A flat tax is a tax system, which refers to a tax on household income, taxes at a uniform rate, regardless of income level. The United States implements a progressive tax system, meaning that high-income earners pay taxes at a higher rate than low-income earners. Although many advocate for a flat tax in the U.S., the system remains progressive.
Pros of Flat Tax
Simplicity is considered a significant benefit of the flat tax system. One tax rate makes for easy computation by the Internal Revenue Service and straightforward payments from taxpayers. Because the flat tax taxes only one income, it is easier to understand and to report. Taxpayers save the financial cost of complying with current IRS regulations, which often includes lawyers, accountants and other resources.
The flat tax remains a popular idea in part because it eliminates double taxation. It removes the section of the tax code that is biased against the formation of capital. It eliminates the death tax, capital gains tax and double taxation of savings and dividends. Families and individuals are not required to report dividends, interest or other business-related income; this income is taxed at the business level. The flat tax makes it unnecessary to pay interest, dividends and other business tax at the individual levels.
A flat tax employs territorial taxation, which is when the government only taxes income that is generated within national borders. In the global economy, taxes remain a critical component of business; countries with low-taxes benefit from jobs and capital. A good tax policy is important to generate revenue for business and also because the penalty for a poorly received tax system on a global scale may be substantial and long-term. The flat tax eliminates global taxation and allows the United States to compete more evenly in global markets.
Fairness remains a lauded feature of the flat tax. For example, a taxpayer who makes $5,000 pays the same tax rate as someone who earns $500,000. The taxpayer making $500,000 pays more taxes simply because the income is greater, however, this taxpayers pays an equal percent to the $5,000 taxpayer. This tax system does not discriminate based on income level; everyone pays the same percent of income.
Cons of flat tax
Opponents of the flat tax contend that the flat tax system penalizes the low-income segment of the population. Low-income individuals and families must spend money on the same necessities required by higher-income people. However, after the necessities are purchased, the poorer taxpayers, because they earn less, will have less money left over to pay taxes, at the same rate as those earning higher income amounts.
Implementing a flat tax system could dismantle the IRS. Many view the IRS as an imposing, intimidating arm of government; however, this institution employs numerous people who were trained to work in the tax industry. IRS employees would most likely lose their jobs under a flat tax system.
Many believe that a flat tax system reduces tax for, and actually benefits, high-income earners. For example, if the tax rate were 10 percent, then someone making $1,000 would have $900 spending income left after taxes. Someone who makes $10,000 is left with $9,000 after taxes; this inequity is thought to prove that a flat tax disproportionately benefits the rich. If the rich paid less tax, many believe that the government would lose significant revenue. A uniform tax rate treats individuals and corporations fairly, but it eliminates a backup revenue source, the extra dollars generated by taxing high-income earners at a higher rate for the government. The government relies heavily on revenue generated from income taxes.
Estonia implemented the first flat tax in 1994; Lithuania and Latvia followed shortly thereafter. Estonia has taxed citizens from 24 percent (2005) to 21 percent (2009); Latvia and Lithuania have implemented taxes of 25 percent and 21 percent respectively. After finding initial economic success, these countries now experience economic difficulties. Despite high tax rates, according to the countries’ leaders, the tax revenue does not cover state level costs, or the expense of providing welfare to low-income citizens. The impact of the tax flat on Estonia, Latvia and Lithuania leads many to speculate whether the flat tax or the implementation of it is to blame.
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