If you dread filing your taxes every year, it’s good to know there are multiple taxation systems besides the current progressive one here in the United States. So if you’ve heard the terms “flat tax” or “Fair Tax” then you may be wondering what they are.
You may also be wondering how they differ from a progressive income tax and why people may want another system.
Look no further, because we’re going to explain it all!
Progressive Income Tax
The difference is clearest once you get a handle on what the current progressive income tax is. Progressive means the tax rate climbs as income does. Under a progressive tax system, tax rates increase as people earn more. So, if someone makes $500,000 in salary, the majority of their income will be taxed at a higher rate than someone making $50,000.
The theory behind this is simple: Proponents say a progressive tax system is fairer to all income groups. After all, someone making $50,000 typically pays a higher percentage of their salary on basic necessities like food and shelter than the typical millionaire earning a $500,000 salary.
This is especially true if that $50,000 salary supports children. It’s also true if medical treatment results in large healthcare bills. The idea is that a lower tax rate allows more disposable income for people in the middle and lower brackets. In the higher brackets, people tend to have more disposable income. They are, therefore, able to pay more taxes.
Those dissatisfied with the progressive tax think it’s unfair to those in higher tax brackets. This is because they pay more not just in dollars, but in percentage of their income.
The progressive tax system also receives criticism for being complex and cumbersome. Most progressive taxation systems, including those in the United States, allow a number of exemptions and different rates for capital gains and investments. On the other hand, alternative systems receive praise for being less complicated.
A progressive tax system is among the most common around the world. It’s the system of choice in countries such as the United States, Canada, China, Japan, Germany and Australia.
The Flat Tax
In some ways a flat tax system is the opposite of a progressive income tax. The flat tax, as its name implies, is simply one flat tax rate. It applies to everyone, regardless of income. If the flat tax is set at 17% of income, both the $50,000 and the $500,000 salary earner would pay 17% of their respective salary.
Proponents praise the flat tax for being truly fair and consistent. Everyone pays the same percentage of their earnings.
Flat tax proponents also like its simplicity. With most flat tax proposals, there are no exemptions or deductions. The tax return form is the size of a postcard. Many observers believe a flat tax would eliminate the need for the Internal Revenue Service.
Detractors of a flat tax say it places an unfair tax burden on the poor. Someone making $10,000, for example, would pay $1700 in tax, which is more than they would likely pay under a progressive tax. Flat tax critics point out their disposable income for necessities may end up being very low.
The Fair Tax
The Fair Tax is significantly different from both a progressive income tax and a flat tax. Rather than a system, the Fair Tax is a specific plan — but unlike the latter two, it’s not a tax on income at all. Instead, it only taxes spending via a national sales tax.
Proponents, such as one-time presidential candidate Mike Huckabee, believe the Fair Tax is fair to all income levels because people are only taxed on their purchases; and spending is entirely under their control.
The Fair Tax avoids disproportionately impacting the poor’s disposable income by including a “prebate” for lower-income folks to purchase necessities like food and shelter; the prebates would not be subject to the Fair Tax.
Proponents also believe the Fair Tax would eliminate complicated and costly income tax filings because there would be no deductions or exemptions.
However, critics believe collecting taxes would be more complicated because the burden of collecting appropriate tax revenue would fall on individual businesses rather than the government. As a result, it might be difficult to ensure uniformity and correct tax collection across the system.
As the next election cycle heats up, keep the pros and cons of each tax system in mind, as they’ll likely be bandied about by those looking for leverage to maintain competitive seats in the House and Senate.
Photo Credit: DonkeyHotey
Modified flat tax. Family income minus poverty level for that size family = taxable income.
Everyone pays same rate without being penalized for necessities. Maybe not a post card but 1 sheet of paper should handle it.
JMO
Fair Tax, or sales tax also snags the underground economy. The drug smuggler who plops down a suitcase full of cash for a yacht or Maserati would pay his share.
