About this time of year, we will hear cries for a flat tax. Those on the outside looking in can be quick to suggest that the current tax system be thrown out and a simple, (supposedly) fair and flat tax replace the cumbersome system we have today. So let’s step back and consider a true flat tax for a moment. Now keep in mind, it must be flat; one rate for all with no exceptions! To be flat there can be no tax credit or added taxes (i.e. alternative minimum tax). Sound good thus far?
Let’s begin with the flat tax rate charged across the board to all taxpayers. Would 34% be appropriate? Heavens no! Millions would be storming Washington D.C. in protest. But what is the current tax rate for those making; $500K, $1 million, $5 million and up?—34%. So those in the upper brackets would love a reduction in tax to perhaps. . .10%?
After the “flat” rate (same for all taxpayers!) is settled, we then remove the vast array of tax credits; child care credits, $1k per child credits, education credits, energy credits, foreign tax credits (does the line of protest grow longer?). Then we remove the itemized deductions; no more deduction for home mortgages (now the bankers and home builders get in line to protest), no charitable contributions deductions (now the charities join that line) and no medical deductions (need I touch on the protest from the “health reform” protesters getting into that line?). No more tax exemption for our dependent children (oh my!). No more break for being married. And we must flat tax all sources of income fairly including municipal interest (state and local municipalities have representatives in that protest line now). The capital gains break disappears in a fair and flat tax regime. How long is that line of protesters now?
My modest opinion is that if Congress were to finally sign a true flat tax, the very next day the political process would begin to “unflatten” it. Will there ever be a “flat tax” in my life time? I don’t think so. But it would be an interesting time in the history of government taxation. Walter Nunnallee, CPA, JD, LL.M once said (paraphrasing) that some of his associates had a dog that could “flat” hunt, a truck that could “flat” run and they thought that the government had “flat” taxed us enough. But I think it would be an interesting time in the history of government taxation. It’s a process that could be fun to watch on cable news. It would be a great idea for a modern reality television series. So I say, “Let’s bring it on!”
Blogger: Charles ‘Eddie’ Brown, CPA