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Real World Problems with a Flat Tax System

I read an interesting article in Forbes [3] the other day and as a former public school teacher of 11 years, it really hit home for me. I was fortunate enough to teach in a school that was adequately funded but not well funded. I, like every teacher I knew, paid for certain expenses not always because the school wouldn’t pay for it but parting the red tape for a reimbursement wasn’t worth the hassle. Plus, I knew that I could write it off and get a portion of that money back and being a small business owner, that was attractive to me although probably not, financially speaking, the best way to go about it.

But here’s what I was thinking about: Sometimes we don’t completely think through what it is that we want. For those who salivate at the idea of a flat tax system, have they thought through the goods and bads of it or are they stuck with the fair versus unfair argument? Let’s say that a true flat tax system went in to effect. Here are just a few of the deductions that you and I may no longer see.

Student Loans

We’ve heard a lot about how student loans are crippling those who have recently graduated and got an entry level job. I was happy to receive tax credits as a young teacher for my loans. It helped me get a sizable tax refund at a time when I really needed it.

Mortgage Interest

If you own a home you know that the deduction you get for mortgage interest is sizable especially if you’re in the early years of paying off your home.

Home Equity Loans

Along the same lines, under current laws you can write off interest paid on a home equity loan up to $100,000.

Charitable Donations

Not only would you be affected but you’ll be much less likely to donate to charities if you can’t write it off. Either would the high net worth individuals who are responsible for sometimes all of the funding for some charities. What would the non profit picture look like if we couldn’t write off charitable contributions?

Home Office Tax Deduction

If you’re a freelancer, you can afford to be self-employed, in part, because of deductions like these. You could make a good argument that this is more of a cost basis deduction where you’re simply subtracting out expenses but the IRS would be happy to get rid of it since it’s responsible for large amounts of filing errors.

Job Search Deductions

If you’re unemployed or making just enough to get by, you’re happy to deduct the costs of job searching.

Moving Expenses

With the amount of foreclosures, short sales, and general downsizing, a lot of people who need all of the deductions they can get may lose the moving expense deduction if the flat tax system was enacted.

Retirement Deductions

What if there were no incentives for retirement savings? No more tax advantages to IRAs, 401(k)s, 529s or other future savings vehicles.

Bottom Line

I’m not a flat tax expert nor am I smart enough to know how a system would work where we kept the best of what we liked and got rid of what we didn’t. What I do know is that the middle class benefits from our complicated tax system just like the rich. Maybe not as much but still, each of us are receiving our breaks.

Of course the argument would be that the flat tax would make up for the loss in deductions but would it? I haven’t seen how that would work. Have you?