Tuesday, April 20, 2010

Keep It Simple Stupid with a Flat Tax

A Brief Guide to the Flat Tax, by Daniel Mitchell, Ph.D.

These major features of a flat tax are:

A Single Flat Rate. All flat tax proposals have a single rate, usually less than 20 percent. The low, flat rate solves the problem of high marginal tax rates by reducing penalties against productive behavior, such as work, risk taking, and entrepreneurship.

Elimination of Special Preferences. Flat tax proposals would eliminate provisions of the tax code that bestow preferential tax treatment on certain behaviors and activities. Getting rid of deductions, credits, exemptions, and other loopholes also helps solve the problem of complexity, allowing taxpayers to file their tax returns on a postcard-sized form.

No Double Taxation of Saving and Invest­ment. Flat tax proposals would eliminate the tax code's bias against capital formation by ending the double taxation of income that is saved and invested. This means no death tax, no capital gains tax, no double taxation of saving, and no double tax on dividends. By taxing income only one time, a flat tax is easier to enforce and more conducive to job creation and capital formation.

Territorial Taxation. Flat tax proposals are based on the commonsense notion of "territorial taxation," meaning that governments should tax only income that is earned inside national borders. By getting rid of "worldwide taxation," a flat tax enables U.S. taxpayers and companies to compete on a level playing field around the world.

Family-Friendly. All flat tax proposals have one "loophole." Households receive a generous exemp­tion based on family size. For instance, a family of four would not begin to pay tax until its annual income reached more than $30,000.[6]

Consumption-Based. A tax code that does not discriminate against saving and investment is con­sidered a consumption-based tax system, regard­less of whether taxes are deducted from the paycheck or collected at the cash register. In this respect, a flat tax is a type of consumption tax. The difference between a flat tax and a national sales tax is where the tax is collected. A flat tax is levied on income-but only once and at one low rate-as it is earned. A sales tax is levied on income-but only once and at one low rate-as it is spent.

Last year, 47% of Americans paid no federal income tax. However, they did not get off scott free-- no, their labor became profit for their employer, and that profit became tax revenue for the federal government, through business and high-income taxes. That means they do not even see a price tag on how much of their labor ended up going to taxes.

With the flat tax proposal above, many of this 47% would have to pay taxes. However, since their employer would be conceivably taxed much less, he could afford to pay his employees more.

But the real reason I like the flat tax is that I think people should see the price tag of the government they have, because the more people know how much it costs, the more they will demand accountability.

Thomas Jefferson believed that an informed electorate was necessary for democracy to succeed, as he wrote to a friend:

" ... whenever the people are well-informed, they can be trusted with their own government; that, whenever things get so far wrong as to attract their notice, they may be relied on to set them to rights"

What information could be more important, more basic, than the actual price each of us must pay for our the government?

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