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Is a Flat Tax Rate Fair? Understanding 2016 Election Flat Tax Proposals

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About 20 years ago, Steve Forbes, chairman of Forbes Media, ran for the Republican presidential nomination on the platform of replacing the enormous American tax code with a flat tax rate. While the 1996 presidential election was the first time many Americans had heard of flat taxes, the idea wasn’t new. In fact, Democrat Jerry Brown championed the flat tax rate in 1992 during his presidential bid.

With the 2016 presidential election season heating up, several current GOP candidates and hopefuls, including Rand Paul, Ted Cruz, Scott Walker, and Rick Perry, have offered support and proposals regarding the idea of establishing a flat tax. On the surface, replacing our nation’s tax code with a flat rate may appear simple, but a lot of thought must go into making sure the taxation would be as fair as possible.

Fairness Through Exemptions

One of the issues experts disagree on is whether a flat tax would be regressive and therefore unfair to lower-income workers. Theoretically, for example, a flat 17 percent tax on all incomes—the amount CNN Money notes Rand Paul originally proposed for his flat tax strategy—would cause a worker earning $10,000 per year to feel the loss of $1,700 of his income far more keenly than a worker earning $100,000 would feel the loss of $17,000.

To relieve this burden on low-income earners and keep the flat tax fair, nearly all proposals allow an exemption. For instance, if there were a standard exemption of $7,000, the individual making $10,000 per year would only pay 17 percent tax on $3,000 of their income, or $510 total.

Untouched Investment Income

Another potential benefit of the flat tax? Most proposals specify zero taxation on investment income from capital gains, dividends, and interest. This is to help incentivize individuals to save and invest their money, which is certainly something the majority of Americans need to do more of.

Goodbye to Wasted Time and Tax Loopholes

One of the biggest draws for instituting a flat tax is that it could potentially reduce the estimated six billion hours taxpayers spend filing their taxes each year, according to The Hill. A simpler tax code could give millions of taxpayers that time back.

A complex tax code may also encourage lobbying and lead to disproportionate tax breaks for certain groups. A simpler flat tax has the potential to eliminate these and other tax loopholes.

Do Americans Want a Flat Tax Rate?

As with any proposed changes to our government, the flat tax has been a difficult sell, and although flat tax proposals promise simplicity and fairness, any changes that would affect the millions of American taxpayers are bound add some initial complexity and feelings of unfairness. What is important is that voters understand the details and merits of each proposal so that they can vote accordingly.

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Emily Guy Birken is a former educator and respected personal finance writer. She is the author of the best-seller The Five Years Before You Retire, and the forth-coming book Choose Your Retirement. Her work has appeared on Huffington Post, Yahoo Finance, Business Insider, MSN Money, and Kiplinger's, and Birken has been a guest on Wisconsin Public Radio as well as several podcasts, including Stacking Benjamins and The Doughroller.Birken's background in education allows her to make complex financial topics relatable and easily understood by the layperson. Her mix of no-nonsense advice, humor, and research into the latest studies on finance and behavior make her work a go-to resource for anyone hoping to get a better handle on money matter.