Fixing the American Economy by Implementing a Flat Tax Policy
Thane Rolston
Submitted 21FEB2017
ERH-102-11
Help Received:
Conference with MAJ Garriott, Peer Review, Writing Center
Concepts I have learned in past Economics classes
Easybib.com
Sources stated on works Cited Page
Certified: Cadet Thane Rolston
$19,975,085,385,713. That is the national debt of the United States as of 2124 Hours, February 13, 2017. Divided by each citizen that is $61,550. Yet, the Internal Revenue Service only brings is an average of $10,260 per citizen (usdebtclock.org). There are two ways to fix this, either lower government spending, or increase tax revenue. If the United States were to replace the current tax code with a new flat tax, America’s GDP will go up, jobs will be created, and government waste will be reduced.
Flat taxes are as implied, one level of taxation for all income levels. Many countries have had great success with flat taxation because it is the only tax model that will consider the Laffer Curve. The Laffer Curve is a graph showing the level of taxation as a percentage on one axis, and the total revenue on another. As tax levels increase, so does the total revenue, until it reaches a point where total revenue decreases. This phenomenon is what is known as diminishing returns. Eventually people become taxed so much that making more money is not worth their time, so they stop working to become wealthier. Flat taxes are used to find the sweet spot where they are not too low as to miss out on making money, and not too high as to cause decreases in the GDP. Flat taxes are designed to be efficient.
In 2001, President Vladimir Putin of the Russian Federation implemented a flat tax on consumer income at 14%, as well as lowered corporate taxes from 35% of revenues to 24% (Heritage Foundation). While many in the United States may disagree with the actions of President Putin, it should be noted that President George W. Bush said, “I am impressed by the fact that [Putin] has instituted tax reform — a flat tax. And as he pointed out to me, it is one of the lowest tax rates in Europe. He and I share something in common: We both proudly stand here as tax reformers.”. Until the global recession of 2008, causing a decline of oil revenues, Russia averaged 7% economic growth annually, and is still the 6th largest economy and the second most powerful country behind the us, per US News.
While the world knows much about the Four Asian Tigers, countries by explosive economic growth, many have never heard of the Three Baltic Tigers, Latvia, Lithuania, and Estonia. Barely 6 million people make up these three countries in Northeast Europe, but sitting on the edge of the Baltic Sea they are worth $185 billion annually. The average citizen in these countries has an astonishing 56-65% more purchasing power compared to the rest of the European Union, who use the typical progressive taxation system (ScienceDirect). Since 1994, these countries have gone from being nothing trapped with a centrally planned economy, to being the model of developing nations. One of the most surprising benefits of tax reform in the Baltics is the lowering of the average national debt. The national debt of the United States is 104.7% of the GDP, compared to an astonishing 54% of the GDP in the Balkans (ST. Louis FED).
Over the past 20 years, the Heritage Foundation has ranked Hong Kong as the freest economy in the world. The World Bank Group ranks them as the fourth easiest country to do business with. Personal income is taxed at 15%, investments are not taxed, and businesses are taxed at a lower rate than most industrialized countries (Business Insider). All of this frees up capital to be reinvested in the economy, companies to have the finances available to grow and hire new employees, and people to have the financial freedom to put more of their money where they want it. Such an effective tax policy has recently been called for in the People’s Republic of China (James Dorn, China in the New Millennium: Market Reforms and Social Development), which could lead to them attracting more of our businesses to their shore. Such an action could cost hard working Americans good paying jobs, and strengthen their economy and eventually lead to them becoming more powerful than the United States.
These five countries who have all implemented flat taxes have achieved enormous success. They are true economic miracles. Now, what would happen if we implement the same systems right here in the good old US of A? Would we be propelled into economic growth that has not been seen in years, or could this be what propels us into recession?
In a very simple view, adopting a flat tax would eliminate the need for the Internal Revenue Service (IRS), because a simple tax policy would eliminate the need for a complex agency. A flat tax would reduce the number of tax forms from 480 to 1, saving 293,760 trees annually. Taxpayers would save $11.2 Billion that is needed to operate the IRS. Also, the $127 Billion believed to be in tax havens would come back to the United States, since the reduced tax rates would eliminate the need to hide money overseas.
In 1994, Representative Dick Armey (R, TX.) proposed a flat tax rate at 17%. His plan, dubbed the “Armey Flat Tax”, would eliminate double taxation on investments, which would free up more capital for Americans to reinvest into the American economy. Businesses would only be taxed on net income minus wages/salaries, investments, and operating costs. For families over four, only be taxed on income after a $30,000 allowance at the same 17% as everyone else. As an example, a company with $1,000,000 in revenue with $250,000 spent on employees and benefits, another $300,000 spent on operating costs, and $100,000 spent on new projects would only pay $59,500 in taxes opposed to $353,045.75 under the current system. As it stands right now, that business could not afford to expand and create new jobs, since without that $100,000 investment they would only profit $96,954.25. Likewise, a family of four making $100,000 annually would be able to deduct $30,000 for necessities such as healthcare, food, and housing, and only be taxed on the remaining $70,000, paying $11,900 in taxes as opposed to about $16,542.50 currently. Many say that flat taxes would only benefit the rich, but a family of four would have less problems saving for college or retirement with their extra $4,642.50 annually. Should that same family be satisfied with their saving, they have extra money for charitable donations and spending on whatever they wish. All in all, their tax saving free the up to spend more money, adding to the GDP of the United States, which creates more revenue for the government while simultaneously increasing the number of jobs and the salaries of American workers. If there were a budget shortfall, the Value-Added Tax (VAT) would be implemented, covering high dollar goods in a sales tax form.
