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By Dr. Stephen Schwalbe
Faculty Member, Public Administration at American Public University
With the election of Donald Trump as president, restructuring our federal income tax code once again has moved to the forefront of congressional deliberations. As usual, when tax issues are raised, many people ask why not go to a simple flat tax approach?
This idea sounds good. It has been raised regularly for decades. But, there are many reasons why a flat tax has never gained any real traction among lawmakers.
What Rate Would the Flat Tax Be?
First, and most important, at what rate would the flat tax need to be set to assure the federal government maintains the same revenue stream it currently receives from our progressive tax system? A low flat tax rate is estimated to be around 20 percent of one’s annual income; some estimates are closer to 30 percent. However, most people cannot afford to pay this higher rate and would likely oppose the change. In addition, once a flat tax was adopted, it would be fairly easy for Congress to simply raise the rate incrementally to accommodate federal spending needs.
Second, a flat tax minimizes incentives and disincentives the government can apply to promote policies (such as giving to charities) or discourage unwanted behavior (such as outsourcing jobs overseas). Given the number of charities that rely on tax deductible donations, numerous powerful public interest groups and their lobbyists would vigorously fight against dropping the current tax code for a flat tax.
A similar situation exists in many other parts of the current tax code, including the areas of education and housing. Many people in related businesses would argue that dropping the current tax code could devastate their industry nationwide.
Regressive Tax Vs. Progressive Tax
Finally, a flat tax is a regressive tax, meaning poorer people are adversely affected more than wealthier people. While millionaires would still have lots of money even after paying one third of their annual income in the flat tax plan, such is not the case for poorer people. They would more likely end up requiring welfare assistance to get by. As it is, there are between 40 and 50 million Americans on welfare today.
Currently, all of our taxes are regressive except the federal income tax, which is progressive. The federal income tax increases as annual incomes increase. So, wealthy people pay more taxes than poorer people do. It is eminently a fairer tax. The regressive taxes are all set rates, such as state sales and local property taxes.
President Trump is not interested in implementing a flat tax, just simplifying the current complicated tax code. Let’s see if all factions within the GOP will arrive at a compromise and allow that to happen.
About the Author
Dr. Stephen Schwalbe is an associate professor at American Public University. He is also an adjunct professor at Columbia College and Embry-Riddle Aeronautical University. Stephen received a Ph.D. in Public Administration and Public Policy from Auburn University in 2006. His book about military base closures was published in 2009.