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.
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I read both types of proposed tax systems, and in my opinion, I prefer the Fair Tax. It’s unfortunate, though, because it will never pass those self-serving politicians. If it would benefit them, it most surely would pass.
Thanks for your comment, Rebekah. You’re probably right, until we clean up the swamp as many say, our present tax code will continue to be amended.
I think that either one of these two tax systems would be so much better that the current system that has been amended so many times to benefit special interest groups. The Fair Tax, though, that wouldn’t hit a family’s necessities, would be a matter of interpretation I’m afraid.
I agree Manny, just about any type of tax plan is better than the one we have now.
Thanks for a great article, and a very informative one. I agree with you in that the best way to start is by stopping the insane, uncontrollable spending by those elected officials who are supposed to represent us.
Thanks for your comment Gino. I’ve been preaching this for years, a balanced budget is the best way to go.
I personally don’t think that the Fair Tax, a national sales tax, would go over very well. In my state, we already have a state sales tax of 8%, and if as an example, a national sales tax of 15% or so, is added, people would go ballistic. They would have a hard time associating the 23% tax on a purchase instead of a payroll tax deduction. Even though the total tax paid might be lower overall, it wouldn’t matter. I would much prefer the Flat Tax on wages.
You have an interesting point Nicole. Replacing federal withholding tax with a national sales tax would be a very large physiological pill to swallow. I would imagine that most states, if not all, have a sales tax & adding 15% or 20% to it for non-necessities would cause an uproar.
I too, would like to see a Flat Tax implemented where everybody who had income, paid their fair share. However, for this plan to work, a requirement for a BALANCED budget would have to be made and those mindless egomanics couldn’t spend one dollar over the budget. Their raises and benefits would also have to be approved by the voters.
I agree Evan. A balanced budget and controlled spending is a must.
To say the current tax code is unfair is a major understatement. There are those that can afford to invest in various tax shelters and pay little or no taxes, and those that are unable to do so, have to pay taxes to support the freeloaders. A Flat Tax would require everyone who had income to pay their fair share. No more loop holes, no convoluted tax code, and cut the IRS workforce by two thirds.
I agree Jessica. I’ve worked with the current convoluted tax code for many years, and it can be confusing at best. Several individuals who have been promoting the Flat Tax have suggested that the IRS be abolished.
You’re preaching to the choir here. For years, I’ve been saying that the current tax code is so screwed up, that many accountants are as confused as most taxpayers. I believe that we still have the current system only because those sanctimonious hypocrites who make our laws, couldn’t care less about those who elected them. They’re in office only to feather their nests and screw anyone who disagrees with them.
Thanks for stopping by Jerry, your comment is appreciated. I also agree with your comments.
I think that the Fair Tax is the best solution. Even a Flat Tax is better than our present tax code, but the Fair Tax makes more sense. With that, you get to decide what you pay and keep more of your hard earned money. It’s easy to implement and no IRS to mess things up. Sad to say though that we’ll never see it in our lifetime because of all the corruption in Washington by both political parties. What’s more, none of them have our best interest at heart, only theirs.
Thanks for commenting Carolyn. I’m afraid you’re right, with all of the special interest groups and politicians with their hands open wide, the messed up tax code will be here for quite awhile.
Your article helped me to better understand the differences between the flat and progressive tax systems and I appreciate it. Outlining some of the pros and cons of each helped a lot. I totally agree that our current tax system is way too complicated. I do my own taxes and if it weren’t for my tax prep software, I would be lost.
By the way, your posts are very well written and organized and I would think that you must have a background in tech writing.
Glad to hear that our article helped, Allan. Thanks for your kind words.
A very interesting read. I’m not a very big fan of a flat tax personally, but I feel that taxes must be simplified. Having taxes simplified would be more fair as the wealthy wouldn’t be able or have a need to pay an army of accountants and lawyers to get around the tax code.
I heard about another option that ties into both the flat and fair tax. It’s called a hybrid system that allows taxpayers to pay the lower of a flat tax and a progressive system with the main idea of protecting those who don’t earn much.
Thanks for your comment Sarah. Yes, we have a number of new tax plan variations, but the first thing is to convince our elected officials that the current system is bad & a new one is necessary.
I agree in part with the criteria mentioned above for a progressive tax. With that, one would pay their tax according to their tax bracket with no loopholes or tax shelters of any kind. I believe that would eliminate a lot of the corruption in our congressional area with their special interest groups where lobbyists bribe them for favorable tax laws.
We should be able to buy a home because it’s a good investment, not for tax write offs and give to charities because it’s the right thing to do, instead of a tax deduction.
I agree Erle. Overcoming the corruption will be a major feat.
Very good article and sure to promote a lot of discussion. I have two fast fixes to the national imbalance of income. The first one would be a national sales tax of 1% on ALL transactions, including those that are not taxed at this present time. The second would be to increase the standard deduction to the federal poverty level.
The first fix would make sure that all citizens would participate in funding the government. The second would eliminate most of the low income individuals from any income tax burden. I haven’t been able to do a calculation on the net effect of the income stream, but I believe that it would be a positive number.
Thanks for your suggestion Lauren. Just about any new plan is better than the one we have now.
You have my vote for the flat tax. There is no way that anyone can fully understand all of the IRS tax rules and regulations in our present tax code.
You’re right Eddie. Many accountants have problems with the current tax code. There are thousands of pages and a lot amending amendments.
A part of our current problem with the tax code is that politicians have very little skin in the game. All they do is to promise more handouts and benefits then saying that somebody else will pay for it. They sound like that Socialist that was elected by Brooklyn voters…stupid as they come.
At least with a flat tax, everyone will have some monetary contribution to make.
Thanks for your comment Angela. Yes, that Socialist that was elected is very confused most of the time. She wanted Medicare for all, and when asked how it would be paid for, her answer was out in left field.
