by John Cane

Created on: January 23, 2009

There are two primary arguments for a flat tax, simplification and removing the disincentives for productivity. There are also a couple of ways to go about a flat tax. But before we try to simplify the tax code, we must first look at why it is so complex.

Part of the reason that the system is so complex is that there have been too many cooks in the kitchen. As senators, representatives, and presidents come and go, they all try to add or subtract this thing or another for this reason or that and things get very complicated very quickly. This sort of complication for the sake of complication is very easy to dismiss, but some of the complication actually serves a purpose.

For example, there are many tax breaks given to people who own real estate. This is designed to encourage affordable housing. This gives an incentive for a person who has the cash to by an extra house to buy it and rent it to someone without the ability to buy a house. So the major benefit for owning property is a tax one not a profit one. If landlords were only after profit, there would be a lot less of them, rents would be higher and homeless rates would be higher.

Another example is that the lowest income brackets don't actually pay income tax. There are actually situations where you can get a tax refund greater than the amount you withheld. This is designed around the theory that if a person doesn't make enough to live on, any you take a portion of it away from them, you further increase the odds that the state will have to pay for them through a welfare program. In this case it is more cost effective to just let them keep their money rather than take it away and then give it back.

Suffice to say a flat tax is not a perfect system and their will be trade offs.

Now there are two ways to go about a flat tax. Flat income tax, or flat sales tax. What most people talk about with a flat tax is a flat income tax because it prevents international companies to do business in the US without paying taxes. I will focus on this because it is the more realistic of the two. Some may do a federal income and leave sales taxes for the state.

The major problem with our current system is that there is a disincentive for productivity. For example, if you own a business, and it takes 2 man hours and $20 worth of supplies to produce and sell a $100 product. If you are paying someone $10/hour to do the work your net profit is $60. If the government takes 20% you actually come home with $48. As you become successful,

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