What Is a Flat Tax Income System? Details on th
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Posted On: 08/06/2016 4:05:47 PM
What Is a Flat Tax Income System?
Details on the Flat Tax System
The "flat tax" is an income tax system in which everyone pays the same tax rate regardless of income. These systems are in place in eight U.S. states as of 2016, but legislation is afoot in at least one state to change to a progressive system.
The Flat Tax Simplifies Taxation
Advocates of the flat tax system contend that it's fair because everyone pays the same tax rate. This system eliminates deductions, tax credits and most exemptions, which in theory curbs biases toward certain behaviors and activities. It also simplifies the tax code, making compliance easier. Some proponents would like to see Federal Form 1040 replaced by a simple post card on which you would write your wages and multiply it by one tax rate.
Only Earned Income Is Taxed
Another aspect of this tax philosophy removes double taxation by taxing only taxing income. Dividends, interest on savings, and capital gains that result from investment or increases in asset value are not taxed under a pure flat tax system.
This is intended to encourage investment.
Economic Growth and the Flat Tax
Supporters of a flat tax system claim that it encourages economic growth by avoiding a system in which earners with higher incomes are penalized for being productive and earning more money. They argue that a progressive tax creates penalties for things like hard work, risk-taking and entrepreneurship. The flat tax is supposed to avoid this by taxing every dollar at the same rate.
At the state level, reducing the top income tax rate by moving to a lower flat tax rate is thought to attract and encourage business investment and to bring in high-income individuals, increasing overall tax revenue and economic stability.
Arguments Against a Flat Tax System
Opponents argue that a flat tax system places an undue burden on the lower and middle class by removing deductions and expanding the tax base to include every level of income. They claim that moving to such a system shifts the tax burden from the rich to the poor, those who are most affected by taxation and who are the least able to pay. They contend that the working class supports the idle rich when unearned income is exempted. Some flat tax systems in the U.S. get around this by exempting individuals who fall below certain income levels and by offering special exemptions or tax credits for low-income individuals.
Opponents of the flat tax argue that progressive tax systems are fair because they tax disposable earnings -- income minus certain deductible expenses. They argue that the wealthy should pay more because they have more disposable income and therefore a greater ability to pay, and that the economy would be better stimulated by decreasing taxes on the middle class, who make up the largest part of the general public. This would give more people additional disposable income to spend on products
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