Principles of the Flat Tax

Special Publications | Taxes


Thursday, September 24, 2015
by NCPA

Today’s graduated income tax system is a morass of deductions, exemptions, allowances, credits and other loopholes:

  • Every year U.S. taxpayers pay an amount equal to 30 percent of total income taxes collected simply tocomply with and administer the complex income tax system.
  • Administrative costs for the IRS in 2010 were approximately $12.4 billion.
  • Taxpayers spent 6 billion hours yearly complying with the income tax code.
  • Studies on the economic burden of the tax system show that the $1 trillion tax revenue generated through theindividual income tax adds a burden of $110-$150 billion on taxpayers and the economy.

There is a better way. Under a flat tax, all income is taxed, and it is taxed at the same rate. Furthermore, income is taxed only once, at its source, when it is realized.

All income is taxed, at the same rate, and only once. For tax year 2013 over 30 percent of individuals claimed itemized deductions with an average individual refund of just over $2,800. The same year 28.8 million returns claimed an earned income tax credit. Today’s deductions, exemptions and loopholes result in more than half of all personal income not being taxed at all. Most flat-tax proposals would require a tax rate of about 17 or 28 percent because they allow two deductions: (1) a generous personal exemption and (2) an immediate write-off of all investments in capital goods. All income is taxed at the same rate. Current marginal income tax rates range from 10 percent to 39.6 percent, making it the most progressive tax in the U.S. second only to the estate tax. Under a revenue-neutral flat tax:

  • The last dollar of income is taxed at the same rate as the first taxable dollar of income.
  • A dollar of corporate income is taxed at the same rate as a dollar of personal income.

Under the current system, investment income can be taxed two, three or even four times. Income is taxed first at the corporate level. When investors receive income in the form of dividends or interest, it is taxed a second time. If the business is sold, it can be taxed a third time through a capital gains tax. And after the owner's death, the investment can be taxed a fourth time through the inheritance tax. A flat tax system would tax income only once when it is earned.

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