How Income Taxes Work

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, everyone pays the same tax rate no matter how much they earn. Former presidential candidate Steve Forbes proposed a 17 percent flat tax in 1996 and 2000, and Rick Perry floated a 20 percent flat tax in his 2012 presidential campaign [source: Tax Policy Center].

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. (Perry's proposal did allow a few deductions such as mortgage interest).

Critics of the flat tax say that it would favor the wealthy. Under Rick Perry's plan, a married couple with two children earning $31,000 would lose $5,000 in credits, while the same earning $424,900 would owe nearly $45,000 less in taxes [source: Rampell].