The Fair Flat Tax

I hate April 15th. I absolutely dread putting together a tax return every year. Forget about whether or not I am getting a rebate or not, I just find it completely onerous to have to provide so much information under threat of accidentally committing perjury. When I was a kid, I thought it was fun to fill out the 1040 EZ. Once you fill in your name, you are half way there. Now, that I am older and make a decent wage, I have to use the more complicated methods of filling in the forms to take advantage of deductions or else leave money on the table, and this requires me to pay for an accountant or at least a computer program, adding to my frustration.

What if the tax code were simplified to the point that everyone could just use the equivalent of the EZ form and still get the most out of his return? I would like to see how a flat income tax could make this possible. Now, I know a lot of folks find the idea of a true flat tax to be too regressive, making it even harder for low income families to get by, which is why what I really want is a flat tax with one deduction that levels the playing field. What deduction is that? Who qualifies for such a thing? You might wonder why I would throw any deductions in when my whole point was to simplify things. Well, this deduction is super simple, because everyone automatically qualifies. It is a deduction that you take simply because you are a human being.

Every man, woman, and child needs food, clothing, housing, and health care. I believe that it is in the government’s best interest to allow every person to earn the money required for these things without having to worry about paying taxes on them. That is why as part of my proposal, we would decide what the average cost is of the basic necessities are for a person to get by, and that amount would automatically be tax free.

So, for the sake of discussion, let us assume that we determine a person requires $20,000 a year to survive. If you are single, and you earn $50,000 in a year, then you automatically deduct the first $20,000, leaving $30,000 of taxable income. This amount is then taxed at the flat rate of, let’s say, 25%. You would owe the government $7,500, leaving you the other $42,500. Let’s see how this stacks up at various income levels.

Income Taxable Income Take Home Taxes Paid Effective Tax Rate
$50,000 $30,000 $42,500 $7,500 15%
$150,000 $130,000 $117,500 $32,500 21%
$30,000 $10,000 $27,500 $2,500 8%

Now, I fully admit that I stole this idea of deducting basic living expenses from the National Retail Sales Tax, or Fair Tax, proposal, but why leave a good idea on the table, just because someone else is using it? As you can see, even though I call this a “flat tax”, it is actually completely progressive, allowing individuals at the lower income levels to pay a lower percentage of taxes than those at the top. Over time, the government can adjust these two factors (the deduction and the flat rate) to make sure that the system is fair and bringing in enough funds to provide services. If the government determines that no one can live on a mere $20,000 a year, then they can raise it to ease the financial burden of those at the bottom. They can also manipulate the flat rate up or down to ensure that the government is not losing money.

Now, you might have picked up on the idea that this is all well and good for an individual, but how might this affect families? I propose that the “human being” deduction counts for each person that the income goes to support. So, if we stick with the $20,000 deduction figure for discussion, and your family of 4 is pulling in $80,000 a year, then you deduct $20,000 times 4, which is $80,000, meaning you pay no taxes, because, really, if it has been determined that you need $80,000 a year to support all four of you without use of government aid, then why pay part of that in taxes, so that the government will just have to give you that money back as subsidies or welfare. I would rather allow you to fully support yourself with no government intervention, if at all possible.

Total Tax Due = (Total Income – (Number of People x Deduction)) x Tax Rate

Income Number of People Taxable Income Take Home Taxes Paid Effective Tax Rate
$80,000 4 $0 $80,000 $0 0%
$80,000 2 $40,000 $70,000 $10,000 12.5%
$200,000 4 $120,000 $170,000 $30,000 15%
$1,000,000 4 $920,000 $770,000 $230,000 23%

As part of this exemption, I propose that it applies to every person that your income supports. So, if you have elderly parents who do not work any longer, then you are considered their provider, and they become your dependents and add to the pool of people in your financial family. If a husband and wife with two kids find that their parents do not take in enough money a year to fully take advantage of the annual deduction, then they can add their minor income to yours, and they will provide you with additional deductions.

What if you find yourself in the position where you have more deductions than income? Does the government pay you? Well, yes, and no. I do not propose as part of this tax plan that you automatically get paid for making less money than is deductible, but I do acknowledge that there are government plans that help support individuals who earn less than the poverty line, so I would expect anyone who ends up with a negative number for “total tax due” after running the above calculation to receive government assistance of some kind through an existing program. It would be expected that if you can earn enough to end up with a positive number for “total tax due”, that you have enough to live without any government aid.

What about charitable deductions? Americans literally give away hundreds of billions of dollars a year to charities, as a way to offset their tax burden. I want to make sure that this trend continues, and this proposal allows for it to. You see, when you give money to a charity, it is only charity if it goes to help another individual, and therefore, any money you give to charity translates to taking on another dependent. Presumably, the person receiving the money would be forgoing a portion of their tax deduction for your gift, but they likely would not be looking for a handout if they made that much money to begin with.

Example time. You give $1,000 to a person as charity. You can increase your annual tax deduction by that much, taking it from $20,000 to $21,000, as long as the receiver of the charity reduces his deduction by the same amount, so he would only be able to take a $19,000 deduction from his income for the year. I know most folks are not likely to do this type of personal exchange. Charitable organizations will be in the middle to arrange it all, which gets a little too complicated to go into here, but it would not be too much to handle.

Keep in mind, you can always just give your money to anyone you want out of the goodness of your heart. You do not have to work out a tax deduction arrangement. After all, aren’t you giving the money way to be a good person, not lower your tax burden? But, the system is in place if you want it to be.

Now, I want you to bear in mind that I have not run the figures comparing this tax plan with the existing one actually used by the Federal government. I would expect that the 25% tax rate that I am using in these examples is probably too low to maintain the current income rate of the government. I am not trying to propose a plan that will lower taxes, merely illustrate that the tax code does not have to be so complicated to achieve a progressive taxation system.

The way the government works now, taxes come from all over the place. Only half of it comes from individual income taxes, which are difficult enough to figure out with all of the deductions and variable rates. Then there are corporate taxes, payroll taxes, and other little taxes, like the gas tax. Americans waste so much time and money simply complying with the tax code. I like the illustration at this website for demonstrating the mind boggling complexities. (http://taxfoundation.org/blog/stark-reminder-excessive-cost-complying-tax-code) To me it just seems that no matter what level of taxation you think is fair, there are better, more transparent ways to collect these taxes. We can never hope to control how much money is taken in by the government, if we cannot understand where it all comes from, which may be exactly why the government likes things to remain as complicated as they are.

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