If enacted, HB 1040 could substantially simplify the tax preparation process for both individuals and businesses by eliminating the progressive tax structure currently in place. The flat tax system is presented as a method to lower tax burden and increase compliance simplicity. However, critics warn that the measure could lead to a decrease in overall revenue generated for public services and infrastructure due to potential reductions in tax contributions from higher-income individuals who would benefit more from such a tax change. Furthermore, the repeal of the estate and gift taxes as outlined in the bill marks a significant pivot in tax policy that could favor wealthier estates and individuals.
Summary
House Bill 1040, known as the Flat Tax Act, proposes a significant overhaul of the current income tax system by offering taxpayers the option of a flat tax. This bill amends the Internal Revenue Code to allow individual taxpayers to make an irrevocable election to be taxed under a new flat tax framework. For individuals who choose this option, a flat tax rate of 19% will apply for the first two years, followed by a rate of 17% in subsequent years. Additionally, there is a provision for business activities, imposing similar rates on taxable income derived from business operations. Notably, this new structure disallows certain tax credits for those opting for the flat tax regime.
Contention
The discussions surrounding HB 1040 have raised significant points of contention. Advocates argue it encourages economic growth by providing a clear and straightforward taxation approach, which may attract businesses. However, opponents have expressed concerns about the loss of tax fairness and equity, particularly for lower-income families who may end up paying a higher percentage of their income under a flat tax system compared to a progressive tax structure. Furthermore, the requirement for a supermajority to consider revenue measures involving tax increases or deduction changes introduces a level of complexity and difficulty in making future adjustments to the tax code, which advocates for fiscal conservatism view as beneficial.
To amend the Internal Revenue Code of 1986 to allow certain credits and deductions to be taken as a refundable tax credit by Puerto Rico businesses or residents, and to extend such credits and deductions to possessions of the United States.