Federal income tax rates currently range from 10% to 37%, varying by filing status and income levels, with state taxes also applying in some areas. ChatGPT has responded to a query about the potential effects of switching to a flat-rate federal income tax, predicting multiple repercussions for taxpayers and the economy.
According to ChatGPT, a flat tax could simplify the tax system by eliminating multiple brackets and potentially removing deductions and exemptions that often benefit wealthier individuals. The AI tool stated this would make tax filing easier, lower IRS compliance burdens, reduce administrative costs, and make it harder for taxpayers to manipulate income to lower tax liability.
Kelly Gilbert, owner of EFG Financial, commented on the idea. "A flat tax seems like a good idea on the surface but in practice it would need a slow evolution, not an instant change," Gilbert said. "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. A flat tax removes those incentives causing 'shocks' to the system instead of a boost."
ChatGPT predicted that a flat-rate income tax would impact taxpayers differently based on income. "Most flat-tax proposals set a single rate below current top marginal rates," the AI tool said. "So wealthy individuals would likely pay lower taxes than they do now." For high-earners, this could mean more money for pockets, investments, or savings, potentially increasing wealth inequality.
Middle- and lower-income earners could end up paying more, depending on the rate set. "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."
Government revenues could see significant shifts, ChatGPT pointed out, with low rates risking deficits and high rates leading to tax hikes. The AI tool noted macroeconomic effects might include slightly greater economic efficiency, more predictable tax obligations, fewer barriers for entrepreneurs, decreased spending for middle- and lower-income households, and greater concentration of wealth.
Annette Nellen, a professor at San Jose State University, added, "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. The effect also depends on whether changes would be made to deductions, exclusions, capital gains rates and the Earned Income Tax Credit."
Gilbert suggested alternatives like a flat tax based on consumption, such as 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."