It’s Friday and time for our weekly shoot-the-shit. This week’s shoot-the-shit is on the concept of “Flat Tax.” As with all shoot-the-shits, readers are free to make unsupported statement, insult anyone they wish, use profanity and / or change subjects.

There’s a lot of hot air being passed by both sides of the political spectrum regarding tax reform and simplification of the “Tax Code.” This is an issue that will be thrown around throughout the 2016 election cycle. It is our intent to provide you with a clearer understanding of this issue.

The United States of America uses a progressive tax systems. Congress establishes tax rates for each income tier. In addition, Congress, through a legislative process establishes deductions that allow businesses and individuals to reduce their taxable income. The legislated tax rate is referred to as the marginal tax rate; however, the actual tax rate and subsequent tax liability after legal deductions will be lower and is referred to as the effective tax rate.  To illustrate…

John Doe had an income of $100,000 for the tax year; his marginal tax rate is say 28%  or $28,000. After legal deductions, John Doe reduces his taxable income from $100,000 to say $70,000, so his new tax rate is now say 18% making his tax liability $12,600. Therefore, John Doe’s effective tax rate is $12,600 / $100,000 or 12.6% The same holds true for major corporations, and it’s possible for corporations with pretax incomes in the billions of dollars to pay no taxes legally, given deductions.

Getting a corporation, or high net worth individual, to the lowest legal effective tax rate is BIG business involving lobbyists, tax attorneys, CPAs, major accounting firms and financial institutions who design financial products to reduce taxable income and achieve the lowest effective tax rate .

The long and short of it is that there is a HUGE economic interest in preserving the progressive tax system!

The flat tax concept proposes two or three tax rates base on total income tiers, and does away with all deductions in its purest form.

Most of the people you talk to feel that the flat tax is a fairer system and a simpler system across the tax base. The one benefit to the flat tax, usually not discussed, is  that with a flat tax corporations, small businesses and individuals are free to make investment decisions that result in the highest returns without considering a tax consequence.  Without a home interest deduction, you effectively remove the tax subsidy for homeowners and you’ll see home prices drop.  Politically, you’d have every national realtor association up in arms…

Therefore, when  you hear someone proposing a flat tax know that it has a positive effect on the economy, but the question that has to be asked is how do you get it passed?

Have a great weekend! Be safe, get out the range and spend sometime with your buds and family!