What are the advantages and disadvantages of adopting a Flat Tax in the US?
With the discussions on reforming the US Tax Structure gaining momentum, there has been a lot of talk about adopting the Flat Tax Rate. So, it is worth analyzing the advantages and disadvantages of the adopting the Flat Tax Rate structure.
What are the advantages of replacing the existing tax system and adopting the flat tax?
1)Adopting the Flat Tax Structure would significantly reduce the marginal and effective tax rate for most US Taxpayers.
2)It has been argued that adopting the Flat Tax "would also eliminate double taxation".
3)It is a proven fact that adopting the Flat Tax Rate structure would definitely simplify tax preparation process saving US Taxpayers Billions of Dollars in Tax Preparation Fees. Both the Corporate and individuals would be able to file their returns on a simplified form.
4)Adopting the Flat Tax Rate structure has a tendency to encourage savings. This in turn would lead to "more capital formation and thereby stimulate the economy".
5)A Tax Simplification Bill accompanying the Flat Tax may enable all "Businesses to expense all their capital investments", and avoid the complex depreciation rules currently in place. Deducting all business expenses will spur domestic investment and increase growth in the US, leading to greater employment and job growth.
6)It is a progressive tax with a flat rate on taxable income, however, the more an individual saves or invests, the lower his taxable income becomes, thus lowering his total tax payment.
7)Experts have said that adopting the Flat Tax Rate structure "would mean that nearly half of all households would pay no federal income tax under this plan".
8)Adopting the Flat Tax Rate structure is a "simple tax that levies the same tax rate to all Americans regardless of taxable income, while reducing or eliminating income taxes for low income families".
9)It would significantly reduce IRS audits for both individual and businesses.
What are the disadvantages of replacing the existing tax system and adopting the flat tax?
1)Adopting the Flat Tax Structure means "eliminations of most of the Schedule A deductions such as mortgage interest payments and property taxes, a major disadvantage to the homeowners". A potential catalyst for further deteriorating home prices. A major incentive for owning a home was the attractive tax benefit for deducting the mortgage and interest payments.
2)Adopting the Flat Tax Structure means, elimination most of the Schedule A deductions such as charitable contributions, employee business expenses and casualty losses.
3)Adopting the Flat Tax Structure means that some taxpayers would never have to pay taxes, thus lowering the overall tax revenues.
4)Adopting the Flat Tax Structure means that some if not all "high earning taxpayers would end up paying lower taxes".
5)Economist has argued that adopting the Flat Tax Structure would effectively mean having a Regressive Tax structure.