Is a Flat Tax Rate Right for America?

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In February, North Dakota lawmakers nearly made history when they voted on replacing their entire income tax system with a flat tax. While the bill failed to pass, it demonstrates how this new, innovative, and controversial idea is gaining traction in the United States.

What Is a Flat Tax?

The United States currently uses a progressive federal income tax system in which the more that you earn, the higher your tax bracket will be. An individual who makes $20,000 a year, for example, falls in the 15 percent tax bracket, while someone making $1 million a year is considered part of the 39.6 percent tax bracket. In other words, the higher your income, the more of each dollar you earn goes toward taxes.

A flat tax scraps tax brackets and replaces everything with only one rate. For example, a country might set a rate of 20 percent. Whether you earn $10,000 or $10 million, 20 cents of every dollar would go toward taxes.

While this idea is a huge departure from the current federal system, it’s more common than you might think: 10 U.S. states and more than 40 countries use this kind of tax system.

Easy as Mailing a Postcard

The key advantage of a flat tax is its simplicity. Filing taxes can be a huge hassle, and most people need to hire a tax professional, because there are so many rules. Under a flat system, you could essentially file your taxes on a postcard. You would record your income for the year and multiply by the flat rate—and that’s it. This form of taxation could save Americans a fortune on tax planning fees.

A flat tax system could also be a fairer system. The current tax code has so many loopholes and hidden rules that some people might exploit it to avoid paying taxes. Supporters of this tax say that implementing this system would bring in more revenue, because people wouldn’t be able to avoid income taxes. As a result, the government could afford to charge a lower overall tax rate, which would help honest taxpayers.

A Sharper Class Divide

Not everyone is a fan, however. Critics say that this system is too regressive and that it would benefit the rich over the poor and middle class. Wealthy taxpayers would save more from a lower flat rate than they pay with the higher progressive rates, including all deductions. Conversely, lower and middle class taxpayers could end up owing more.

Another potential issue is that many of the deductions in the tax code were created to motivate beneficial activities, such as buying a home, giving to charity, and saving for retirement. If the nation or more states switch to a flat rate, people wouldn’t have these same incentives and might not act in the same positive way.

Whether the flat tax is right for America isn’t 100 percent clear. All that’s for certain is that the current tax system needs adjusting. It’s important for Americans to keep new ideas in mind so that one day we can develop as fair a system as possible.