I think experience matters more than theory. Why sit around and talk about how well something will work when we have experience so we can see how they work? Experience reveals the unintended consequences that may not be considered in stylized discussions of idealized scenarios.
The trick, however, is recognizing where we have experience. Sometimes such experiences hide in plain sight.
There has been much debate a flat and simple tax code for at least 20 years, if not more.
But, one thought that I didn’t include in my previous thoughts on taxes was that we already have a flat tax model at work and it has been there for quite some time: Social Security and Medicare tax.
Below is the entire Social Security and Medicare “tax code” from the Social Security Administration’s website.
For 2012, the maximum taxable earnings amount for Social Security (OASDI) taxes is $110,100. There is no limitation on taxable earnings for Medicare’s Hospital Insurance (HI) taxes.
- The Social Security tax rate for employees is 4.2 percent through the end of the year
- The Social Security tax rate for employers is 6.2 percent
- The Medicare tax rate is 1.45 percent for employees and employers
- The Social Security tax rate for self-employed is 10.4 percent through the end of the year. The Medicare tax rate is 2.9 percent for self-employed.
That’s pretty simple. Over the decades, somehow, Social Security and Medicare have managed to resist the ‘fairness’ urges that have made the income tax code a complex behemoth.
While we hear some squawking from folks to make this flat tax more progressive, that so far hasn’t risen above the extraneous noise level because I believe most people view it (perhaps incorrectly) as something they will directly benefit from, so they feel it’s fair to pay their share.
You do not have to file a Social Security/Medicare tax return. The total taxes collected through Social Security are about half of the Federal income tax.
If you’re opposed to a simpler income tax code, you should at least consider that the Social Security/Medicare is a relatively flat tax that seems to do its job without creating an inefficient compliance bureaucracy.