America is ready for change in its tax code at all levels of government. In reforming the tax code there should be a discussion on what level of government funds what specific public interests (e.g. education, public safety, infrastructure, as examples).
In many ways, Governor Rick Perry’s plan is what Americans have been asking for: a bold, straight forward and logical approach to limiting the negative influence of government in our lives. Like any plan it has it pros and cons. Its biggest pro is that it requires everyone to file a tax return, its biggest con well some people are going to have to pay taxes.
A flat tax by definition is a single rate that applies to everyone obligated to pay the tax. As an example, sales taxes are flat taxes.
Governor Perry is not the only GOP candidate to propose a flat rate income tax, other candidates like Herman Cain and Newt Gingrich, already have and more still may. Others like former Governor Mitt Romney continue to cling to the progressive tax system.
By definition a progressive tax takes a larger percentage from the income of high income earners than it does from low income individuals. That means the more money you make, the more taxes you're responsible for paying.
Today the United States has a progressive tax on income, where tax payers are broken down into tax brackets based on taxable income. As an example, in 2010 individuals who earned up to $8,375 fell into the 10% tax bracket, while individuals earning $373,650 fell into the 35% tax bracket. Once an individual crosses a tax bracket benchmark cut-off point they pay more taxes. In theory that is how it is supposed to work. But it is complicated given the current federal tax code which allows for a number of exemptions.
Under a flat tax that doesn't matter. Under ideal conditions it does not matter how much income an individual makes, they are still going to pay the same portion of that in taxes. Same should apply to business.
Lower income individuals probably wouldn't be affected by it very much. Assuming they already pay taxes to begin with, in 2009 it is estimated that 51 percent did not pay taxes. Who it would affect are individuals in the higher marginal brackets, they would then pay a larger portion because they might not have the exemptions they have now.
So even if you were paying taxes at a lower rate than before, you could actually be paying more because more of your income could be considered taxable. Proponents argue that the flat tax is fair and simple, while opponents view it as a bonanza for the wealthy. The litmus test of any flat income tax proposal is does an individual end up paying more or less than before.
And that's really the bottom line for most people. Is a flat tax going to help or hurt them financially?
It is more likely a flat tax would create more revenue for the government and prohibit them from changing the tax rate on people based on income and tax bracket. A number of other countries operate under a flat tax system.
What is not being discussed by the GOP candidates is replacing the federal income tax with a national sales tax. A true national sales tax and not the complicated 9% proposed by Herman Cain, which some experts believe when state and local taxes are included can be as high as 25%. A large number of states and the District of Colombia impose sales taxes on their residents.
By definition a national sales tax is a consumption tax charged at the point of sale for specified goods and services, generally calculated as a percentage of the selling price. It can be levied every time a commodity changes hands, as from the manufacturer to the wholesaler, from the wholesaler to the retailer, and finally to the consumer.
Abolishing the income tax (corporate and personal) and implementing a national sales tax would capture tax revenue from those that currently avoid taxes completely (cash economy, criminal organizations, etc ...). During last year's BP oil spill in the Gulf of Mexico I witnessed a number of interviews on the news networks of individuals not being able to support $50,000 to $100,000 annual income claims because they admitted to not filing federal income tax and being employed in a sesonal cash business.
The lower income groups could be helped by excluding basic food items (bread, milk, butter, fresh vegetable) not sodas, candy, etc ... With a national income tax sectors of the economy as needed in real time can be stimulated by providing a 30-day tax waiver on domestic auto sales to help stimulate sales or any other sector that needs stimulating (e.g. steel, construction, as other examples). This system would be more effective than the current tax credits.
Under a national sales tax a large portion of the IRS could be eliminated potentially saving billions of dollars every year. The portion eliminated would be replaced with a point-of-purchase tax collection that is very effective and inexpensive.
Proponents of the national sales tax which would be imposed on everyone believe it is fairer than a flat or progressive tax system. Opponents of a national sales tax view it as being regressive and that it can potentially place a burden of lower income brackets. The fact is sales taxes unlike other forms of taxation can yield large revenue and governments find it easy to collect.
At the end of the day did Rick Perry submit a perfect plan? Maybe or maybe not ... but he opened the discussion further for tax reform and moving away from the current complicated system most Americans are fed up with.
