What is the Flat Tax?

Reform Bill With Aims to Levy Funds From all Income at the Same Rate

Jul 7, 2009

The current income tax code is complicated. Among several reform bills to simplify the tax code, the Flat Tax seeks to tax all income equally.

The idea known as the Flat Tax has proposed that all taxes from individuals and corporations take place one time at one rate.

While there are other tax bills in place to reform the current system, the Flat Tax is not any less competitive among them. For those unfamiliar with the proposal, it seeks to:

A Flat Tax Rate of 15%

Most flat tax rates in the world are between 15% and 25%. Most recently in the United States, Republican senator Sam Brownback (KS) proposed for a 15% flat tax on all income. Steve Forbes, CEO of Forbes, Inc. and Republican presidential candidate in 1996 and 2000, had previously proposed a rate of 17%.

Under Sen. Brownback's plan, families of four would pay on all earned income exceeding $30,000 while singles would be expected to pay on all earned income exceeding $25,000. Those same families of four under Forbes' plan would pay on earned income exceeding $36,000.

Using Sen Brownback's plan, a private first class in the US military earns about $18,800 annually. At 15%, he would have $2,820 withheld from his pay. Since his income does not exceed the $25,000 threshold, he will receive all of that money back in the form of a tax return. A 2nd Lieutenant, however, earns $30,600. His withholdings would be $4,590. Being single, he will not be taxed on the first $25,000 of his income, reducing his tax burden to $840 (15% of $5,600), granting him a tax return of $3,750.

As for US corporations that fall under today's progressive corporate tax, ranging from 15% to 38%, they would not have to worry about how to allocate expenses or losses for tax gains by attempting to move into a lower bracket.

Rather, corporations would be expected to pay a 15% tax on income, making the United States a corporate tax haven versus neighboring Canada and Mexico where rates are 19.5% and 28% respectively, according to worldwide-tax.com.

The Flat Tax Proposes to Eliminate Double Taxation

Under the proposed Flat Tax, investments made with money that has already been taxed will not be taxed a second time.

For example, if "Joe The Plumber" steps out of a job with his paycheck and purchases a $1,000 HH savings bond that pays yearly interest of 2%, or $20, then the money made on the bond is not subject to tax since Joe has already been taxed on his wages.

This would not be the case with money put into tax deferred investments, such as a traditional IRA. However, when investors are ready to cash out their IRAs, they can do so without having to worry about a progressive tax system that will tax them at a higher rate for withdrawing a large amount of money. Instead, the money would simply be taxed at 15% unless the person's total income was below the taxable limit.

Simply put, the Flat Tax will allow a person to withdraw every cent- no matter how much- without any surprises from the IRS.

The Flat Tax Will Simplify all Income Tax Forms to 10 Lines

According to Daniel Mitchell's July 7, 2005 article, "A Brief Guide to the Flat Tax," on heritage.org, taxpayers would not have the thick packet that comes with the usual returns each year. Instead, they would fill out a 10-line form:

This 10-line form appears to be very simple. It is. This concept is a possibility as more citizens weigh the pros and cons of one system versus the other as the Flat Tax could be the new system for income taxation in the United States in the near future.

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