The Flat Tax
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The Sixteenth Amendment of the U.S. Constitution states, “the Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without appointment among the several states, and without regard to any census or enumeration.” (Mallor et al, 1280). The ratification of the Sixteenth Amendment, the Revenue Act of 1913 is the first tax Form 1040 which was due on March 1, 1914 is now a part of every working American . The complexity of the U.S. Tax Code is a familiar routine for working individuals, accountants, and attorneys on April 15 of every year.
The Sixteenth Amendment was introduced to the people as a ” simple to compute, fair to all, and would never apply to any part of a person income needed to sustain a decent standard of living..it was understood only very large incomes from investments would be taxed, not the wages of working man.” (Griffin, 10). However, income tax is now a “major source of revenue for the Federal government…. the collections of income tax from individuals and corporations amount to 53% of the total receipts.” (Hoffman, 1-4).
According to author Deroy Murdock, it is estimated that “Americans will pay accountants and attorneys $140-$200 billion, or $700 for every man, woman and child to do their taxes, and examine through the 46,000- page of U.S. tax Code, and spend 5.4 billion hours a year doing income tax.” (Murdock, 1). For many years, the U.S. government has tried to simplify the tax code; however, it seems to be more complicated each year. In recent years, Congressman Dick Armey and Senator Richard Shelby have tried to introduce a new tax reform called the H.R.1040-the Armey-Shelby Flat Tax, which is also known as the “flat tax rate.” This is the most vocal and notable proposal to date. The proposal calls for a “flat tax rate of 17% apply to the annual income from all wages, salaries, and pensions after deduction of personal allowance.” (Tax Reform, Flat Tax, 1).
In addition, there will also be four categories of allowances:
$ 23,000 for married filing jointly
$ 15,000 for single head of household
$ 11,000 for single
$ 5,000 for dependent child
(Tax Reform: Flat Tax, 2)
The Armey Plan would also call for the elimination of “the current deductions of $ 3,000 child credits, exclusions, and $3100 exemption, as well as the current tax brackets of 10%, 15%, 25%, 28%, 33%, and 35%. (Idea House, 1).
In addition to the elimination of the complex tax computation, the new tax system would be simple for taxpayers to fill out the returns on a “postcard” size form and easier to understand 🙁 Tax Reform: Flat Tax, 2).
The new proposal would mean that the more an individual earns, the more he or she pays. Follow the above exemptions, a family of four would have to earn above $30,000 before paying federal income tax. Under the flat tax, all income is taxed at the same rate, and only once, when it is realized.
In addition, businesses would be taxed at 17% tax rate. The base is the total revenue or receipts less the expenses, which would include purchases of goods and services, salaries and wages, capital equipment, land, structures, and retirement contributions. Business would no longer be allowed to depreciate assets either by straight
line or accelerated method each year. The assets can be written off immediately as investment in real capital. (Idea House, 7). However, there are advantages and disadvantages to the flat tax rate.
The advantages are:
It would reduce the tax rate for many Americans
It would eliminate double taxation
It would simplify tax preparation for both individuals and corporations
Corporations would be allowed to expense all investments – avoid the complex depreciations
It would eliminate the questions of who should pay more and reduce income taxes for low income families
The disadvantages are:
It would eliminate deductions for mortgage interest payments
It would eliminate deductions for charitable donations
Corporations would no longer be able to deduct interest payments on debt
Corporations would no longer be exempt from social security, health, or life insurance
No deduction for State and Local taxes and no tax advantages for Municipal Bonds
(Tax Reform: Its Time For A Change, 2).
The new tax proposal would mean that all businesses from a small convenient store to a large corporation such as Microsoft are taxed at the same rate. The flat tax rate is not an absolute guarantee resolution to the current tax system; yet it is a tax system that has been adopted by Hong Kong for more than 50 years and has been effective for the country. The Hong Kong flat tax system is as follow:
Profits Tax: Corporations are taxed at 16% income. Unincorporated business are taxed at 15%
Salary Tax at 15%
Single persons allowance
Married persons allowance
Deductions for children
Property Tax at 5%
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