Contrary to popular belief, the United States currently imposes tax rates on high earners that are comparable to those in Sweden, depending on where they reside. Over time, income tax brackets have become more progressive, with bottom rates decreasing while top rates remain largely unchanged. There is an argument to be made for adjusting tax burdens so that the wealthy pay less and the less affluent pay more, but this proposition is likely to face strong opposition. There is now a renewed discussion, similar to that led by Steve Forbes in the 1990s, about simplifying the tax code.
During Ronald Reagan’s second term, the tax law featured only two brackets at 16 percent and 28 percent, representing the flattest tax rates since the inception of income tax in 1913. Following this change, the economy experienced robust growth and tax revenue increased due to the simplification of the tax code and the reduction of loopholes. While Treasury Secretary Scott Bessent has not yet focused on tax reform, there are indications that a significant simplification and flattening of the tax system might be on the horizon, building on the 2017 Tax Cuts and Jobs Act.
The current tax structure includes bottom rates of 10 percent and 12 percent, with the 12 percent bracket tapering off around $90,000 for married couples filing jointly. Many individuals in this bracket benefit from sizable standard deductions, child tax credits, and earned income tax credits, resulting in a significant reduction of their tax liability. However, this setup may create a misconception among taxpayers, as they receive most of their taxes back in the form of refunds.
It is worth noting that the U.S. has a lower bottom tax rate compared to other developed nations like Sweden and Britain. Advocates for a flatter tax system argue that everyone should have a stake in contributing financially, as it promotes a sense of responsibility. Even a flat tax system can be viewed as progressive, as individuals pay taxes in proportion to their income. Nevertheless, criticisms persist about the perceived unfairness in tax distribution, especially when higher-income earners are accused of not paying their “fair share.”
Implementing a flatter tax code without deductions and credits is projected to generate more revenue in the long run. While much of the debate around tax cuts revolves around the growing deficit, streamlining the tax code could help move closer to balancing the budget. Historically, despite fluctuations in tax brackets, the government’s tax revenue has averaged around 20 percent of the gross domestic product.
Duct. When taxes are high, individuals tend to seek ways to evade them. Conversely, when taxes are low, people are more willing to comply with their tax obligations. If raising taxes does not result in increased revenue, it would be illogical to enact such measures as they would merely serve as a bureaucratic exercise and inconvenience for all parties involved. The most straightforward and equitable tax system is a consumption tax, yet implementing such a tax without first repealing the 16th Amendment would be imprudent. This could result in the existence of two concurrent taxation systems, potentially leading to the government claiming up to 40 percent of the Gross Domestic Product, akin to many Western European countries. As things stand, we are bound by the income tax unless there is a drastic shift in political dynamics, therefore efforts should be made to enhance its fairness. While achieving a completely flat tax system may be challenging, some level of progressivity is inevitable. Nevertheless, moving towards a flatter tax structure would greatly contribute to fairness and promote economic growth. The article concludes that the adoption of a flat tax system is overdue and essential for enhancing the tax landscape.
