Zero

“I lean toward a flat tax. But I want to make it real flat like zero.” (Ron Paul)

A flat tax is an income tax system in which everyone pays the same tax rate regardless of how much income they have. These systems are in place in eleven U.S. states as of 2019[i], and several countries use this system as well including Russia, Latvia, and Lithuania. Two of the most important rules of good tax law are low tax rates and less double taxation of saving and investment. Maximum personal income tax rates, for instance, are 23 percentage points lower today in developed nations than they were back in 1980.

Corporate income tax rates have dropped by almost 20 percentage points. Many nations including Scandinavian countries are reducing tax rates on individual capital income and lowering taxes on wealth. All these reforms boost economic performance by lowering the marginal tax rate on productive behavior. It is no surprise that nations that enact these policies grow faster and create more jobs.

Governments that try to keep tax rates high, by contrast, suffer from stagnation and joblessness. Politicians from these countries complain about ''harmful'' tax competition from Ireland, Slovakia, Estonia, and the United States, but they should look in the mirror if they want to find who really deserves to be blamed.

The U.S. federal government operates on a progressive tax system. The more you earn, the greater a percentage in taxes you'll pay. For example, single taxpayers pay a 10 percent tax rate on incomes up to $9,700 in 2019, but they pay 32 percent on income over $160,725 up to $204,100.

Social Security and Medicare taxes are examples of a flat tax system already in place in the U.S. Employees pay 6.2 percent of their earnings in Social Security tax up on all earnings up to a wage base of $132,900 as of 2019. Earnings above $132,900 are exempt—the rate doesn't increase. They pay 1.45 percent of their earnings to Medicare regardless of how much they earn. As with many potential changes to the tax code, a flat tax rate comes with both advantages and disadvantages:

Advantages

·        Proponents of a flat tax cite some benefits of the Internal Revenue Service (IRS) switching away from its current progressive tax system. For one thing, flat tax supporters argue the system would be fairer because everyone would pay the same rate.

·        Some flat tax proposals include closing certain tax loopholes for individuals and business owners to simplify the tax code further.

·        Some who support a flat tax argue that it could also promote economic growth because taxpayers would be encouraged to earn and invest more money.

·        To provide for low-income earners, some proposals have called for an exemption amount that isn’t taxable. If, for example, the exemption amount is $35,000 and your income is $50,000, you’d only pay a flat tax on $15,000; the amount by which your income exceeds the exemption amount if your income is below the exemption amount, you won’t pay anything at all.

Disadvantages

·        A progressive personal income tax can help equalize wealth in a country by taking a larger share from high-income groups and effectively giving a tax break to low-income groups.

·        In 1992, the Congressional Budget Office (CBO) simulated the effect a flat tax would have on the after-tax income of American families. The CBO found a flat tax would increase the after-tax income of the highest earners by nearly 7% and decrease the after-tax income of the lowest earners by nearly 22%.

·        That doesn’t work with a flat income tax rate. In this scenario, any tax revenue the IRS loses through a lower rate on high-income earners must be made up by low-income earners.

 “The 9-9-9 plan would resuscitate this economy because it replaces the outdated tax code that allows politicians to pick winners and losers, and to provide favors in the form of tax breaks, special exemptions and loopholes. It simplifies the code dramatically: 9% business flat tax, 9% personal flat tax, 9% sales tax.” (Herman Cain) [ii]

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[i] Colorado (4.63), Illinois (4.95), Indiana (3.23), Massachusetts (5.05), Kentucky (5), Michigan (4.25), New Hampshire (5), North Carolina (5.25), Pennsylvania (3.07), Utah (4.95), and Tennessee (2) use the flat tax system percentage as shown above for 2019.

 

[ii] Sources used:

·        “Flat Tax is the Way of the Future” by Daniel J. Mitchell

·        “What Is a Flat Income Tax System?” By Tonya Moreno

·        “What is a flat tax on income?” by Ben Luthi