United States Tax System

.. depending on how they earn their income. The family that earns a larger share of its income from labor will pay a higher personal tax than the family that collects more of its income from interest, dividends, and capital gains (Hamond 1). Those in favor of the flat tax would rebut with the fact that all capital income is already taxed at the business level. One of the most debated topics on the flat tax is whether or not it increases economic growth. Proponents of the flat tax claim that the flat tax would allow Americans to keep more of the money they earn, creating the desire to work more, and to save and invest more (Mitchell 1, 13).

Even if a flat tax lifted long-term growth by as little as 0.5 percent (and most estimates show growth increasing by twice that amount, 1.6 percent), the income of the average family of four after ten years would be as much as five thousand dollars higher otherwise (Mitchell 1, 13; Gale 2, 2). According to one study by a former chief economist for the Congress Joint Committee on Taxation, under the flat tax the economy would 5.7 percent larger after five years than under the current system. That translates into $522 billion in higher output, or $3,000 in higher income for the typical family of four (Armey 4). But this effect may be overstated, because it rests upon a rapid increase in the saving rate, that is unlikely to occur (Gale 2, 2). Opponents of the flat tax have a simple argument; if every person in the U.S.

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had their taxes cut the federal revenues would fall thus increasing the deficit. The Treasury Department has estimated that a 17 percent flat rate as proposed by Rep. Dick Armey would increase the deficit by $160 billion a year. However, Armey and other conservatives have taken this fact into account and agree that at the current growth rate a 17 percent rate would not work, but with the increased saving and investment the economy will rise, thus with strict government controls on spending as proposed by Rep. Armey, the budget would work itself out (Mitchell 1, 39-40).

A real important issue raised by the opponents of the flat tax is what the flat tax would do to the poor. Millions of low-income families living in poverty receiving a wage supplement through the earned-income tax credit (EITC), which is designed to bring families with a full-time, year-round worker up to the poverty level (Hamond 2). For many families, it makes their federal tax burden negative because families receive a net fund. Rep. Armeys proposal along with many other flat tax proposals would abolish the EITC, which could possibly reduce work incentives for low-paid people while pushing several million families below the poverty line. The large personal tax exemption does not help working poor people, because their incomes are already too low to require federal income tax (Hamond 2).

However, there may not be a need for the EITC due to the fact that poor would be able to save and invest more of what they earn because there would no longer be a tax on savings and investments. All business income, whatever the source, is taxed at one rate. The flat tax at the business level would apply to the difference between sales of goods and services on the one hand and the sum of wages, pension contributions, material costs and capital investments on the other (Gale 1, 1). No deductions are permitted for fringe benefits, interest, or payments to owners (Armey 7). The taxation of business at every level makes sure that every part of the economy is taxed.

The corporate income tax now raises about 20 percent of total income tax revenues; the Treasury Department estimates that the flat tax would raise revenues from 20 to 42 percent (Gale 1, 1). Proponents of the flat tax use this information to support their claim arguing that business will be likely to invest more because the money that they invest would not be taxed. Opponents claim that moving to this type of tax without a transition period, which would introduce complexity, would hurt industries with little debt but much new investment, such as high technology, while vastly increasing the tax burden on industries with high debt to investment ratios, such as the automotive sector (Hamond 2). Although opponents make a valid argument, one of the most important things that the flat tax does for business is let firms make choices for economic reasons instead of for tax considerations. In conclusion, as pointed out early in this paper there is a strong base for tax reform. The flat tax could quite possibly be the missing link in tax reform.

Although opponents offer good arguments against the flat tax, with some modifications the flat tax could be implemented in the American tax system. The current flat tax proposals could be modified to insure security for businesses and the poor. With insurance for businesses and the poor more people would be likely to get behind a flat tax or some type of proposal that resembles a flat tax. All proposals will have their opponents, but it is up to the people to weigh the pros and cons and decide what would work the best, because obviously are current system is not working for the benefit of its people. Bibliography A Flat Tax for the U.S.: The Advantages and Disadvantages of a Flat Tax.

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(1) The Flat Tax: Freedom, Fairness, Jobs, and Growth. Washington D.C.: Regnery Publishing Inc, 1996. Mitchell, Daniel. (2) Making Sense of Competing Tax Reform Plans. 22 Feb. 1996: On- line. Internet. 4 Dec.

1999. Available WWW: http://www.heritage.org/library/categories/budgett ax/bgup268.html Mitchell, Daniel. (3) Which Tax Reform Plan is Best for America? 26 Sept. 1995: On- line. Internet.

30. Nov. 1999. Available WWW: http://www.heritage.org/library/categories/budgett ax/bg1055.html Hamond, Jeff. The Failings of the Flat Tax.

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