A Solution to Replace the Unfair US Tax Code
Finally A Solution to the Current, Highly Complex, & Unfair US Tax Code
If I were to ask this question to a group of American taxpayers, ” Are you happy with our current tax system” what do you think their response would be? I would imagine some would want to see the entire unfair US tax code burned and its authors tarred and feathered.
I think most of us would have to agree the current and extremely complex tax code is far from perfect. So imperfect in fact, that two groups have formulated plans to replace the present tax code. Our goal in this article is to compare the two plans for you to decide if either one has merit. One plan is the Flat Tax and the other is the Fair Tax.
Proponents of the Fair Tax and Flat Tax alternatives both agree that when comparing our tax system with other countries, it shows that the USA lags far behind their more effective method of raising taxes. Each says the best way to correct our ineffective system is to use their particular method of taxation.
Way back in the 2000 presidential election, these two plans were being popularized. Ralph Nader, the Green Party hopeful, was supporting a flat tax. Eight years later, Mike Huckabee got behind the fair tax alternative. Even with all the publicity, many voters were confused and didn’t have a clue what the differences between the fair tax and flat tax were.
Current Unfair US tax code is a progressive tax based on income
In order to explain these different tax alternatives and changes that would be made, we need to have a better understanding of our current tax system, and why it’s so highly criticized. Our current system is a progressive tax on income. What this means is those with low income pay a smaller percentage of tax while others with higher income, pay a higher percentage of tax.
To confuse matters more, margins are factored in, called tax brackets, and this determines the percentage of tax an individual pays. That in itself might not be too difficult to understand, but then the amount of capital gains earned and certain deductions and exemptions used, are also factored in to determine taxable income.
Critics of our confusing unfair US tax code claim that it’s impossible for the average taxpayer to understand. They then are forced to hire a tax professional. I’ll go one step further – many tax professionals don’t fully understand the complex tax code.
It’s been amended so many times by Congress that they too get confused. Often times, it’s not until money comes in from lobbyists whose clients want a change in a certain section of the code, do our elected politicians understand what that code section means.
Many other critics claim that a progressive tax method in itself is very unfair to wealthy taxpayers. They say that it discourages true economic growth, and if the government were to change our system, everyone would enjoy the benefits of a healthy economy in the long term.
Both the flat tax and the fair tax have similar goals and would require a major overhaul of our present system of taxation.
The two alternatives also have differences in some basic ways. If a flat tax were implemented, all taxpayers, regardless of the amount of income earned, would pay at the same percentage rate. Under the fair tax, income would not be taxed at all. Instead, a national sales tax would be implemented.
Neither tax alternatives are fundamentally new ideas. For a short period of time after the Civil war, the government instituted a flat tax on income. As a matter of fact, many nations today use a flat tax. The fair tax concept, however, is not that old…it dates back to the mid-1990’s.
Were you aware that the US government’s source of income prior to 1913 was a national sales tax? I didn’t either. When the 16th amendment was passed in 1913, the tax on income began. Now, we’ll get into the basic’s of each alternative to see how it would work today. Current tax code has more holes than swiss cheese…Adopt flat tax.
Under the Flat Tax, everyone pays the same tax rate on income
Those who support a flat tax are of the mind that it’s the fairest type of tax because everyone pays the same percentage rate, no matter how much you earn. This same group believes that a tax rate of 17% would be enough to support the government. ( I would suggest a 10% tax rate and a substantial decrease in spending).
A flat tax, by its definition, would do away with exemptions, deductions, and other loopholes that make our current unfair US tax code so onerous. Proponents of a flat tax say that the individual taxpayer could file their tax return on a postcard. (At least, until Congress figured a way to cover their excessive spending.)
Under the Fair Tax, a national sales tax instead of income tax
The most radical change implementing the fair tax is that it would eliminate all taxation on income, both for individuals and businesses. Along with that, the Internal Revenue Service would be abolished. (Wow, what savings there.) A national sales tax would be implemented that would cover every government program. This concept essentially taxes money being spent and not earned.
The fair tax concept would make sure that low-income families are not hit hard with a sales tax on necessities. A monthly check called a prebate would be sent to them to cover the tax on any necessities purchased. The primary concept is that no American citizen would be paying a tax on their necessities.
Both plans have many concepts that are alike. Many other types of taxes are eliminated and they claim that it’s much fairer than our current tax code. Proponents of both tax alternatives claim that their plan will be a benefit for everyone. Economic growth will be promoted with the elimination of the capital gains tax plus double taxation now in place that discourages investing, saving, and creation of jobs.
As you might imagine, there are critics to both of these two tax plans. The critics of the flat tax say that taxpayers anticipating a tax advantage wouldn’t get one. They give an example of having no mortgage interest deduction. (Well, so what! Under a flat tax, there would be no exemptions or deductions anyway.)
Critics of the fair tax offer this lame reasoning why it’s not the one for us. They say that if the fair tax were implemented, just before it kicked in, many consumers would buy items with their credit cards, not paying the national sales tax. They then would pay for the credit card purchases for years with income that isn’t taxed. (So what!)
The Tax Foundation Group, who is independent and doesn’t promote any plan over the other, responded to these allegations. They said that the benefits produced by either the flat tax or the fair tax plans would be well worth any problems created by transitioning to a new system of taxation.
It’s no surprise that Congress hasn’t backed either of these tax plans. They obviously haven’t figured out a way to make either plan work for their personal agendas. Something needs to be done very soon with our present highly complex and unfair US tax code.
What do you think? Do you favor either of these two plans? Do you have an alternative plan? Do you think the current unfair US tax code should be replaced? Do us a big favor by commenting below.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a major law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.