The realities of a flat tax

Last week I introduced three ways to divide out who paid what in taxes to run the government. Today I want to look at the pros and cons of the flat tax system.

If you remember, with a flat tax you simply figure out how much income there is out there to tax, how much revenue it is you want the government to have, and then charge a percentage of everyone’s income to get the money transferred. Flat implies that the percentage is the same for everyone. Let’s say that the percentage ends up being 18%. That means everyone pays 18% of their income. If you earn $50,000 a year you pay $9,000; if you earn $150,000 you pay $27,000.

First I will say this about a flat tax and the other two systems as well: They are fair. They are also unfair, depending on your definition of fair. Because of this, “fair” is neither a pro nor a con without knowing what the individual reader thinks of as fair.

A flat tax is fair because everyone pays the exact same proportion of their income in taxes.

The main advantage of a flat tax is that it is incredibly easy to understand. You make X dollars. You take X and multiply it by the flat percentage. You send in that amount of money. It also makes sure that everyone pays at least some taxes. That tends to keep people interested in what the folks in D.C. are doing to and for us. With a flat tax, when the government needs more money there is no question as to who shoulders the load…we all do. If it is decided that less taxes are needed then everyone saves some money. And there is the fact that if you find a way (preferably honest) to earn more money, you are not disproportionately taxed on it compared to the average Joe.

The con is that while the flat tax treats everyone the same when it comes to the percentage of income that is taxed, it does not take into consideration the amount of discretionary income a person has. To explain this, let us suppose that everyone has certain needs: Food, clothing, and shelter are some examples. But most would be kind enough to say that it is not extravagant for people to also be able to get an education, have transportation other than their feet, and some amount of health care.

Of course all of those things have ranges to them, from Spartan to opulent, but for our example, let’s assume that an agreed upon minimal standard of living was $15,000 per person. Imagine then if our flat tax was 18% and a person was bringing in $15,000 a year. The resultant tax of $2700 would come out of the money needed for a meager existence.

Someone earning $150,000 a year and paying $27,000 in taxes would be paying the same percentage and 10x the actual dollar amount. But none of that would affect their ability to provide a minimal standard of living for themselves.

Yes, there are ways around this, but for now, we’re only looking at the baseline cases of each tax program. Next week we’ll look at a sliding-scale.

This article was published in the Wichita Falls Times Record News on February 15, 2015.