Pros and Cons of a Flat Tax

A flat tax system in the United States by definition refers to taxing household incomes at the same rate regardless of income levels. Advocates of a flat tax system argue that it will simplify U.S. tax codes and eliminate other taxes. Opponents of a flat tax system argue that it only benefits wealthy individuals and would eliminate the IRS, causing wide-spread unemployment. Here are some of the pros and cons of a flat tax system.


Flat Tax Pros

Promote Economic Growth- Many advocates of flat taxes argue it will promote economic growth and spur job creation. One argument is that many working Americans would work harder to increase their incomes without fear of entering higher tax brackets.

Eliminate Additional Taxes- The thinking is a flat tax rate system would eliminate additional taxes such as capital gains taxes, death taxes and double taxation on savings. Flat taxes would also eliminate additional taxes on business-related income.

Simplify the Tax Code

A flat tax system would replace other complicated taxes requiring mounds of paperwork. A single rate for every American is easier to calculate for both tax filers and employees of the IRS. The current tax system in the U.S. is extremely complex with nearly four million words that make up the entire tax code.

Flat Tax Cons

Penalize Low-Income Workers- Opponents of a flat tax system argue it will penalize low-income earners and take expenses out of the picture. The argument is since low-income earners have to pay the same expenses as high-income earners, a flat tax would lead to less spending power for low-income earners.

State and Local Taxes- A flat tax system would leave current local and state tax levels in place. Therefore, businesses and families must spend the same amount of time figuring out their state and local taxes as they would with the current federal tax system.

Medicare, Social Security and Payroll Taxes- Opponents of a flat tax system argue it does not address payroll taxes, social security and Medicare benefits. Since the federal government funds social security and Medicare through payroll taxes, opponents argue a flat tax system must keep payroll taxes in place, leaving individuals and businesses with the same dilemma as the current tax system.

One thing that opponents and advocates of a flat tax agree on is it would simplify the tax filing process. A flat tax would close many government loopholes and eliminate all the complex marginal rates and tax breaks. Although a flat tax is an alluring proposition, most Americans do not expect an overhaul of the U.S. tax code anytime soon.

William Doonan is a tax law and legal expert in New York.