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The Case for a Single-Rate Tax: Why Our Progressive Tax Code is Inconsistent with the Changing Face of American Taxpayers

2 min readBy: Scott Hodge

Download Comments Submitted to the President?s Advisory Panel on Federal Tax Reform

Comments Submitted to the President’s Advisory Panel on Federal TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Reform

Executive SummaryAmericans are ready to support fundamental tax reform, judging from their responses to a recent Tax Foundation/Harris Interactive poll. A majority of American adults believe federal taxes are too high, the tax code is too complex, and the income tax system is unfair. A majority even support simplification even if it means giving up some deductions and exemptions.

The first step toward a solution is to understand how our progressive income tax rate system interacts with recent demographic changes. If we look at who comprises the wealthiest 20 percent of taxpayers, we find they share many traits with our traditional notions of “middle class”:

  • They are overwhelmingly dual-income married couples;
  • They live in high-cost metropolitan areas and have correspondingly high nominal incomes, but average living standards;
  • They are older workers, at or nearing their peak earning years;
  • They are college educated and have professional jobs; and
  • They have business income.

The current tax system penalizes these groups. These families are taxed at the highest income tax rates because our progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. rate system is not fully adjusted for such things as cost of living, age, education, or the number of incomes in a household. Tax reform should attempt to make the tax code more neutral to these demographic traits.

The only way to mitigate the punishing effects of our current progressive rate structure on dual-income couples, older workers, the college educated, business owners, and families living in high-cost communities, is to enact a single-rate tax levied on consumption or on incomes.

Such a tax should be set a low rate, applied to a broad base, and have as few deductions as is politically possible. Single-rate tax systems have proven successful in Central and Eastern European countries in recent years, and would likely enjoy similar success in the United States.