The Tax Code: Make It Flat

Mar 7 2014, 8:47am CST | by

If Republicans and pro-growth Democrats had their wits about them, they would push the flat tax.

The need for a simple flat tax was underscored recently by the comprehensive tax reform plan released by the outgoing chairman of the House Ways & Means Committee, Dave Camp (R–Mich.). The chairman decided to work with the existing tax code and has attempted to change this monster into something that encourages more economic growth. He deserves all the plaudits possible for his heroic effort.

THE GOOD, THE BAD

Under Camp’s plan tax rates for individuals and corporations would be reduced; the hideous alternative minimum tax would be abolished; a lot of deductions would be swept away, phased out or modified; and the number of individual tax brackets would be reduced from seven to three. An estimated 95% of tax filers would be able to use the standard deduction form instead of having to itemize deductions. Much simpler!

There are, however, flaws, especially regarding capital gains and dividends, where the federal tax burden—already far too high—goes up a tad.

… AND THE REALLY UGLY

But what you really need to know is that Camp’s impressive effort to simplify the tax code runs almost 1,000 pages. Lobbyists and trade associations are already lining up to amend the proposal. And given its complexity, this bill is ripe for mischief. One of all too many examples: S corps and limited liability companies, whose profits are passed through to their owners as personal income. Under Camp’s plan this income would be declared “production” income, with tax rates capped at 25%. These owners would thus be taxed at the same rate as regular corporations (cut to 25% in the bill) and would not be subject to the 35% personal income tax rate. Tax lawyers and Congress will have a field day defining what qualifies as production income, which would thus be subject to the lower tax rate.

Camp’s bill doesn’t go as far in simplifying things as the last effort in 1986, when countless tax shelters were eliminated, the number of brackets was knocked down to two, and the top rate was whacked from 50% to 28%, the lowest since the days of Calvin Coolidge.

PUT THE BEAST OUT OF ITS MISERY

The federal tax code is beyond redemption. We should kill it and institute a flat tax. My flat-tax proposal calls for a 17% tax rate for all, with generous deductions for individuals and families ( a family of four would owe no federal income tax on their first $46,000). And that’s it—no tax on savings and no death tax. The federal corporate tax rate would be dropped to 17%, and capital investments would be expensed immediately. There are other worthy variations of the flat tax.

Let’s not repeat the mistake of 1986 and pass a reform bill that runs hundreds of pages. Junk the federal income tax code and start over!

Source: Forbes Business

 
 
 

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