Most of these blogs are helpful hints to think through financial issues that impact you. This one is not that applicable to most readers. It’s certainly not political, but may give food for thought about the negotiations that go into tax legislation. As the national debt limit is being debated, there’s governmental discussion over tax cuts and tax increases as opposed to tax reform. The tax code is certainly more complicated than it should be, as are other government funding issues. Some of the most simple solutions may never get serious consideration because they are, in fact, so simple. Here are a couple that will probably never off the ground.
A true flat tax would be exactly that. Everyone would pay the same percentage of every dollar they get from anything that’s income. So wages, dividends, interest, capital gains, sales – everything – would be taxed at the same rate. Deductions would either be minimal (alimony paid, the cost of items sold for profit, etc.) or non-existent. So if you make $15,000, you’d pay the same percentage of you income that someone who makes $500,000. Those with higher income pay more dollars, but you’d each pay the same percentage. To have our current system – the more you make the higher percentage you pay may seem fair in the sense that those who make more have more disposable income. But the deductions always end up debated and making things complicated. Shouldn’t we encourage home ownership by giving people a tax break for their home mortgage? Maybe so, but what about all those innovations that could save the environment? Shouldn’t they get a break? How about farmers? They feed our nation and should be able to pay less in taxes. Right? And so it begins. What the “flat” tax is and how it’s structured has as much potential for interpretation and complication as our current tax system once it gets started.
National Sales Tax
This is so simple it wouldn’t even require filing a tax return. The government could impose taxes for anything purchased in the country. They could even set different rates for different purchases to help out lower income households. So food purchased at a grocery store could be at a low tax rate or no tax, but food purchased at a restaurant could have a higher tax. We all have to eat, but those who don’t make a social occasion of it pay less to eat than those who do. Cars could have a higher tax rate, maybe even much higher for vehicles in a higher price range. Houses could have the same structure as cars and the tax could be part of what we’re able to finance with a mortgage. But how do people get to claim their deductions? And so a national sales tax falls apart, too.
And so it all ends up with the same concerns about having a system that generates income for government, attempts to tax those who can afford it, and gives breaks to those who are doing things that society wants to reward. To be clear, my descriptions of these two alternatives aren’t the ones that have been put forth for public debate. They describe a basic concept and how it might work. Unfortunately it seems that none of the systems – including the one we currently have – work for everyone.