Effect to economy by simplifying taxes

[sweeps]

Just a thought exercise here since it has 0% chance of happening...

What would happen to the economy if the tax system was revamped to an ultra-simplified flat tax. In other words, no tax deductions, no tax credits, no AMT, no exceptions, no exceptions to the exceptions, etc. You could do your taxes on a postcard.

[anonymous_saver]

I would love it if our country had a flat tax! I don't exactly think there is 0% chance of that happening though, although I think it would be hard to get people to be ok with it.

I would not like the postcard version though.

[InDebtInDC]

How do you calculate income? My money has a strange way of going straight to other people's pocket

[sweeps]

How do you calculate income?

The same way you calculate income now?

Back to the original question, I guess where I was going with this is would the economy improve by eliminating all these arcane tax rules. Granted, CPAs and tax software companies (e.g. Intuit) might be in a world of hurt, but think of how much money could be saved if people don't have to hire professionals or buy expensive software just to calculate their taxes and devise wacky strategies to minimize tax bills.

There are probably other effects too -- that's just one thought that comes to mind.

[cptacek]

I think if they got rid of all the deductions for small businesses, lots of people would get out of small businesses. When I figure up how I did for the year in my business, I count the amount I got back from taxes because of that as income to the business. And if I didn't have that, it would have taken me a lot longer to be in the black.

Also, isn't the AMT a flat tax? If you look into it, the real reason people hate it is because they can't deduct their high state taxes. So, if people hate the AMT, wouldn't they hate a flat tax?

[Aleta]

I really think that a consumption tax would be great. It would tax people fairly, reward savers, and get money from those who are not currently earning their money legally and paying taxes.

[gackle]

I would LOVE to see a flat tax enacted. I think if a politician running for president seriously backed a flat tax they would be very competitive in the election. If we did have a flat tax, the goliath IRS would be drastically reduced, thus saving a lot of tax dollars. Here is an interesting article about the success of the flat tax in former Soviet Union countries.

[InDebtInDC]

The same way you calculate income now?

Then there is no real change the system. The current system is cash based. So if I have my employer deposit my paycheck straight into a 401(k) account, technically I have no income from that paycheck, although my retirement net worth has increased.

What if my employer decides to pay me with uncut diamond?

Respectfully, I do not think it is that simple. You need to address the root cause of the problem: cash-based tax accounting. As we all know, not all transactions involve cash.


I think the idea would be a great first step, but the only problem would be to accurately pinpoint each person's income.

There are people who get paid straight into overseas accounts and they personally do not touch any money. Technically they are earning income.


With your system, the majority of the tax burden would fall on the poor and the middle class who have no means to hide their income. Can we do better than this?


I propose a use tax. This would be similar to how insurance companies rate your premium. The more risk you of filing a claim for money or services, the more you have to pay.

For example, we could monitor vehicle usage. The more you drive and the heavier your vehicle is, the more tax you pay towards roads. This is currently built into the gas tax.

It is my experience that people who incur the most cost for the public pay the least amount of tax. Can we do better?


For example: someone who keeps to themselves and don't go out much versus someone who has 10 kids and require government assistance. The first person is paying a disproportionate share for the second person. The second person is likely not to pay anything at all.

The only problem with my proposed system is that people do not like to be monitored, and people think that rich people have a burden to bear for being rich.

[sweeps]

DC, you bring up valid points, but it's off-topic from my question.

Obviously individuals and companies can lie to the IRS with the current system, just like they could lie to the IRS with any other income-based system. Similarly, companies could lie to the IRS in a sales-tax based system. But again, it's off-topic.

Just for the sake of argument, 401k's would be scrapped because again it is part of a complex tax rule. All savings would be on a post-tax basis. The point of the question -- what if the tax code was 10 pages instead of thousands of pages... who wins and who loses.

[InDebtInDC]

DC, you bring up valid points, but it's off-topic from my question.

Obviously individuals and companies can lie to the IRS with the current system, just like they could lie to the IRS with any other income-based system. Similarly, companies could lie to the IRS in a sales-tax based system. But again, it's off-topic.

Just for the sake of argument, 401k's would be scrapped because again it is part of a complex tax rule. All savings would be on a post-tax basis. The point of the question -- what if the tax code was 10 pages instead of thousands of pages... who wins and who loses.

I agree with simplying the tax code. The laws were passed by people who a) didn't quite understand the implications of implementing those changes, and/or b) were under pressure from lobbyists.

The only problem is how do we accurately gauge income if we scrapped everything and started from scratch?


The other thing we lose is the ability to provide tax incentives to encourage certain behaviours. Would you propose a separate tax structure for big businesses?