The flat tax has been talked about a lot in the American tax debate. Its proponents say it is simple, fair, and good for economic growth. Its opponents, however, call it unfair to the poor.
A flat tax is supposed to be designed to treat all taxpayers equally. It does this by charging one tax rate to everyone while eliminating loopholes, deductions, and other credits. Over the past several years, there have been a few different flat tax plans proposed by economists and politicians. While no plan is exactly the same as the others, they all have some common features.
All flat tax proposals have one single tax rate that would apply to all taxpayers. In general, this rate has varied between proposals, but most of the time it is less than 20 percent. It is this rate that is the cause of a lot of the controversy surrounding the flat tax. This rate is a lower rate than the current highest tax brackets currently paid by the highest income earners. The proposed rate is higher than the current two lowest tax brackets that are offered.
Opponents of a flat tax state that this would mean that people who earn less, and thereby pay the least amount of taxes under the current system, would have to pay more taxes under a flat tax. People who make enough income to be taxed under the highest tax brackets under the current system would probably pay less.
Strictly speaking, a flat tax would also eliminate deductions, credits, and exemptions. The positive effect of these eliminations will be getting rid of a lot of paperwork and the companies who work to find these deductions. The money that people would have spent on these services, say proponents, would be spent instead on growing the economy via consumer spending and business investment.
On the other hand, opponents of a flat tax say that this plan would harm many lower and middle class individuals and families who use these tax credits to lower their tax bill. Opponents also argue that the flat tax would take away the subsidies that encourage people towards desired behaviors such as purchasing a fuel efficient car or donating to charity. The companies and non-profit organizations that rely on the current system of tax incentives could be forced into bankruptcy. It should be noted, though, that a few flat tax proposals have included an exemption for a small base amount of income that could be excluded from the tax.