Ross Perot in his bids for the Presidency in 1992 and 1996 was the first to nationally publicize the idea of a flat tax. This was shot down and then in 2004 Steve Forbes pushed it again. While Rubio-Lee is not proposing exactly a flat tax they are taking some major points from those plans and putting it into this idea.
The reason, supposedly, why the flat tax was supposed to never work is because it would harm lower earners. This reason has a lot of flaws into it. In the proposed version of flat taxes by both Perot and Forbes they set a minimum income level of the median income, which in 2015 would be 44,500. If you were below that line you would not pay taxes, essentially like right now with standard deductions and current tax brackets. Thus there wouldn’t be a significant change. In the Rubio-Lee plan anyone that made $75,000 or less would pay 15% in income taxes and all deductions would be eliminated except for Charitable and Mortgage Deductions. This approach might affect the lower income folks more than before. However, it would be balanced out by creating a higher tax bracket for all those that make more than $75,000 which would lead them to be taxed at 35%. The current top tax bracket is 39.5% which you don’t hit till you start making over $400,000 but to hit the 35% you need to be making over $150,000. This new proposal shifts the divide between lower income and higher income tax payers more dramatically.
The Internal Revenue Service (IRS) estimates that 20% of income taxpayers pay over 80% of the tax revenue. This new change could make it about 35% of the tax payers pay almost 90% of the revenue. This will further a deeper divide and hatred among earning classes but could be our solution. The interesting piece about the plan is the way corporations are treated. Here all businesses are taxed at 25% with no loopholes for them. This could be helpful as it gives a clear piece of how to address different the corporate tax problem but could also affect revenue growth in the short term.
No solution is perfect, and this one still has a long way to go with details and more information, remember it is only a white paper, but it is a start. From a strategy point of view it could open up opportunities and we could see some great advantages to this. However, no one ever wants to lose anything, and with the elimination of every deduction in the tax code except for two this could be a serious challenge and discussion but one we should embark and help answer questions that he whitepaper has created.