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A Flat Tax Isn't Simpler, Right?
Old 10-25-2011, 09:15 AM   #1
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A Flat Tax Isn't Simpler, Right?

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."
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Old 10-25-2011, 09:24 AM   #2
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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.
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Old 10-25-2011, 09:30 AM   #3
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Flat means no special treatment on types of income or expenses. Take all income, make no deductions, multiply by a rate, subtract a credit.
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Old 10-25-2011, 09:34 AM   #4
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Originally Posted by TromboneAl View Post
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.
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Old 10-25-2011, 09:35 AM   #5
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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).
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Old 10-25-2011, 09:37 AM   #6
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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.
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Old 10-25-2011, 09:47 AM   #7
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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.
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Old 10-25-2011, 09:55 AM   #8
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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.
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Old 10-25-2011, 09:56 AM   #9
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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
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Old 10-25-2011, 10:37 AM   #10
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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.
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Old 10-25-2011, 11:59 AM   #11
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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.
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Old 10-25-2011, 12:14 PM   #12
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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...........
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Old 10-25-2011, 12:37 PM   #13
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+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.



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I think mostly it's an attempt to lower taxes at the upper incomes.
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Old 10-25-2011, 12:59 PM   #14
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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.
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Old 10-25-2011, 01:07 PM   #15
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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.
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Old 10-25-2011, 01:18 PM   #16
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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".
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Old 10-25-2011, 01:24 PM   #17
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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.........
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Old 10-25-2011, 01:34 PM   #18
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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.
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Old 10-25-2011, 01:39 PM   #19
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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.
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Old 10-25-2011, 01:45 PM   #20
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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.


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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.
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