Alternative: Flat Tax
Humorist and travel writer Stanton Delaplane once offered this lighthearted suggestion for a simplified tax form: "How much money did you make last year? Mail it in." While that may be a drastic way to change the tax system, there has been no shortage of people proposing new tax systems since the 16th amendment was passed in 1913. If you follow presidential campaigns, there is usually talk from some of the candidates on revising the tax system. Here's a quick look at two of these alternative tax plans.
We currently use a marginal tax system, also called a graduated tax, in which the percentage you pay in taxes varies based on your income. Under a flat tax system, you pay a flat rate on your income. In other words, there is a single tax bracket for all taxpayers. A common percentage thrown out for a flat-tax system is 17 percent. This is the rate proposed by former presidential candidate Steve Forbes and U.S. Representative Dick Armey.
Proponents of a flat-tax system say that it would do away with the complicated tax code and tax forms. The flat tax would need only one form, about the size of a postcard and consisting of only 10 lines. You would merely add up wage, salary and pension income, subtract any personal allowances and pay 17 percent of your taxable income. Deductions and credits would be eliminated under this type of plan.
Critics of the flat tax say that it would favor the wealthy and could put a higher tax burden on those who make less money. Under Dick Armey's proposed flat tax, any family with a taxable income less than $36,800 would pay no taxes. However, it would raise the taxes of some people who now may pay only 15 percent in taxes. The group who would benefit the most is wealthy Americans who now pay upward of 33 percent in federal income tax.
On the next page, you'll find out about another alternative: the National Sales Tax.