The Flat Tax Essay Research Paper The — страница 2

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tax, based on the Hall/Rabushka flat tax would replace the current personal and corporate income tax with a simple 17 percent tax on all income. With the exception of a generous family allowance ($33,300 for a family of four), all labor income is taxed at the individual level. Taxes on business income (such as interest, dividends, capital gains, and rent) are withheld and paid at the business level. Both businesses and individuals would fill out simple post card sized returns (Mitchell 3, 3). Using the same model as the Armey/Shelby flat tax, Senator Arlen Specter, purposes a slightly higher rate of 20 percent and lower personal allowance in order to maintain limited deductions for charitable contributions and the full deduction for home mortgage interest (Mitchell 2, 3). Steve

Forbes proposal is much the same as the Armey/Shelby proposal. Forbes uses the same 17 percent as the Armey/Shelby plan, but increases the family of four allowance to $36,000 (Mitchell 3, 3). Senator Phil Gramm and Pat Buchanan both setup their respective proposals quite different from the others. Gramm uses a 16 percent rate, however keeps deductions for home mortgage interest and charitable deductions, but the biggest difference is the continued double taxation of many forms of income. Capital gains taxes would not be abolished, while income used for savings would continue to be taxed twice and the bias against business investment would be reduced, but would not be eliminated (Mitchell 3, 3). Buchanan follows Gramm?s format but uses a low 15 percent rate. Corporate profits

would continue to be taxed at both the individual level and the business level. Savings would be taxed twice. There would be a flat 17 percent rate on corporations, but provisions biasing the current system against investment, such as the alternative minimum tax and depreciation, would remain (Mitchell 3, 3). All of these competing flat tax proposals are possible plans for tax reform. However, because only the Armey/Shelby has spent a generous amount of time in the public eye there is limited discussion on the other proposals. For the purpose of a fair analysis of the flat tax this paper will focus on the basic structure of the flat tax as created by Robert Hall and Alvin Rabushka. Proponents and critics of the flat tax agree on at least one aspect of the flat tax, simplicity.

The flat tax replaces the endless exemptions and loopholes with a postcard-size form that all Americans would fill out whether they are a CEO or young kid flipping burgers. The Tax Foundation estimates that a flat tax would reduce compliance costs by 94 percent, freeing up resources that are currently wasted on record keeping, filing forms, learning the tax code, litigation, and tax avoidance, saving taxpayers more than $100 billion in compliance costs each year (Armey 3). One of the major areas that proponents of the flat tax claim fame to is the issue of fairness. They argue that no matter how much money a person makes or what they do, they will be taxed the same as every other citizen. With the elimination of deductions there are no loopholes to help the wealthy get out of

paying taxes. Critics argue that by eliminating taxes on capital income the gap between rich and poor will become even bigger. By eliminating the current tax on savings and investment not only will future taxes on savings be avoid, but so will existing savings and investments. This would represent a huge tax windfall to current investors, most of who are in the top five percent of the income distribution (Hamond 1). Families with the same total income will face vastly different tax burdens depending on how they earn their income. The family that earns a larger share of its income from labor will pay a higher personal tax than the family that collects more of its income from interest, dividends, and capital gains (Hamond 1). Those in favor of the flat tax would rebut with the fact

that all capital income is already taxed at the business level. One of the most debated topics on the flat tax is whether or not it increases economic growth. Proponents of the flat tax claim that the flat tax would allow Americans to keep more of the money they earn, creating the desire to work more, and to save and invest more (Mitchell 1, 13). Even if a flat tax lifted long-term growth by as little as 0.5 percent (and most estimates show growth increasing by twice that amount, 1.6 percent), the income of the average family of four after ten years would be as much as five thousand dollars higher otherwise (Mitchell 1, 13; Gale 2, 2). According to one study by a former chief economist for the Congress? Joint Committee on Taxation, under the flat tax the economy would 5.7 percent