With every round of Congressional budget talks, one topic that generates heated discussion is income taxes. A lot of debate centers on whether the nation should have a flat or a graduated income tax.
What’s the Difference?
This type of income tax goes up in steps. Those with the highest incomes are responsible for the highest tax percentage and assessments of the fairness of this system vary. The current tax system has six graduated rates that range from 10 to 35 percent. In addition to citing fairness issues, many who advocate tax changes point to a frustrating level of complication when reporting taxes. Under the current system, a taxpayer needs an average of 26.5 hours to prepare an annual return. One reason for this is that the steadily increasing Internal Revenue Code has morphed to more than 3 million words.
A system with a flat income tax assesses a uniform rate on everyone, regardless of the taxpayer’s income level. Several states currently use flat tax systems.
Critics of graduated taxes have suggested several types of flat tax systems. One often-mentioned option assesses a flat rate of tax only on earned income. This is a significant difference from a graduated tax system, which taxes passive income like dividends, stock sale profits and interest on savings accounts.
Proponents point out a number of benefits of a flat tax:
- It’s simple. A single rate would make life easier for the Internal Revenue Service (IRS). Calculations should be much easier for taxpayers.
- Taxpayer savings. Many who now hire professionals like accountants and attorneys could do without them because of the ease of reporting.
- No double taxation. Removal of part of the tax code would eliminate death taxes, taxes on capital gains and double taxation for dividends and savings.
- No global taxation. A flat tax system taxes only income generated within the country’s borders. This benefits U.S. competition in global markets.
- Fairness. The same tax percentage applies to someone who earns $20,000 and one earning $200,000.
- Low-income penalty. Critics say poorer families would have less money left to pay taxes than higher earners after buying necessities.
- Effect on IRS. The agency’s fate would be in question. Employees trained to handle graduated taxes could lose their jobs.
- Lost revenue. If the rich ended up paying less than today, the government could lose a substantial amount of income.
Taxes on a Postcard?
In an interview with Fox News’s Eric Bolling, Sen. Ted Cruz (R-TX) was solidly in favor of adopting a flat tax system. Cruz wants to jettison the current complicated system in favor of one with a return simple enough for an average American to submit on a postcard.
The Senator said a taxpayer should only need to record how much he earns and any deductions for contributions to charity and mortgage interest, and then enter how much he owes Uncle Sam. Cruz is so opposed to the way the IRS operates that he proposes abolishing it. However, he didn’t suggest a replacement.