Why a Flat Tax Would Not Work

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Herman Cain proposed his peculiar 9-9-9 tax plan with a flat 9 percent tax on personal income and businesses. Rick Perry tried to push his proposition to replace our current tax code with a “simple” 20 percent flat tax. Even Mitt Romney, who in the past denounced the flat-tax proposals, was quoted a few months ago, saying “I love flat tax.”

Why are politicians fascinated with the idea of a flat tax? Is it because the U.S. economy is at a standstill and not getting any better? Is it because people feel that some drastic changes are needed? Or is it all based on the illusion that a flat tax would be a cure for the troubled economy, free U.S. businesses from a 35 percent corporate tax and start a long-awaited and so much desired economic boom?

None of the reasons above can actually justify the proposition of the flat tax (other than using it as an attractive political campaign slogan.) A flat tax simply would not work.

Raising Taxes on The Middle Class, While Cutting Taxes For The Top Earners

The U.S. tax code has always required the rich to pay a greater percentage of their incomes then the poor. If we flatten that out, the rich and corporations will get massive tax cuts, while taxes for the poor and middle class will go up. All of these would be just in time to strengthen the already rising income inequality.

In order to avoid the outrageous gap between the wealthy and the poor, the capital gains tax would have to be increased. However, the definition of a “flat” tax in itself (a constant marginal rate) would not allow a capital gains tax hike.

A Flat Tax is a Drag on Government Revenues

Cutting down on taxes will have a staggering impact on revenues. If the government is left with huge decreases in tax revenue and gaping deficits, it will end up borrowing more, and probably making cuts in a lot of government funded programs. What gives?

Probably using a flat tax slogan serves more as a political stunt rather than a substantial, well-thought out plan.

Comments (15)

  • The flat tax is definitely a hot topic these days but I still think a graduated tax system helps lower income individuals more.

  • Any tax system needs to consider not only rates but what people actually pay. There is evidence that the system we have now is already pretty flat when you look at what people pay. A flat tax would simply recognize this fact and enable taxpayers to have an easier time filing due to simplification.

    Also, marginal rates that are lower would provide incentives for people to earn more. If your goal is to maximize what tax revenue you collect, a flatter tax system is the way to go. If you want to politicize and demonize certain taxpayers, well, then…

    • I am not trying to politicize or demonize certain taxpayers. I assume you are reffering to the “rich.” I think I clearly expessed my concerns with a flat tax, so I won’t repeat myself. But I will tell you this… right now the middle class utilizes a lot of credits and deductions to reduce its tax burdern. You take that away, and there will be a huge tax hike. The middle class does not have a lot of discretionary income left to be able to afford such a tax hike.

  • This makes sense but it just sounds so great! I would love a flat tax if it would actually work.

    sorta like communism huh? good on paper not so good in action? We still need some sort of solution though to the oh so complicated current tax code.

    • Actually the fact that our tax system is complicated, is not so bad. I like our current tax system. I think there are a few loopholes that need to be fixed but overall, it is a good system. 🙂

  • How about NO personal income taxes?
    Alternate proposal: Gradually shift system to system of higher import tariffs. Phase it in with say a 5% to 10% tax just on the highest income earners, to satisfy the masses’ resentment against the “rich”, decreasing every year to perhaps a couple percentage points, the way it was originally sold when it was first passed as an amendment.
    Given the US’s incredible consumption of material goods, I wonder what kind of ramifications and unintended consequences this would cause (there are *always* unintended consequences).
    Just a thought.

  • A Flat tax is regressive against the poor. But, our current progressive system is also regressive in certain parts.. FICA, Social Security, Sales tax. I think a flat tax works if we get rid of all the credits, subsidies, deductions.

    • You just listed all the reasons why a flat tax would not work. You get rid of the deductions and credits, and the poor becomes poorer, the rich richer and so on.

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  • I think a lot of people do not realize that a flat tax is bad for them. Not just poor… 🙂

  • I am totally against flat tax. I thought Cain is out of the race.

  • You hit it on the head! Flat tax is just a catchy slogan. Maybe Buffett for President so he can convince the 1%-ers to pay more taxes.

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