Will We Have a Flat Tax in the United States?

By Matthew Frankel Markets Fool.com

The tax code in the United States is extremely complex, with seven tax brackets, and a list of deductions, exemptions, and tax credits, each of which seem more complicated than the next.

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One logical solution to the complex U.S. tax code would be to have a flat tax rate, which means that everyone pays the same percentage of their income -- no deductions or exemptions allowed. This idea has been suggested by several politicians, but a single, universal tax rate is not seriously being considered at this time. With that in mind, here's a discussion of the three main types of taxes, and why the U.S. doesn't use a flat tax system.

The U.S. tax code is very complex -- could we replace it with a single flat tax rate? Image source: Getty Images.

The three types of taxes

Of course, there are many different taxes that exist in the United States, and around the world. However, they can be divided into three main categories:

  1. Progressive tax:This refers to a tax whose rate increases as the taxable amount increases. The U.S. federal income tax is a form of a progressive tax system, since higher tax rates are used for higher-income taxpayers.
  2. Regressive tax:The opposite of a progressive tax, a regressive tax rate decreases as the amount increases. The Social Security tax in the U.S. is an example of a regressive tax, in that it is only assessed on incomes below a certain cap ($127,200 in 2017). To be fair, however, Social Security benefits are weighted in favor of lower-income workers.
  3. Flat tax:Also known as a proportional tax, a flat tax has a constant marginal rate, regardless of the amount of money that can be taxed. Many countries around the world have flat tax rates, as do several U.S. states. The Medicare tax in the United States used to be a flat tax, until the additional Medicare tax on higher earners was implemented.

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It's also worth noting that some taxes could fall into more than one of these categories, depending on who you ask. For example, a state sales tax could be considered a form of a flat tax, since everyone pays the same rate, regardless of how much they make or what they're buying. On the other hand, it could also be considered a regressive tax, since lower-income individuals tend to spend more, as a percentage of their income, than wealthy individuals.

Why the United States uses a progressive tax system

In a nutshell, it's the general consensus among U.S. citizens and politicians of all age groups, income levels, and political affiliations, that the wealthy should pay more into the system than the poor.

For a little more color, consider the 2017 U.S. marginal tax brackets:

Tax Bracket

Single

Married Filing Jointly

Married Filing Separately

Head of Household

10%

$0-$9,325

$0-$18,650

$0-$9,325

$0-$13,350

15%

$9,326-$37,950

$18,651-$75,900

$9,326-$37,950

$13,351-$50,800

25%

$37,951-$91,900

$75,901-$153,100

$37,951-$76,550

$50,801-$131,200

28%

$91,901-$191,650

$153,101-$233,350

$76,551-$116,675

$131,201-$212,500

33%

$191,651-$416,700

$233,351-$416,700

$116,676-$208,350

$212,501-$416,700

35%

$416,701-$418,400

$416,701-$470,700

$208,351-$235,350

$416,701-$444,550

39.6%

$418,401 and above

$470,701 and above

$235,351 and above

$444,551 and above

Data source: IRS.

Also, keep in mind that the income ranges listed here refer to taxable income. There are several deductions and tax credits that are specifically designed to reduce taxes on lower- and middle-income Americans, and specifically exclude the wealthy. The Earned Income Tax Credit is a good example, as is the American Opportunity Credit for college expenses.

In practice, our tax system achieves its goal of being progressive. According to the Tax Policy Center, Americans in the lowest quintile (20%) pay an effective federal tax rate of just 3.7%, including income, payroll, corporate income, estate, and excise taxes. For the middle quintile, the effective rate jumps to 13.6%. And, for the top 1% of Americans, the effective federal tax rate is 33.4%, nearly 10 times what those in the lowest quintile pay.

Will we ever have a flat tax rate in the U.S.?

While it's entirely possible that we could have a flat tax in the United States at some point in the future, it's not under serious discussion by any major political party or organization at this time.

However, some flat tax proposals have gained significant political traction in the recent past. One notable example was 2012 presidential candidate Herman Cain's "9-9-9" plan, which would replace all current federal taxes with a 9% business transactions tax, a 9% personal income tax, and a 9% federal sales tax.

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