Why a Flat Tax is Bad
August 13, 2016
A flat taxes is one of those things that sounds good and from a common sense perspective, it's obvious that we should enact one. However, that "obvious" nature of it masks what is really a flawed idea that would likely have a pretty negative impact on society.
A fair tax system is one in which paying taxes is equally painful for everyone.
I think the main misconception from those who like the idea of a flat tax is that money has the same value to everyone. In reality, the value of a dollar varies based on the person holding it. Suppose we create a flat tax that taxes everyone equally at 20% of their income, which sounds fair, but let's examine this:
- To someone making $25,000 per year, they will pay $5,000 in taxes, leaving them $20,000 to live on. That's painful!
- To someone making $100,000 per year, they will pay $20,000. It's maybe mildly painful, but not as bad. This person still has $80,000 to live on.
- To someone making $1,000,000 per year, they will pay $200,000. Yeah, that's a lot of money, but they can likely still survive on $800,000.
So life is pretty hard for the lowest income earner up there with or without the tax withdrawal, but the point is that as someone makes more money, each dollar is worth less and less to them. The pain that each of the three people in the above scenarios feel when paying there taxes is much higher for the low-income person, and it gets less painful with the more money that someone makes.
In a perfect society we should aim to make the act of paying taxes as painless as possible, but it should have equal weight. Since a flat percentage of someone's income doesn't reflect the notion that money has a different value to different incomes, it isn't actually a fair system.
Your Taxes Will Likely Go Up
Currently we have a progressive tax structure, so those who make more money pay a higher percentage of their income in taxes. So a large percentage of society is funded currently by those who make more money (which in my opinion is how it should be).
If we were to move to a flat-tax system, I'm sure most people aren't thinking that their tax rate would be 39.6%, which is currently the highest tax bracket. If we move that percentage down. On the other end of the spectrum, the current lowest tax bracket is 10%, which if everyone moved to this rate, wouldn't be enough to fund our society. We would meet somewhere in the middle, maybe at 25% or 30%. It's hard to know the specific numbers, but the point is that the taxes for those low-income earners, and likely those in the middle class would need to rise to meet the reduction in tax revenue from high-earners.
It Actually Doesn't Simplify Things
One of the main lines of reasoning around a flat tax is that it is easy and that our tax code could be reduced. The complication with taxes isn't really related to that there are different rates based on income, but that there are deductions, credits, business expenses, investment income, corporate loopholes etc... These additional items within the tax code aren't a necessary aspect of progressive tax structures any more than they are for flat tax structures. They are currently part of the tax system (which is nice because for many of us, they reduce our tax bills), and whether or not we should have some of them is open to debate, but that's a separate debate than everyone paying the same percentage of their income or not.
Yeah, But Tax Brackets Suck
Yes, yes they do -- let's stop using them. A progressive tax system doesn't need brackets. We can adopt a tax percentage that smoothly rises as one's income does, elminating the need for confusing tax tables and the need for playing games to stay within a tax bracket. It actually just needs to be a simple equation, which would eliminate the games people play to stay within a lesser tax bracket.
The flat tax idea is touted for it's fairness, it's simplification of the tax code, and the belief that one's taxes will be reduced. These are however are just not really true. Enacting a flat tax would likely have very detrimental affects on our ability to invest in our society.
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