Flat Tax Rate

1. The Current system needs reform The need for tax reform is growing stronger every day. A large part of the tax code is outdated and based upon principles established in the 1930s and 40s, and since then the economic conditions have changed. Even in the 1960s many called for reform due to the complexity of the tax code. The tax code was 900 pages long, administrative regulations were hard to understand, and court cases continued to add unnecessary complexity to the tax code [1]. The current tax code imposes rates which are very high and biases against investment. Complexity remains an issue today, 50 years after some of the early calls of tax reform have ended. The layers of complexity discourage investment. When all of the taxes up, “investment returns face a tax rate of almost 54 percent … That high rate raises the hurdle rate that investors require before making certain investments since they are concerned with their after-tax returns for taking the risk. Therefore, many potential investments fall short of meeting the mark and thus go unmade. The effect on families is the same as when pass-throughs invest less: fewer new job opportunities and forgone wage increases.” [2] Entrepreneurship is essential for our economy. Businessmen must weigh the costs and benefits whenever they make an idea and contemplate selling it. If the tax burden is too high, many breakthroughs will not become a reality because the cost of the tax burden outweighs the benefits of the product. Thirty years ago under the Reagan administration the government did overhaul the system, reduce rates, close loopholes, and cause economic growth. But this was not enough. Congress over time has re-added complexities and has ruined the progress previously achieved. Tax reform needs to (1) lower rates and broaden the tax base, (2) end double taxation, (3) reduce complexity, and (4) cause growth. 2. A flat tax does everything tax reform needs to do (1) There are two main tax rates. The first is the marginal income tax rate for the rich at 40%. The second is the one for the middle class at 30%. The Heritage Foundation has suggested a 28% flat tax, lower than both of the aforementioned rates, which means tax rates would be reduced for everybody under the flat tax system [3]. The flat tax would keep the EITC which both liberals and conservatives support as it reduces poverty--especially for single mothers [4]. Lower tax rates are widely accepted to reduce income tax evasion, so the base would be broadened. (2) It would end double taxation. It would be a single tax. (3) It would reduce complexity. There would only be two tax credits. Three deductions. Things under the current law would be grandfathered in as to reduce economic strain during a transition and avoid major legal issues. Saving would be tax exempt until used for consumption. “The New Flat Tax offers tremendous simplification for individuals and businesses; it provides much greater transparency so that taxpayers can be more confident the taxes they pay are in line with those of their neighbors, and so taxpayers can be more informed about the true costs of government. [5] (4) The most comprehensive study on the issue suggests a revenue neutral--which the New Flat Tax plan is--flat tax would create economic growth in the USA. [6] 3. Russia A similar experiment was done in Russia. Russia already had low taxes with 28% being their max tax rate (like under the Reagan administration), but they lowered their income tax to a flat 13%. The International Monetary Fund, although unable to find a supply side effect from the tax, was able to find that more people paid the tax and that revenue increased as a result. [7]In Russia, a flat tax provided more revenue than a progressive tax! Other researchers did find a supply side effect, noting more hours were worked and it was easier to find jobs. Not only did revenue increase, but the jobs market thrived as a result. [8] A final study on the reform found that there was more tax compliance—so more revenue—but also that productivity increased. [9] The flat tax in Russia was a huge success, and was far superior to the liberal progressive tax they had before. 1. http://taxfoundation.org... 2. http://www.heritage.org... 3. http://www.heritage.org... 4. http://www.cbpp.org... 5. http://www.heritage.org... 6. http://www.frbsf.org... 7. https://www.imf.org... 8. http://ftp.iza.org... 9. http://www.voxeu.org...