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Income Tax: Is a flat tax the best way?

Income Tax

“Collect no more taxes than the government requires.” (Jesus Christ – New Living Translation)

FOUNDING FATHERS’ PERSPECTIVE

In every Society also, there must be some taxes because the necessity of supporting Government & defending the State always exist. To do these on the cheapest terms is wise.” (Robert Morris)

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.” (John Adams)


FACTS

The first temporary income tax was approved by Congress in 1862 to help pay for the Civil War.

In 1913, income tax was permanently established by the passage of the 16th Amendment to the Constitution.

Today, 47% of the US Annual Budget comes from personal income tax.

IRS US Tax Center. “The history of income taxes”
Center on Budget and Policy Priorities, 3/4/16. “Where do federal tax revenues come from?”


The US income tax is a progressive tax. The more income a person earns, the higher percentage of tax they pay on it.

The highest income tax rate ever charged in the US was 94%, instituted by President Franklin Roosevelt in 1942 to help pay for World War II.

Current income tax rates in the US range from 10% – 40%.

The top 2.5% of wage earners pay 53% of all income tax, and 45% of Americans pay no tax at all.

Establishing a progressive income tax is the second plank in the Platform of the Communist Party on how to turn capitalistic countries to socialism.

Manifesto of the Communist Party, 1848. Marx, Karl and Engels, Friedrich. “Chapter 2 – Proletarians and Communists”
Mises Institute, 9/7/04. Young, Adam. “The Origin of the Income Tax”
Forbes, 10/6/15. Williams, Roberton. “New Estimates of How Many Households Pay No Federal Income Tax”
Pew Research, 4/13/16. DeSilver, Drew “High income Americans pay most taxes, but enough to be fair?”


The flat tax is an often-proposed alternative to progressive income tax. With minimal deductions and exceptions for low-income earners, everyone pays the same tax percentage regardless of income level. Thirty-seven countries presently have flat tax systems, with their tax rates ranging from 10% – 30%. The only major world power in this group is Russia.
Wikopedia, “Flat Tax”


Benefits of a Progressive Income Tax include:

  • Takes the most money from those who can most afford to pay
  • Offers low-income earners an opportunity to save

Problems with Progressive Income Tax include:

  • Unfairly punishes high-income earners
  • Discourages economic growth
  • Easily exploited: $458 billion in annual revenue is lost due to cheating
  • Complicated: The current IRS Tax Code has 74,608 pages and uses 500 different tax forms
  • Costly: The annual IRS budget is $12.4 billion

Washington Examiner, 4/15/16. Russell, Jason. “Look at how many pages are in the federal tax code”
Forbes, 8/7/15. Phillips, Kelly. “Our current tax vs. the flat tax vs. the fair tax: what’s the difference?”
Fiscal Times, 4/29/16. Pianin, Eric. “IRS pegs tax-cheating by Americans at $458 billion annually”
The Laffer Center, April 2011. Laffer, Arthur B. et al. “The Economic Burden Caused by Tax Code Complexity”


Benefits of a Flat Tax include:

  • Simple to implement: everyone pays one rate
  • Has encouraged economic growth in most countries that have it
  • Could significantly reduce the size of the IRS
  • Reduces loopholes and deductions, and eliminates payroll and estate taxes

Problems with a Flat Tax include:

  • Without adequate deductions for low-income earners, it could disproportionately harm the poor.
  • Difficult to predict if it would consistently raise enough money to operate the federal government

Heritage Foundation, 5/20/06. Mitchell, Daniel. “Flat tax is the way of the future”
Small Business Chronicle. Meehan, Colette. “Pros and Cons of a Flat Tax”


62% of Americans favor a flat tax: 66% of Republicans and 52% of Democrats.
Reason-Rupe Poll, 4/15/14. Ekins, Emily “62% of Americans say they favor a flat tax”


SUMMARY

The income tax provision in the Constitution was not established to correct social inequities, but to simply raise the money needed to operate the federal government. Support for our current income tax system comes not from those who believe in its effectiveness, but from those who feel it’s morally acceptable to take a higher percentage in taxes from those who earn more. That rationale does not justify maintaining our long-failing, progressive system.

A flat tax would offer tax breaks to the poor, but would also eliminate disproportionately punishing successful individuals and corporations who create jobs and build the economy. The Laffer Curve economic theory has shown that lowering tax rates on high income earners increases business productivity and improves the economic position of all income levels, thus benefiting the country as a whole.

The Laffer Center, 1/13/17. “The Laffer Curve”


POSSIBLE SOLUTIONS

A flat tax should be tried because its potential benefits far outweigh its possible risks. If a flat tax did not raise sufficient revenue to support the federal government, Congress could return to the progressive system, or reduce the government’s size and cost.

Brief #24A – January 17, 2017

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