I Asked ChatGPT What Would Happen If Income Taxes Became Flat-Rate
Written by
Angela Mae Watson
Edited by
Jenna Klaverweiden
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Federal income tax rates range from 10% to 37%. The exact tax rate depends on factors like filing status and income. The greater your income, the more you’ll generally pay in taxes. Depending on where you live, you may also have to pay state income tax.
But what might happen if federal income taxes were to become flat-rate? According to ChatGPT, there could be multiple repercussions for individual taxpayers and the economy.
Taxes Would Be Simplified
Although the exact effects of a flat-rate income tax depend on the rate chosen, ChatGPT predicted an overall simpler — and possibly fairer — tax system. This is because a flat tax rate could potentially get rid of tax deductions and tax exemptions that benefit wealthier taxpayers.
The change would also eliminate multiple tax brackets. According to ChatGPT, these changes would:
- Make it easier to file taxes since there wouldn’t be multiple tax brackets to consider
- Lower the IRS compliance burden
- Reduce administrative costs
- Make it harder for taxpayers to manipulate their income to lower their tax liability.
While some good may come of this change, there are no guarantees.
“A flat tax seems like a good idea on the surface but in practice it would need a slow evolution, not an instant change. I say that because tax laws are designed to encourage certain behaviors such as deductions for mortgage interest to encourage people to buy homes, or deductions for business investment to encourage small business development,” said Kelly Gilbert, owner of EFG Financial. “A flat tax removes those incentives causing ‘shocks’ to the system instead of a boost.”
Some Taxpayers Would Pay More, Others Less
ChatGPT predicted that a flat-rate income tax would impact taxpayers differently based on their income. “Most flat-tax proposals set a single rate below current top marginal rates,” the artificial intelligence (AI) tool said. “So wealthy individuals would likely pay lower taxes than they do now.”
For high-earners, this could mean more money in their pockets at the end of the day (or tax season). It could also result in more money for investments and savings, which could in turn create more wealth inequality.
Conversely, middle- and lower-income earners could end up paying more. Again, it depends on what the flat-rate tax would be. But if it’s higher than the current marginal tax rates, the overall individual tax liability would rise.
“W2 employees would be hurt the most if we enact a flat income tax,” Gilbert said. “This is because small business owners and 1099 workers like real estate agents and consultants can invest earnings to offset taxable income amounts but W2 earners have no mechanisms to do this.”
There Would Be Widespread Effects
It’s not just the people who’d be affected by the flat-rate tax system. The implications of such a shift could be widespread.
ChatGPT pointed out that government revenues could see significant shifts. If the flat rate is too low, it could result in large deficits. If it’s too high, there could be major tax hikes on most taxpayers.
The shift to a flat-rate income tax could also have macroeconomic effects, which, according to the AI tool, could include:
- Slightly greater economic efficiency
- More predictable tax obligations
- Fewer barriers for entrepreneurs
- Decreased spending for middle- and lower-income households
- Greater concentration of wealth (and greater inequality).
The Bottom Line
As ChatGPT pointed out, a flat-rate income tax could have both smaller and larger effects. For individuals, the actual impact would depend heavily on what the new rate is and whether or not other aspects of the tax system change accordingly.
“There could be a large standard deduction and personal and dependent exemptions to remove lower income taxpayers from the system, but the flat rate would likely shift some tax now paid by very high income taxpayers to the middle class,” said Annette Nellen, professor at San Jose State University. “The effect also depends on whether changes would be made to deductions, exclusions, capital gains rates and the Earned Income Tax Credit.”
A flat-rate income tax may be effective in some ways, but some alternatives may be better. For example, Gilbert suggested the idea of a flat tax based on consumption — like a national sales tax.
“This would create larger tax bills for those who spend more,” Gilbert said. “But again, this might slow down the economy because people no longer want to buy cars, furniture, etc.”
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