An equal tax rate in the United States does not appear to make sense, as the people who want it the most are the ones who will likely be hurt. During the recent U.S. budget crisis, political parties spewed accusations at each other trying to divert attention from their own contribution to the U.S. deficit problems that resulted in a downgrade of the U.S. sovereignty debt rating and almost sent the country into default. Republicans blamed Democrats for overspending and Democrats accused Republicans of fostering the benefits of the wealthy at the cost of middle class and lower income Americans. One of the issues raised was whether a flat tax rate for all would be the most equitable and beneficial system. The answer is yes only if by equitable, the intent is to give more income to the rich and transfer an even greater burden to middle and lower income wage earners.
Currently, the U.S. operates under a progressive system, with tax liabilities ranging from 10% to 35% after deductions (based on 2010 tax brackets), with most middle income wage earners paying between 25-28%. In light of current economic conditions, with 25 million people out of work and one out of four households receiving foreclosure notices, it is unlikely that raising the tax bracket of middle-income wage earners is a realistic expectation. So, the question becomes why lower the tax bracket of high income earners?
The argument supporting this theory rests in the so called, “tax loopholes” that are touted by Democrats. Keep in mind that often “loopholes” are tax breaks and incentives that attempt to resolve economic problems and stimulate economic growth in troubled areas. While samples of abuse are often evident, the overall programs are designed to help the public-at-large and removal of most of the programs would adversely impact middle class Americans the most.
Examining the types of tax relief that are available makes this point more clear. Tax exemptions include mortgages, medical expenses, casualty losses, investment interest, state, local and real estate taxes. Think about the unfavorable impact that removal of these tax advantages would create for most Americans if these “loopholes” were removed and everyone just paid a flat tax.
Some argue that the real problem lies within the corporate tax structure and it is in this area where tax reform should occur. Yet, according to the Tax Foundation, the U.S. is second only to Japan in the high tax rate that it charges it’s corporations (Tax Foundation, “U.S. States Lead the World in High Corporate Taxes” (2008)). Most corporations pay a Federal tax of 35% plus state taxes, with the average around 39.6% in taxes. This high corporate tax rate creates competitive problems for the U.S. within the global markets and there have been attempts in Congress to lower the rates to as low as 25%, hardly what most Americans are thinking when referring to flat tax rate reform.
Finally, tax breaks and incentives are tools meant to foster U.S. growth and stability by stimulating sluggish areas of the economy and offsetting negative impacts to U.S. interests. Despite recognized abuses, to remove these mechanisms in lieu of a flat tax rate would be to take away Congress’ ability to assist flailing industries and individuals who may be suffering from company closings, unforeseen market influences and global pressure in certain areas of the economy.
The only possible benefit would be if transitioning to a flat tax without tax breaks and incentives would fuel the economy and take the U.S. out of its long-term economic downturn; but it is unlikely it would achieve such a goal and would almost certainly result in serious casualties to middle and lower-income Americans.
In order for a flat tax to achieve the objectives recently outlined in Congress to deal with the debt ceiling problem, middle-income wage earners would have to pay a higher rate under a flat tax system, which would be unduly burdensome for many under present economic conditions. Moreover, even though corporate Federal tax rates would probably be lowered if a flat tax rate were implemented, many experts argue that the high state tax rates make a federal decrease insufficient to help corporations stay competitive in the current market; making it unlikely that a decrease would positively impact current U.S. debt problems. And though most wealthy individuals would probably pay less and enjoy higher discretionary income, there is no guarantee where they will choose to spend and/or invest their money – it could very well be in the global market, which may not help the U.S. economy.
Thus, the decreased tax revenues from corporations and wealthy individuals would only worsen the budget problems currently facing America and shift an even greater burden to average Americans.