FLAT TAX ACCOUNTING: If the U.S. Implemented a “Flat Tax” Income Tax, How Would That Affect the Accounting Field?

In 2010, the National Taxpayer Advocate reported to Congress that the U.S. Tax Code had grown to over 3.8 million words, and U.S. taxpayers spent 6.1 billion hours working on their taxes. That was 2010 and the code is longer now. More returns are filed electronically, but at the same time, new laws like the Affordable Care Act (ACA) add to the complexity. What if everything could be simplified down to just one flat tax? How would implementing a flat tax in the U.S. affect the accounting field?

What is a Flat Tax?

The idea for flat tax accounting was introduced in the Washington Post in 1981 by economists Robert Hall and Alvin Rabushka. Since then, various politicians and financial gurus like billionaire Steve Forbes have proposed a flat tax. Simply put, a flat tax means that individuals and businesses would pay a flat percentage of their income, such as 10, 15 or 19 percent, and there would be no deductions, tax credits or different tax brackets.

How Would This Affect Business Accounting?

According to a 2015 survey by the SCORE business mentoring organization, 40% of business owners said that bookkeeping and taxes were the “worst part” of owning a small business. The survey showed that 77% of small businesses spent between $1,000 and $20,000 a year on tax preparation and accounting services. A flat tax might make these businesses happier, but they would no longer need to pay for tax accounting services.

How Would Flat Tax Accounting Affect Individual Services?

When two Presidential candidates proposed a flat tax during the 2012 U.S. election, U.S. News discovered that Americans spent about $400 billion on tax preparation services. Nearly 2/3 of Americans pay professional tax preparers for accounting services and most of the rest, 28%, use online tax programs. In 2015, CPA Practice Advisor found that the average cost ranged from $198 in the Midwest to $348 in Pacific coast states. A flat tax would greatly reduce the amount spent and some of the estimated 800,000 tax industry jobs would certainly be lost. American Institute of CPA’s President Edward Karl estimated that about 200,000 tax industry jobs were held by certified public accountants. CPAs don’t spend all their time preparing individual taxes but it is a significant part of their work.

What Could the Future of a Flat Tax Be?

Eight U.S. states have a flat tax, with rates ranging from 3.07% in Pennsylvania to 5.75% in North Carolina. Seven states have no income tax at all. This shows that different systems from the complex U.S. Federal income tax system can be adopted and can work. Some states believe that lower flat tax rates encourage business growth and investment. Other experts think that flat tax rates discourage savings and especially retirement funds, since Individual Retirement Accounts (IRAs) are among the most popular tax deductions. Cynical accountants and financial advisors say that flat tax accounting will never be widely adopted. The reason? Campaign contributions to lawmakers flow from individuals or businesses that want to encourage special benefits in the tax code. With a simple flat tax and no code: the contributions would no longer be necessary.

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