Subject: Variation On A Flat Tax Comment: Submitted on April 26, 2005 by: Marcus Hernandez, an Individual 901 Palm View Drive Los Angeles, Ca 90042 323-257-0271 Marcus_LA@Netscape.com I. Description of Proposal. This is a proposal of a variation of a Flat Tax. The only exceptions to a true Flat Tax will encompass a need to recognise and support the ideals of relief to our lowest income individuals, home ownership and charitable giving. ~The tax base will include income from salary, wages, interest, rents, stock/bond sales and all other presently accepted forms of Personal Income. Salary, wages and stock/bond sales will be taxed at the time of payment. For example, the federal withholding on salary and wages will be adjusted to 20% for all Americans. As most Americans have their salary, wages as their sole source of income this would mean that most Americans will no longer have any federal tax forms to ever submit. To repeat, with the 20% tax rate withheld from their salary most Americans will then have no further need for ever filing another federal tax form. There truly cannot be a simpler process. Any stock/bond sale will have 20% of profits withheld by the selling brokerage firm at the time of the sale. In the case of any losses from the sale of stocks/bonds, the seller can then file a special income tax form requesting a credit for losses only up to the level of what had been withheld. ~Exemptions, deductions, credits and exclusions will be eliminated in all but the most important of social objectives. Below there is an elaboration of the individual recommendations for a fairer treatment of the objectives of relief for the lowest income individuals, home ownership and charitable giving. While there can be an argument made for literally hundreds of other important social objectives, the above should be given greater importance as the President has identified them as being most important to him and to most Americans. Also, an expansion to encompass more social objectives will only bring us back to where we are today, with an overly complex and unwieldy system. Besides, by lowering the rate to a flat 20% most Americans will already realise both a reduction in their tax rates and a relief from the burden of filing any federal tax forms of any kind. ~Much has been written of the suggestion of a Flat Tax rate in the neighborhood of 17% without any exceptions. However, to provide for the social objectives of relief for the poor, home ownership and charitable giving the rate will have to be higher, nearer a rate of 20%. ~The distribution of the tax burden should be as fairly and equitably shared as possible, but without the social engineering engendered in an 'accelerated' tax rate. To provide for relief for low-income individuals there should be an exception where all taxpayers will still pay the same flat 20%, but those on the lowest income rungs will receive a federal tax refund depending on the level of their reported income. This tax refund can be calculated by the Internal Revenue Service without need for these low income individuals to file any burdensome federal tax forms. The rate of refund can be a simple inverse of the amount earned in comparison to an objective amount, likely the federal poverty level. For example, if the federal government has received withholdings on an individual equivalent to an annual income of 80% of the poverty rate, this would translate into a refund of 20% of their withholdings. If withholdings were equivalent to an annual income of 60% of the poverty rate, then the calculation will be for a refund of 40% of the withholdings, and so on. The Internal Revenue Service can easily construct a computer program to gleam through all Americans' withholdings and identify those eligible for a refund. Then, a simple form outlining the calculations can be sent to these individuals alerting them to their potential entitlement and requesting they either advise the Internal Revenue Service of any other sources of income or simply singoff on the calculations. Then they can return their signed acknowledgement of the accuracy of the calculations and promise under penalty of perjury that they have no other unreported income. Upon receipt of the returned acknowledgement the Internal Revenue Service could they issue their refund. Please note that while it would be more expedious for the Internal Revenue Service to simply perform the calculations and churn out checks, it would be more prudent to first get a written aknowledgement and acceptance from the individual taxpayer. This ideal is to maintain the simplicity of a flat 20% rate across the board, while managing to provide an unburdened form of relief to our lowest income earners. ~There is an inherent flaw in our present system of granting relief for charitable donations in that all but the most high-end giving is on an 'honor basis'. This is especially true of church giving where there is no paper trail verifying the validity or accuracy of claimed giving. Instead, we should move to a system where we can eliminate any tax benefit for charitable giving, to be replaced with an enhanced 'faith-based' and 'community-based' giving from the federal government. We first need to accept two basic tenets; 1) most charitable giving is from the heart and is not affected whether there is a federal incentive or not. This giving will continue, and to insist on continuing an exemption for such giving does not make any economic sense, especially not in a period of unrelenting national budget deficits. 