ACC 261 Online – Discussion Problem 2
Every year during the tax filing season, people complain about how complex the tax system has become. Assume that Congress is considering passing legislation to do away with the current tax system and impose a 18% flat tax on all income. This means there is no longer tax free provisions such as the gain exclusion on the sale of your home, social security income, tax-exempt interest, life insurance proceeds, and child support. This also means that there are no special loopholes, no longer an Alternative Minimum Tax (see Ch. 13), no filing status distinctions, no tax credits, and no graduated tax rates.
1. What would be your tax liability under the current system?
2. What would be the effective tax rate under the current system?
3. What would be your tax liability under this new 18% flat Tax system?
4. Would you vote in favor of this flat tax system? Explain your position.
5. Would the government have a budget surplus or deficit under this new system with respect to these two taxpayers (assume all other factors remain constant)? Is this system fair?