction and skip Schedules A, C, E, and friends, rather than pull together the hoary details of every allowed deductible medical expense, log miles to that jazz gig, or remember that $1.80 spent on a new sink trap for the rental.

I'd bet (based on reviewing years of deceased parents and relatives tax returns) that there's more individual tax returns with an overpayment rather than underpayment. Of course, some of those underpayments may be whoppers.

 

[scrabbler1]

IMO, the greatest complexity with our current system (and where the greatest amount of fraud is, and where the policymakers most seek to manipulate behavior) is in the calculation of taxable income. Once that is accomplished, having one bracket or several is relatively minor thing.

Exactly. I recall watching a great debate on "The Firing Line" back in late 1995 and this point was brought out by the panelists.

 

[farmerEd]

I don't dispute the fact that IRS tax laws can be confusing, but I bet for the vast majority of people, including me, spending about $50 a year on turbotax (or other software) takes the vast majority of the complexity out of the equation - my returns are generally pretty simple, though I am an active trader and my Schedule D is sometimes 50 pages long, but none-the-less I can usually complete my taxes every year in under 90 minutes from start to finish. Every year the software gets smarter and my return gets easier.

As far as a flat tax with no deductions, I can pretty much guarantee you it will NEVER happen. Even cain with his 999 plan is now talking about deductions for the first 50K of earnings (for a family of 4), if politicians can't play favorites with the tax code, what will they do all day? There is NO WAY they are ever going to give that up - that's my opinion anyway.