Summary of a Flat Tax Proposal

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Summary

House majority leader Dick Armey is proposing a 17% flat tax on income. This is basically the same plan supported by former candidate Steve Forbes. Currently many Americans pay as much as 33% or more in cumulative taxes because tax rates vary for each individual based on income brackets, exemptions and a complex system of IRS codes. This proposal would create a single flat rate tax fixed at 17% that would be the same rate for all Americans. Most Americans would see this as a reduction in tax rate. The national average is currently 22%.

Advantages: the 17% flat tax would replace the existing tax system and proposes the following:

Individuals would be initially taxed at a flat rate of 20%, falling to 17% after two years.
It would significantly reduce the tax rate for many Americans.
It would eliminate double taxation.
It would simplify tax preparation. Corporate and individuals would be able to file their returns on a ten-line postcard-size tax form.
It would encourage savings. Individuals would no longer pay tax on income from savings, capital gains, and interest income.
It would provide a strong boost to capital formation and thereby stimulate the economy.
It would reduce IRS staff and overhead and streamline tax preparation.
Corporations would be allowed to expense all their investments--no more complex depreciations.
It is a progressive tax with a flat rate on taxable income, however, the more an individual saves or invests, the lower his taxable income becomes, thus lowering his total tax payment.
Taxable income is defined as total income minus savings and investments minus a threshold income. The typical family threshold income is $36,800.
This would mean that nearly half of all households would pay no federal income tax under this plan.
It would reduce the cost of compliance from $593 Billion to an estimated $50 billion per year.
It is a simple tax that levies the same tax rate to all Americans regardless of taxable income, while reducing or eliminating income taxes for low income families.

Disadvantages :

It would not eliminate the IRS, but would reduce its role.
It would eliminate deductions for mortgage interest payments, a drawback for homeowners.
It would eliminate deductions for charitable donations.
Corporations could deduct all wages and salaries, but benefits like social security, health or life insurance would no longer be tax exempt.
Corporations would no longer be able to deduct interest payments on debt.