In theory, a flat tax is a good idea because it requires each individual to pay a proportional amount of tax on what they earn. I agree completely that our current tax code needs revamping in major proportions. As a wise man once said, “complexity equals and promotes corruption.”
Thanks for your comment, Donald. The wise man you’re referring to hit it right on the head.
I think that the flat tax will not work because it involves income, and once again, the IRS has their fingers in the pie. A national sales tax would replace the federal income tax and would be more fair.
FICA would have to remain as a payroll tax, and would not be included in the sales tax. It would have to be set in the area of 12% to 15%.
The main objective is to get the IRS out of the loop and a sales tax would do that. It would protect the poor and fairly tax everyone else.
A flat tax is still an income tax!
Thanks for your insight Barbara. You have a good point in your main objective.
In my humble opinion, a flat tax would go a long way in increasing the equality of the various tax groups in the USA. A lot of people complain that the rich avoid paying their taxes while others can’t. There is some truth in this, but a properly constructed flat tax would take care of that.
Thanks for your comment Kenny. Many commenters here do prefer the Flat Tax, some with variations.
I would be in favor of just about any tax plan that would prevent corrupt politicians from taking campaign money and “other perks” from special interest groups who want favorable tax laws.
I totally agree Gracie.
This is a good discussion on the pros and cons of the flat tax and the fair tax. As I see it, the bottom line is that our current system is broken and must be replaced.
In Eastern Europe, the flat tax appears to be working, but the question that I have, is are things better because of the flat tax implementation or the political change?
In my home state of PA, we have a flat rate of 3.07% on all income except social security and retirement income. Few if any deductions make the return relatively simple to complete.
I can recall way back in one of my college classes, we were required to prepare a federal tax return by hand, and it was not easy. If more people had to do this, and especially in today’s environment, they would be in line to eliminate the entire tax code.
Thanks for your comment Paul. I started out in my accounting career preparing all tax returns by hand. It did make one think. If we had to do that today, with the complexity of the code, the IRS would be pulling their hair out with all the errors being made, both in math and tax theory.
Let’s not forget, that no matter what tax plan we adopt, any sitting Congress can amend, remove, or alter any legislation that a previous Congress adopted. They usually are able to make changes faster than anyone can follow.
It appears to me that a flat tax would hurt new auto purchases and also many major manufacturing firms in the US. The points made in this article are well thought out explains the good and bad of each plan.
I was hoping that the real problem in the US would be addressed, and that is the insane excessive spending in the government.
Thanks for your comment David. We appreciate your kind words and your keen insight.
It doesn’t matter what income tax system we adopt, flat or progressive, the government siezes their share before you are able to feed your family or put a roof over your family’s head.
With a Fair Tax, your keep your money until you decide to spend it. You know up front how much tax you will spend on each purchase so you in effect decide when and how much tax you will pay.
Thanks for your comment Kate. A lot of people seem to prefer the fair tax for the same reason you gave.
I too favor the Fair Tax because you can choose when and what you will purchase and you will have more money in your pocket to do so. If you don’t have the money, you can wait until you do. Under current tax laws, or any income tax system, your choice is gone. Your money is taken by the government no matter what your financial situation is like.
Thanks Brett, for your comment. You have a good point and a lot of people share it.
Reading over the perceived disadvantages, it appears that the negatives are based on the uncertainty of possible changes. The loss of government control over our behavior is the gorilla in the room.
Tossing out the gorilla, AKA the IRS, would save a lot in wasted earnings. When you add in the cost of compliance to 70,000 + pages of tax regulations and also the business cost of tax collection, the amount is staggering.
Consider now, the amount of taxes that would be collected from drug dealers, prostitutes, crooks of all kind, illegal aliens, unlicensed businesses, and wealthy individuals who are able to shelter or hide income. Don’t forget crooked politicians (whoops, that is redundant) as well. As you look at the big picture of the Fair Tax, this has to be the logical choice.
It appears that most of the individuals making comments prefer the fair tax too, Seymour. You’re correct, it would bring a lot of folks into the fold who never pay now.
This is nothing but a scam. The only way to make it fair is if the tax covered everything purchased, not just items purchased in stores. The middle class and the poor have to spend a major portion of their income on items to sustain their lives. The tax should also be levied on all foreign and domestic real estate and investments. That would include mutual funds, stocks and bonds, commidity contracts, CD’s, insurance and any other investment.
It may be fair then, otherwise it’s nothing but a greedy scam to squeeze the poor and middle class once again.
Thanks for your comment Henri and your insight.
Many individuals lose the concept of the word “fair” today. They are brain washed in class warfare and anti capitalism, and don’t grasp the concept of EVERYONE receiving the prebate that will offset taxes for lower income individuals. If you raise the taxes that affects the wealthy, no one cares. If you raise taxes that affects everybody, the poor and wealthy alike, there is a
There are also advantages by not persecuting people who struggle with the complexity of the current tax code. In addition to the tax to pay, they have a large cost to pay just trying to comply with the tax code. Guess who pays those costs? Right… the consumer as they are passed through. Many individuals feel that it’s great to “stick it to the Man”, who is big business. They don’t realize that they’re shooting themself in the foot. If you remove the huge cost, the economy booms.
With a Fair Tax, the wealthy spend more and are taxed more. The tax burden isn’t placed on the poor and middle class. There are many that aren’t paying a tax now, but will, such as illegal aliens, criminals of all type, and others who figure out ways to not pay taxes. But with a Fair Tax, they will as they spend their money. There won’t be any loopholes or deductions, and it will remove the ability of the government to use the tax code as a punishment or a reward.
You’re right, Roger, under a fair tax, many who are now not contributing, would be in the system and paying on what they purchased.