Unfortunately, the Armey Flat Tax never made if off the floor. The Clinton Administration as well as House Democrats, arguing it would be increasingly burdensome on lower income families and only benefit wealthy Americans. The 17% tax would be higher than the current 15% tax a family would pay on their $100,000 income (contradicting the previous paragraph). The way the current system works, the same family would only pay $6,252 in federal income tax. Except that only accounts for the 25% tax levied on income over $75,300. The tax bracket they would fall under would be $75,300-$151,900, which there is an additional tax of $10,367.50. Income is taxed a certain percentage over the bottom income in their bracket, but adding a blanket tax of a certain amount depending on bracket. This actually hurts families at the lower end of their brackets, because many struggle to make the flat amount set for their bracket. The flat tax would eliminate the need for families to pay a percentage of income, and add more just because they are in a certain income range.
National debt is crippling the nation, and current attitudes are that the solution resides in increased taxation. Ronald Reagan said, “The government’s view on the economy could be summed up in a few short phrases: If it moves, Tax it. If it keeps moving, Regulate it. And if it stops moving, Subsidies it.” this current trend of thinking is what caused our current economic situation. Not politics. Just the short sightedness to increase taxes, and then pay to keep failing businesses in business. Long term success of our nation relies on a flat tax, freeing up capital for investment, thus increasing our gross domestic product, where more money can be taxed to make up for government spending.
“Who’s on the case for flat taxes?”
-Joshua Micah Marshall
Works Cited
“The 60 Most Powerful Countries in the World.” U.S. News & World Report, U.S. News & World Report, www.usnews.com/news/best-countries/power-rankings. Accessed 21 Feb. 2017.
Azacis, Helmuts, and Max Gillman. “Flat Tax Reform: The Baltics 2000â2007.” Journal of Macroeconomics, vol. 32, no. 2, 2010, pp. 692–708., doi:10.1016/j.jmacro.2009.05.001.
Brad, et al. “How a Family of Four with a $100,000 Yearly Income Pays Only $6,252 in Federal Income Tax.” RichmondSavers.com, 21 Jan. 2017, www.richmondsavers.com/how-a-family-of-four-with-a-100000-yearly-income-pays-only-6400-in-federal-income-tax/. Accessed 21 Feb. 2017.
“The Case for Flat Taxes.” The Economist, The Economist Newspaper, 16 Apr. 2005, www.economist.com/node/3860731. Accessed 21 Feb. 2017.
“Cato Institute.” Cato Institute – SourceWatch, www.sourcewatch.org/index.php/Cato_Institute. Accessed 21 Feb. 2017.
“Central Government Debt, Total (% of GDP) for Central Europe and the Baltics.” Central Government Debt, Total (% of GDP) for Central Europe and the Baltics | FRED | St. Louis Fed, 23 Jan. 2017, fred.stlouisfed.org/series/GCDODTOTLGDZSCEB. Accessed 21 Feb. 2017.
Dorn, James A. China in the New Millennium: Market Reforms and Social Development. Washington, D.C., Cato Institute, 1998.
“The Effects of Russia’s Flat Tax | VOX, CEPR’s Policy Portal.” The Effects of Russia’s Flat Tax | VOX, CEPR’s Policy Portal, voxeu.org/article/effects-russia-s-flat-tax. Accessed 21 Feb. 2017.
Gethard, Gregory. “Should The U.S. Switch To A Flat Tax?” Investopedia, 26 Oct. 2009, www.investopedia.com/articles/tax/09/flat-taxes.asp. Accessed 21 Feb. 2017.
“How Trickle-down Economics Works.” HowStuffWorks, 9 Dec. 2008, money.howstuffworks.com/trickle-down-economics2.htm. Accessed 21 Feb. 2017.
Mitchell, Daniel. “577,951,692,634 Reasons…And Counting: Why a Flat Tax Is Needed ToReform the IRS.” The Heritage Foundation, www.heritage.org/taxes/report/577951692634-reasonsand-counting-why-flat-tax-needed-toreform-the-irs. Accessed 21 Feb. 2017.
Mitchell, Daniel J. “Policy Report: The Global Flat Tax Revolution.” Cato Institute, 1 July 2007, www.cato.org/policy-report/julyaugust-2007/global-flat-tax-revolution. Accessed 21 Feb. 2017.
Mitchell, Daniel. “Russia’s Flat Tax Miracle.” The Heritage Foundation, The Heritage Foundation, www.heritage.org/europe/commentary/russias-flat-tax-miracle. Accessed 21 Feb. 2017.
Stock, Peter. “The Flat Tax Works — Check Out The Hong Kong Experience.” Business Insider, Business Insider, 14 July 2010, www.businessinsider.com/america-take-example-on-hong-kongs-simple-and-efficient-flat-tax-2010-7. Accessed 21 Feb. 2017.
Urken, Ross Kenneth. “Republicans Love the Idea of a Flat Tax, but Does It Actually Work?” TheStreet, TheStreet, 1 Nov. 2015, www.thestreet.com/story/13343006/1/gopdebate-candidates-love-a-flat-tax-does-it-actually-work.html. Accessed 21 Feb. 2017.
“U.S. National Debt Clock : Real Time.” U.S. National Debt Clock : Real Time, www.usdebtclock.org/. Accessed 13 Feb. 2017.
“The World Factbook: RUSSIA.” Central Intelligence Agency, Central Intelligence Agency, 12 Jan. 2017, www.cia.gov/library/publications/the-world-factbook/geos/rs.html. Accessed 21 Feb. 2017.