Flat Tax

Many people would like you to believe that flat tax is so named because it
will flatten your finances. That at the least is the intended conclusion. By
eliminating

personal deductions like mortgagee interest payments, the study claims, the
flat tax

would reduce housing values in this country by upwards of 10 percent. The
study\'s

methodology is shaky at best, and the jury on housing values is still out.

Despite the forces allied against the flat tax, tax reform has grown steadily
because the current tax system is so unpopular and the alternatives promise so
much. But in addition to the possibility of lower housing values, the flat tax
poses several other

serious problems too easily dismissed by its advocates. Businesses may be the
flat

tax\'s second biggest obstacle. By reducing the cost of compliance with the
tax laws and removing uncertainties about the tax situation, the flat tax would
eventually benefit businesses. However, they would see their tax burden rise by
about two-thirds, on average, from 31 percent of the total tax burden to around
50 percent. This tax increase on businesses would result from the loss of
deductions for state and local taxes and for employee fringe benefits, among
other things.

Though businesses will try to pass on these costs to consumers and
employees-by raising prices and trimming fringe benefits, for example-shifting
the nations tax burden to the business community will not produce successful tax
reform. Next, the flat tax initially would raise taxes on the middle class by 20
percent. On

average, a family with between $40,000 and $50,000 in adjusted gross income

would see there taxes rise about $700 to about $7.500.

The flat tax also appears to have a major fairness problem. For example
consider two families. The Jones have a combined salary of $50,000 in wages.
Under the

flat tax, a 20 percent rate would cost this family $3,700. Now consider the
Smiths, who in retirement consume every dollar of their $1 million in dividend
income. Under the flat tax, the Smiths owe no tax at all because capital income
is excluded from the tax base. To be sure, their dividend income was taxed at
least once at the business level before they received it. But the perception
would persist that a high income family would pay no tax. Will tax fairness be
defined so that individuals consuming significant amounts of capital income
would pay little or no tax?

Though difficult issues, they are not impossible to resolve. Moreover, the
system\'s advantage could well outweigh it\'s drawbacks. The flat tax could prove
a boon for the economy by eliminating a passel of convoluted tax disincentives
to saving and

investing. Economists will quibble over exact estimates, but there can be no
question that savings and investment will improve in both the short and long run
under a flat tax. Advocates are correct to insist that the flat tax would be
much simpler than the current tax system. The new system would tax only the
income derived from individual labor, after allowing for personal exemptions.
There would be no deductions. The flat tax would tax businesses\' net cash income
at the same rate that applies to individual income, while eliminating all the
apical tax provisions that penalize some businesses while benefiting others.

One big problem with the current system is that it costs from $150 billion to
$300 billion annually to operate. The flat tax, by contrast, would cost about
1/5th as

much once fully phased in. These cost savings are equivalent to more than a
$100

billion tax cut for the American people.

No tax system is perfect, and no tax reform proposal is without flaws. In the
end, the flat tax\'s greatest strength is that it would remove the current tax
system\'s depressing effect on the economy. This over time, could make up for all
the problems mentioned above. But before it can pass the problems must be
addressed.

Category: Business