The Flat Tax Explained:
Steve Forbes proposed a flat tax rate of 17% in his book, Flat Tax Revolution. However, everyone gets an exemption: $13,200 for adults ($17,160 for single mothers) and $4,000 for dependents. A family of four would not pay taxes if they made less than $46,000. The estate tax and the Alternative Minimum tax
would be done away with. In addition, any income that is saved or invested is tax exempt. That means no taxes on capital gains, Social Security benefits, interest, or dividends. Corporations could expense all investments, doing away with depreciation schedules, and would only be taxed on American-made products.
Why Forbes Says a Flat Tax Is Needed:
The current U.S. tax system is so complicated, it costs taxpayers a lot just to implement it. On average, it takes 28 hours and 30 minutes to figure out what you owe - whether you do your own taxes, or you work the hours needed to pay someone else to do the taxes. The cost in lost productivity is $200 billion. That's not counting the 97,440 IRS employees' salaries.
A fictional tax return given by Money magazine to 45 tax preparers resulted in 45 different tax calculations. Even a Treasury Department study found that callers to the IRS toll-free help lines got the wrong answers 25% of the time.(Source: MISES)
Is It Really a Flat Tax?:
The flat tax ignores Social Security taxes, Medicare taxes, or federal excise taxes. This means, for example, that the 12.4% Social Security payroll tax (split between employer and employee) would remain in place. Currently, once you make over $90,000 a year, you no longer have to pay the Social Security tax. It also leaves in place all state and local taxes. So, a lot of unfairness and complexity remains. And, if you read between the lines, it appears that a lot of taxes the rich pay - capital gains, dividends, and interest - goes away, while the benefits - that Social Security exclusion - remains. (Source: Forbes