People have been proposing a flat income tax for many years. With the bi-partisian commission on taxation being created in the summer of 2005 the idea of a flat tax will again gain the light of day as the solution to the complexity of income taxes. It is unlikely that any kind of flat tax would be passed, or would such a flat tax be any better than the current system though.
The first thing to set out is a basic assumption about taxes. Businesses do not actually pay taxes. Governments impose corporate income taxes, property tax on corporate property, employer's portion of social security and medicare taxes, and other taxes and fees. Businesses pay the taxes, but then pass the cost of these taxes on to the consumers as higher prices and / or to the employees as lower cash wages.
The second thing to mention is that a graduated income tax is not complex. That you owe 10% of the first $10,000 and 15% of next $20,000 of taxable income is easy to figure. The calculation is sixth grade math. It is simple decimals, or for most people it is a matter of looking up their taxable income on a table to determine the tax owed. It is the determination of taxable income that is the complex part, and that determination is not part of the graduated income tax concept..
When people talk about a flat income tax there are normally two ideas brought forth.
The first one is a flat tax (often quoted as 10%, 15% or similar relatively low percentage) on gross income for both individuals and companies. The second flat tax is a flat tax on wages. There would be no tax on dividends, interest, or capital gains. Nor would there be a tax on corporations.
A flat tax on gross income will destroy most, if not all companies. Alternatively prices will rise so much that many people will not be able to afford most US made goods or services. What is the problem with a flat tax on gross income? The easiest way to explain is to use an example. Take a widget maker. They buy $40 for materials per widget. They pay their workers another $20 per widget to turn the raw materials into widgets. They then sell the widget for $63 to a store. That gives them a profit of $3 per widget (5%), which also has to cover other costs such as plant improvements, paying their investors and such. Under the current tax system they pay 33% tax on the $3, or $1. Under a flat tax system of 10%, they would pay $6.30 or 10% on the entire sales price of $63. Under the flat tax system they would lose money on every widget they sell. Now, they could up the price to $70 (tax is $7, profit is again $3) and they would they make the same profit.
The store used to buy the widget for $63 plus $2 of it's labor and overhead costs and sell it for $68.25 (profit of 3.25 or 5%), now has to pay $70 and still needs to make a profit of 5%, or $3.75. This boosts the consumers cost from $68.25 to $75.75. In the long run it's a losing proposition. The more expensive the product, especially ones that have a lot of expensive raw materials or lots of labor or lots of layers between raw material and the consumer, the more the taxes are paid. The flat tax on gross income amounts to a sales tax on each and every step of the supply chain.
If you permit companies to deduct the cost of doing business you are at the current tax system with regards to corporations. Most of the current corporate tax code is designed to ensure on the correct expenses are deducted. There is no way to have a simple corporate income tax. There is a choice between complex and extremely complex.
So what would happen if you made a flat tax just on personal income? Well, you still have to let the small business people such as plumbers, gardners, and such deduct their business expenses (Schedule C) and the farms and fishermen (Schedule F) and small real estate owners (Schedule E) have to deduct their expenses. You also have to let people who invest deduct their cost basis (Schedule D) or nobody would be able to invest in the stock market. While that elimates the complexity for those who are not in those catagories, it really isn't the flat tax that solves the complexity issue. The complexity issue is eliminated by the elimination of deductions like home mortgage interest, employee business expenses and state and local taxes. You can eliminate the complexity without a flat tax rate by just elimating the deductions.
The other form of flat tax is to only tax wages, don't tax captial gains and dividends. While it is very simple, it is very regressive. The regressive issue is a politcal issue rather than a tax issue per se. The tax burden would fall on the workers, and not on anybody who already has money. Again, it is not the flat tax that solves the complexity, it is the elimination of deductions that solves the complexity issue.
In short, if you want to have a simpler personal income tax code you have to eliminate the deductions. Wether you pay a single rate or graduated rate is irrelevnt to the complexity.