2) there is a certain level of giving which is influenced by the attraction of a tax deduction. Instead of continuing to support this type of opportunistic giving, we should instead consider enhancing the support of the President's 'faith-based' giving instead. Also, we can enhance the support of 'community-based' giving to support divergent charitable groups such as the United Way, Sierra Club, Audobon Society etc. By this method, we can assure the same overall level of charity giving while reducing the tax burden of supporting the present high rates of fraud, abuse and opportunistic giving. ~Home ownership would be largely unattainable for too many Americans if we did not maintain a mortgage interest deduction. To continue to provide a mortgage interest deduction while simplifying the tax system is actually a key benefit of a flat tax rate. Instead of having to continue to burden countless millions of Americans with annually figuring our their interst deductible a flat rate will simplify the process such that the lending institutions will then be enabled to do this for us. The calculation under a Flat Rate will be simplified as per the following example, with a $1,000.00 monthly mortgage payment, $300.00 of which is interest: $300.00 monthly interest X 20% multiplied by flat tax rate =$ 60.00 monthly tax deduct $1,000.00 - $60.00 = $940.00 The amount of $940.00 represents the monthly mortgage payment the home owner will pay to the mortgage lender. Thus, instead of the present system where each and every mortgagee must file an annual federal tax report to encorporate their mortgage interest deduction, the lending institution will now be enabled to calculate the morgage interest deduction and subtract this amount from the monthly mortgage due. Rather than having literally hundreds of millions of taxpayers complete a federal tax form to receive their mortgage interest deduction, the lending institutions will calculate this figure for the borrower, deduct this amount from the monthly mortgage payment and in turn request a refund of the $60.00 directly from the Internal Revenue Service. In addition to the ease of having the mortgage lender calculate and deduct the interest deduction for the borrower, the IRS will have a much simpler time verifying the accuracy of the request for repayment of mortgage interest not collected by tens of thousands of closely regulated banks and Savings&Loans versus today's hundreds of millions of appreciably less sophisticated American taxpayers. These lending institutions have the capacity to make all their requests for repayment electronically, simplifying the process even further for the Internal Revenue Service. There should not be any additional compensation offered to offset the loss of the depreciation deduction as in actuality the idea of the value of American homes has almost always been shown to be entirely a fiction. ~The collection method of a Flat Rate is what is fairest and most appealing. There is nothing inherently simpler than a 'one size fits all' rate. I remember back in my college days while studying in England when I saw firsthand the intrinsic simplicity of a Flat Tax model. The gardener of the estate showed me his pay stub. The first line indicated his gross pay (35 hours X $/hour), the second line indicated less a 30% tax ate, the third line indicated his net pay. This is very easy and straight-forward method to understand. It should prove to be equally acceptable to most Americans as being 'fairer' when you can feel confident that every American is paying the same 20% without any room for unfair tax shelters or outright cheating. ~I have no recommendations for reforming the business tax code. II. Impact of Proposal Relative to Current System. ~As the President has stated, a primary purpose in reviewing our current system is to cut through the complexity and redundancy of all the present overlapping exemptions, deductions, credits, exclusions and all the confusing rate categories. There is also a certain amount of transparency when most Americans will no longer be assigned the task of calculating their own tax bite. The temptation to minimize one's own tax burden can, and has, been too alluring such that tax-cheating in all its many forms has become a very large industry. However with a Flat Tax, lending institutions calculating and providing direct mortgage payment relief, plus charity giving being institutionalized there will then be almost no opportunity for the average American to illegally affect their tax burden. ~Perhaps the largest debate over any version of a Flat Tax will entail the definition of fairness. Is it fair that a poor worker pay 20% on their low wages and a rich worker pay the same rate on their millions earned? Or is it fairer still to have the millionaire pay an even higher rate on their much larger income? I believe most Americans will accept an absolute flat rate as fairer than what we have now and forget all the rhetoric about squeezing the rich. The only exception could be a 'decelerated' tax rate for the poor as described above. Not only would most Americans see it as inherently fair to make a special allowance for the low wage earner, but the annual federal tax refund will serve the dual purpose of providing an annual large lump sum payment of which many of these individuals would not otherwise be able to save for larger purchases, school savings accounts etc. ~I have no comment on economic growth and competitiveness except to say that when we institute a system which is seen as being both fairer and streamlined everyone would benefit. ~I have no comment on compliance and administrative costs except as indicated above that the process of collecting a Flat Tax would mean most Americans will no longer have to file an income tax form, and the Internal Revenue Service in turn would no longer have to wade through these hundreds of millions of returns. Certainly the administrrative cost savings will be substantial. III. Transition, Tradeoffs and Special Issues. The most important issue not addressed so far has to be the lack of any strong push towards improving our nation's very low savings rate. I have found that the only effective means for me to save has been to have the money taken out by my employer before I can get my hands on it. Most Americans would probably agree that it is also easiest for them to not spend money they never received in the first place. Therefore, I recommend there should be an allowance for the exception where any taxpayer could request their employer withhold more than their fair 20%. At the end of the year when the Internal Revenue Service conducts their overall audit to calculate any refund due to the lowest income taxpayers they can also identify those taxpayers who chose to overpay and who would then be eligible for a refund. When sending the form to the taxpayer indicating the Internal Revenue Service's calculation of what amount is due, the IRS can also insert advice regarding the alternative of instead receiving a refund in the form of a Treasury bond. |