I agree with Techie; the ‘Fair Tax’ would involve everyone as even criminals buy things. It would also involve the 48% of folks who currently pay no income tax. As for difficulty reporting, most businesses already handle sales, use, FICA, etc. taxes, so I don’t think the learning curve would be too much for them.
Funny reading this from north of the border where we pay far far more taxes for our universal programs and look south every year to see where all the whining is coming from. In my bigger earning years I have paid 50% of income to income tax, and of course we have added on provincial sales taxes, federal GST (VAT) or a blended version that varies across provinces, and of course property taxes. Our school system is paid for out of Provincial revenues for the most part so property taxes are much lower for everyone here. (renters pay property taxes whether they know it or not as it is built into the rent. Yes, I am a landlord). The working poor pay very little taxes here with subsidies and top ups that end up negating anything they do pay for.
I just signed off at the accountant’s for this year after vowing a few years ago to never waste another spring day(s) building the assembly of info and doing the Turbo dance and probably missing a deduction, anyways.
I have never minded paying taxes and have always felt wonder at the lengths people go for a free ride on services? Our school system is what is known as leveled, which means the poorer regions have the same quality of facilities, curriculum, resources, and teacher certification. Private schools receive 50% of the same per pupil funding PROVIDED they teach the provincial curriculum to provincial standards.The results speak for themselves in universal achievement testing compared worldwide. Teachers are paid the same across districts with top ups for rural/remote. Hospitals have the same standard of care and it is law that all communities have to be within 1.25 hours of ambulance transport to a facility.
I am 67 and have never had a medical bill, and that includes numerous broken bones, a few emergency surgeries, and even a bout of cancer 11 years ago with the rigorous CT surveillance until the all clear and cured diagnosis. (Caught at stage 1 at a yearly physical). There is no medical insurance premium here. And property taxes are quite low compared to many of our southern neighbours.
Here’s the rub, if you want highways, schools, airports, infrastructure options, medical services, police security, armed forces and coast guard, etc the money has to come from somewhere. There is no magic money tree. So, states like Texas that boast no income tax pay huge property taxes.
I have a good friend in our nearby town with a multi million dollar home (spectacular ocean view) who pays $6K per year in property tax. I am rural, but live on a river with 16 acres zoned residential but looks like a farm, with a rental I built a few years ago, and total taxes plus property and liability insurance is just $5K per year. (Insurance is the highest bill. The cottage I rent out to a family friend is rented out to just cover our insurance and tax bill with the understanding if they go up the rent will follow suit.) She gets a 640 sq foot new cottage, with carport and laundry facility, for $500 per month. I figure we make enough on the increase in property values which my kids will get anyway, and she is that perfect tenant who we never want to leave.
The point of this post being is the money Govt and citizens need for services has to come from somewhere. A VAT might catch wealthy scofflaws buying their Beamers and toys, but it is a common accepted fact that a flat tax and/or VAT inordinately affects the working poor which inevitably reduces their opportunities to improve their situation and that of their children.
So pay your taxes with a smile on your face knowing you won’t have to tip the cop to get through the New Years impaired driving roadblock next year and be thankful you have the opportunity to vote and choose how you wish your money to be spent.
Oh yeah, our Federal elections are run by an independent Govt body that also decides on electoral boundaries when demographics change. When the boundaries are decided upon or adjusted they are published and posted for public input and criticism and changed if need be. Political parties are limited in outside funding and receive Federal dollars for electioneering expenses beyond the very limited private donations allowed. Elections are approximately 30 days in length and it is illegal to advertise the last day before voting day. It costs money, tax dollar money, to take the corruption out of Govt. 🙂 Go figure.
Thanks for your sharing your thoughts, Paul.
I have to point out two statements that are at odds with each other:
1. “I am 67 and have never had a medical bill.”
2. “If you want highways, schools, airports, infrastructure options, medical services, police security, armed forces and coast guard, etc the money has to come from somewhere.”
The second statement also infers government is the only possible provider of those services. I realize many people believe that, but it is a misperception. 🙂