Part XI

Introducing a “flat tax” is a popular idea among some Libertarians as an idea to increase revenue, reduce costs and reduce government interference in private life. I won’t go into the pros and cons of a flat tax system as it would stray too far from the topic at hand. But the general idea is, if one was implemented, that the government would eliminate all current income taxes (the standard income tax, the Medicare tax, Social Security taxes, employment insurance, etc.), all deductions and all tax credits and would replace it with a single tax rate for all taxpayers that applies to their total annual income, regardless of the sources (no taxing capital gains differently than wage income).

A “flat tax” would be very different because the rich would pay the same percentage as the poor and there would be no tax loopholes for anyone to use (or abuse).  If the tax rate was 15%, instead of the current forms we use the tax return for a family of four who made $50,000 a year would look like this:

• Tax rate for 2010: 15%
• Income: $50,000
• Taxes owned in 2010: $7,500
• Taxes paid from payroll deductions: $7,500 ($625 per month)
• Balanced owed: $0

It would be a lot simpler and it would ensure that every American pays at the same rate but would it raise more money than the current system?

In 2010 the federal government collected $1,782 billion in various forms of individual income tax and payroll taxes. The total amount of personal income from all sources (but not including income from government assistance programs) in the US in 2010 was $10,089 billion (keep in mind this income includes previously untaxed sources of income such as employer contributions to retirement programs). To raise the same amount of money we would have to have a flat income tax of 17.6%. A flat income tax of 18% would raise more than the current system. So if we had such a system would you pay more or less in taxes? Here is a list of the average taxable incomes in different tax brackets and the percentage each paid in taxes in 2008 (these numbers include payroll taxes as well).

Annual Income	Current Average Tax Rate
$12,509	14.4%
$61,470	16.1%
$284,735	23.25%
$1,207,751	26.6%
$6,841,677	25.25%
$29,671,274	22.45%

Now consider that 77.2% of Americans have a taxable wage lower than $75,000.  Under a flat tax system, about 77% of Americans would have to pay more taxes than they do now if we were to maintain our current levels of revenue.  We would have to raise taxes on most people to keep the deficit from getting any larger, so the argument that a flat tax could reduce the deficit without raising taxes does not hold water. Now a supporter of a flat tax would argue there are some hidden savings, because if we had a simpler tax system we could reduce the size of the IRS and that would save money. This is true but it would not save that much. The IRS budget was 12.2 billion or 0.3% of the total budget in 2010.  Even if we could disband the IRS all together it would not make much of a dent in the budget deficit.

So what is the verdict? Despite what some supporters of a flat tax would argue, the system would not raise revenue without raising taxes. Nor would it increase government efficiency to a point that would save enough money to make an impact on the deficit. Ultimately, there are some good arguments out there for implementing some form of a flat tax, but the argument that it will help balance the budget is not one of them.