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Factsheet #98 on Taxes and Economy

January 19, 2012

THE NEW FLAT TAX: Encourages Growth and Job Creation

Fundamental Tax Reform Is Needed Now

  • A Drain on the Economy: High marginal tax rates and a battalion of tax distortions discourage productivity, slowing the rise in wages and economic growth and making it difficult for businesses to compete globally.
  • Far Too Complicated: The current tax system is too complex. The income tax inflicts a multitude of rules and exceptions that lack transparency and fairness.
  • Pro-Growth: The tax system should be economically neutral, not distorting economic decision-making of savers, investors, and workers.
  • Revenue Neutral: The new tax system should be revenue neutral, raising as much revenue as current policy—about 18.5 percent of the economy.
  • Incentives Change, not Burdens: The tax system should be distributionally neutral, leaving the tax distribution unchanged as much as possible.
  • The New Flat Tax Is the Remedy: The New Flat Tax, as outlined in Heritage’s ‘Saving the American Dream’ plan, would replace today’s convoluted tax system with a simple, neutral, and transparent tax system that would allow America to achieve its full economic potential.

Easy as One, Two, Three

  • One Tax System with One Rate for All: In addition to the income tax, the federal government imposes payroll tax, death tax, and a slew of excises. The New Flat Tax replaces them all for individuals, families, and businesses with one tax system with one tax rate of roughly 28 percent. 
  • Two Tax Credits: The New Flat Tax retains the Earned Income Credit to preserve the level of income support for low-wage workers. And low- and middle-income families also receive a tax credit of $3,000 ($2,500 for singles) toward the purchase of health insurance.
  • Three Deductions: The only remaining deductions are for higher education, gifts and charitable contributions, and an optional home mortgage interest deduction.

Simple to Save and Invest

  • Saving Is Tax Free: Personal saving would be deducted immediately and would remain tax exempt until spent on consumption.
  • Pro-Investment: Business investment would be immediately deducted.

Transition Is Fair and Simple

  • Straightforward Transition: Transition to the New Flat Tax would be straightforward: Current arrangements would be grandfathered, subject to current law, and the New Flat Tax would apply to new income and new decisions. 
  • Least Possible Disruptions: Simple transition means there is minimal disruption to taxpayers and to the economy in moving from the old tax system to the New Flat Tax.

A Stronger Economy

  • Greater Financial Security: A smarter tax policy leads to increased personal saving.
  • Higher Wages, Stronger Companies: The New Flat Tax means higher wages and more competitive companies through increased private investment.

For more information, please visit http://savingthedream.org.

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