2012 Iowa caucus candidates eye flat tax system
Most of the candidates running for the Republican presidential nomination want to simplify the federal tax system. Conservatives say that would spur economic growth, but some scholars say those plans could end up hurting the poor.
GOP leaders say the current federal tax system is too complicated, burdensome, and costly. One solution the some of candidates support is replacing federal income tax brackets with some kind of flat tax.
"What we are hearing from most of the candidates center on the idea of making the tax process less confusing," said Cristi Gleason, a University of Iowa accounting associate professor. "… This I think is a reaction to the general public's frustration with the taxation process. I agree that right now filing taxes can be confusing because of the various deductions and loopholes."
Leo Linbeck — cofounder and CEO of Americans for Fair Taxation, sometimes referred to simply as FairTax — said his organization focused on tax simplification when members penned their tax-policy proposal in the mid-1990s.
The FairTax plan would eliminate existing federal taxes and replace them with a national sales tax of 23 percent.
The FairTax plan wouldn't include deductions or exemptions for such items as food staples, which many states do not subject to sales tax. However, Linbeck said, the plan does include a "prebate" to cover taxes an average consumer would pay for such basic needs as food and shelter.
FairTax proponents say the plan would be revenue-neutral — that is, it would not cause a huge dip to federal revenue. However, Eugene Steuerle, a researcher who works with the Tax Policy Center, said many flat-tax proposals such as FairTax would mean fewer dollars coming into the federal government.
"They are reducing taxes on higher-income-level households at the expense of increasing the tax burden on the lower-income households. The decrease in revenue would make funding for entitlement programs difficult," he said. "That is probably because they replace a progressive rate structure with a flat-rate structure."
Republicans are also eyeing the federal long-term capital-gains tax, a tax on income from investments such as stocks and bonds.
Many Republican tax proposals would either lower the capital-gains tax — which is currently 15 percent — or eliminate it altogether. They claim this would offer an incentive to consumers to invest more.
But Steuerle says this, too, favors the rich, because many managers and CEOs convert their income to capital, and a complete elimination of the capital-gains tax would cost the government huge amounts of revenue.
In 2011, for instance, the capital-gains tax generated $447 billion in federal revenue, 3 percent of the country's GDP.
Some in the Republican race also want to eliminate the alternative minimum tax — a flat rate imposed on individuals and businesses if their income federal tax bill falls below a certain amount.
Anjali Singh, a tax accountant, says that change would primarily affect individuals with higher incomes and big corporations.
"The alternative minimum tax is calculated for every individual and business. Taxpayers pay the alternative minimum tax if it comes out to be higher than their federal income tax," she said. "Usually, people with higher incomes and corporations are able to keep their taxable income surprisingly low due to professional and timely tax planning. This allows them to bring down their taxable incomes to lower tax brackets. This is when the alternative minimum tax kicks in."
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