House Deliberates Flat Tax as Alternative to the Current Income Tax System

A new bill filed by Rep. Michael C. Burgess, R-Texas, would provide taxpayers an alternative to the current income tax system in the form of a flat tax.

H.R. 1040, given the title “To amend the Internal Revenue Code of 1986 to provide taxpayers a flat tax alternative to the current income tax system,” is also known as the “Freedom Flat Tax Act.”

Burgess’ bill specifically amends the Internal Revenue Code (“IRC”) to authorize an individual or a person engaged in business activity to make an irrevocable election to be subject to a flat tax (in lieu of the existing tax provisions) of 19% for the first two years after an election is made, and 17% thereafter.

The proposed legislation calculates taxable income for individual taxpayers by subtracting a basic standard deduction and an additional standard deduction for each dependent from the total of wages, retirement distributions, and unemployment compensation. The bill defines “business taxable income” to mean gross active income reduced by the cost of certain business inputs.

The bill also imposes an employer tax on the value of excludable compensation provided to employees not engaged in business activity of 19% for the first two years after an election is made under the Act and 17% thereafter.

Finally, the bill repeals the estate, gift, and generation-skipping transfer taxes.

After its introduction on the congressinal floor on February 14, 2009, the House referred the bill to the Committee on Ways and Means, and in addition to the Committee on Rules, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

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