Tax Reform: Flat Tax
Dateline: 03/13/98
The '97-'98 Tax Season has been something else, hasn't it? The IRS, slammed by taxpayers in Congressional hearings, survived to publish 480 tax forms plus another 280 forms to explain how to fill them out. (Still need some? Right here.) Yet, when it comes to income tax, many politicians and citizens agree -- something's got to change!
Two bills, currently before the House, propose plans radically changing the way taxes are collected: H.R. 1040 - The Armey-Shelby Flat Tax and H.R. 2001 - The National Retail Sales Tax Act include changes ranging from putting our entire annual tax return on a post card, to completely doing away with the IRS and the taxation of income.
In this special two-part feature, I'll try to summarize and compare these two plans, either of which, if passed, would drastically impact every individual and business in America.
The Armey-Shelby Flat Tax
According to U.S. Representative Dick Armey (R., Texas), the IRS sends out 300,000 trees worth of forms and instructions every year. Eight billion pages. Twenty-eight times around the world if laid end-to-end. Perhaps more amazing, are figures compiled by the Congressman showing that we spend 5.4 billion hours a year doing our income tax at a total cost of $200 billion, or $700 for every man, woman and child in America.
But, if Congressman Armey ever sees his plan prevail, filing your annual individual income tax return will be a lot easier, faster, and, for the government anyway, cheaper. The plan is called "Flat Tax" and while it's been around for years, these two conservative Congressmen have pushed it farther up the "Hill" and won it more bi-partisan support than ever before.
Ironically labeled "H.R.1040", the Armey-Shelby Flat Tax would toss out the current tax code in favor of a system that would treat all Americans the same regardless of their income. According to Armey and Shelby, the flat tax would simplify the tax system, boost the economy, and make the tax system absolutely fair.
How the Flat Tax Would Work
The flat tax rule simply says this: Everyone -- you, me, even Bill Gates
-- would pay 17% of what's left of their total annual income from all wages,
salaries, and pensions after subtracting a personal allowance. Uh, oh,
"allowances". Here comes the higher math. Here come the forms. Right? Nope.
There would be only four allowances:
- $23,200 for married filling jointly
- $14,850 for single head of household
- $11,600 for single
- $5,300 for each dependent child
No more, tax credits to figure, deductions to keep up with, or loopholes to look for. In fact, the entire tax return form would be printed -- on a postcard.
(source: U.S. Rep. Dick Armey's
flat tax
summary web site.)
Flat Tax Effect on Individuals
The more you earn (no matter how you earn it), the more you pay. Rep. Armey
cites these examples: Given the exemptions shown above, a family of four
earning $25,000 would owe no tax. A family of four earning $50,000 would
owe 6%, and a family of four earning $200,000 would owe14% in tax.
The flat tax proposal would eliminate the marriage penalty, almost double the deduction for dependent children, and end multiple taxation of savings.
Social Security and Medicare payroll taxes would not be affected under the flat tax proposal. Social Security benefits would not be taxed.
Want to see your tax status under the flat tax? Try Rep. Armey's Flat Tax Calculator.
How Would Businesses be Taxed?
Pretty much the same. All businesses, from "Mom N' Pops Widgets" to Microsoft
would take their total income, subtract total expenses and if the result
is a positive amount (profit), pay tax on that amount at a rate of 17%. Expenses
would include purchases of goods and services, capital equipment, structures,
land, wages and contributions to retirement plans.
Observations and Questions
To me, the flat tax, while easier, leaves some questions unanswered in either
Rep.
Armey's web presentation, or the
entire
text of H.R. 1040 itself.
For instance, what about self-employed individuals, or those who run a part-time home business and have a regular job? Would they file an individual return, or a business return? How about a married couple where one partner has a regular day job and runs a home drop-in baby sitting service at night, and a spouse who's a real estate agent earning a company commission and privately owns rental property? Would these taxpayers be allowed to file the return yielding the best result?
The complexities and inequities of the current self-employment tax have long been an issue with taxpayers. Just consider the plight of folks who provide at-home day care services. They provide a service making it possible for multi-career families to pay huge income tax bills by being multi-career families, but are themselves popped the 15% self-employment tax. The SE tax is a big cause of going crazy, out of business, or both for home day care providers. Our own Stay At Home Parents Guide is a home day care provider. Read about her taxing experience.
Additionally, lots of the complexity of the current system will remain under the flat tax. Withholding from wages will have to continue and income tax-related record keeping for business will not be significantly reduced. Some people will still try to cheat, hide income, or just not file.
Current Status of H.R. 1040
The Flat Tax bill has been under consideration by the
House Ways
and Means Committee since 3/12/97.
Next Week
It just could be that any system which taxes income will spawn complexity
and encourage cheating. Next week, we'll look at the
National Retail Sales
Act, a tax system based not on how much you make, but on how much
of it you spend.
Have an opinion about the Flat Tax?
Let's hear it! Post your opinions or questions.
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