Flat tax

A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion of income), as opposed to a graduated, or progressive, scheme. The term flat tax is most often discussed in the context of income taxes. The flat tax is currently used very rarely in the developed world on a national level, standing in contrast to the more widely used progressive income tax, in which citizens and corporations with higher incomes pay tax at a higher rate than those with lower income.

Contents

1 Arguments for

2 Arguments against

1 Uses of the flat tax
2 See Also
3 External links

Arguments for

The replacement of a progressive tax system with a flat tax system reduces taxes for the richest people in society. This, of course, is a powerful argument in favor, if one happens to be, or to represent, one of the richest people in society. Since these people control many opinion-forming organisations, including newspapers, television channels, and political parties, many such organisations advocate a flat rate tax.

The main argument they advance is the prospect that the richest people (or corporations) may choose to emigrate to countries which offer lower rates of tax. Lower taxes for the rich in a given country, they claim, will therefore result in more rich people living in that country, which, they argue, will bring economic benefits as their wealth "trickles down" to the rest of society.

Such advocates also say that a flat tax system may arguably have most of the benefits of a progressive tax, depending on whether the flat rate is combined with a significant threshold. Usually the flat tax is proposed to kick in at a certain income level, or to exempt income below that level, so that the lowest-income members of society pay no income tax. (some argue that this is technically a two-bracket progressive tax rather than a flat tax, but others maintain that the lowest "bracket" has a zero tax rate, making it an exemption, rather than a bracket)

Both sides generally agree that theoretically, the income of the poor should not be taxed, though opponents point out that this becomes harder to achieve if the rich are to pay less.

Proponents of a flat tax sometimes advocate raising the "no tax" level to include working-class citizens, as a way to avoid raising their taxes when the flat tax is introduced (since most working-class citizens currently pay less taxes than they would under a flat tax scheme). Again, opponents point out that this becomes harder to achieve if the rich are to pay less.

Proponents of a flat tax sometimes suggest that it might actually result in higher revenues for the government, by simplifying the tax code and removing certain loopholes currently used by the rich to pay less taxes. Opponents point out that the current tax code could be simplified, and the loopholes (various exemptions and deductions) could be removed, without flattening the tax brackets.

The amount of income the government receives from a flat tax depends entirely on the level of the tax. Usually flat taxes are advocated by parties that also believe in a tax-cutting agenda, but a flat tax could be used to increase government revenue by simply raising the tax rate.

Arguments against

Those who oppose a flat tax claim that it will benefit the rich at the expense of the poor. One argument is that, since most other taxes (sales taxes etc.) tend to be regressive in practice, making the income tax flat will actually make the overall tax structure regressive (i.e. lower-income people will pay a higher proportion of their income in total taxes compared with the affluent). Another argument can be made by looking upon the value of money to various groups and not simply the rate of taxation. While the monetary value of a dollar (or other unit of currency) is the same for everyone, it is argued to be "worth" a lot more to someone who is struggling to afford food than to a millionaire.

Opponents note that by limiting the flat tax to paid wages, wealthier people who earn proportionally more money from investments and savings are not taxed for their additional revenue at all; similarly, the loss of deductions means that some tax reliefs for the middle class will disappear. The wealthy would actually be paying less, as a percentage of their monetary gains, than the less wealthy. Therefore, opponents point out that the flat tax is deceptively advertised as fair, when in fact it shifts the tax burden off the upper class onto the middle class -- the real issues are deductions and what money counts as "income", not where the tax brackets are set.

The argument that rich people, or corporations, might move to countries with lower taxes is difficult to argue against in the context of any one country, though it is, perhaps, sometimes overstated. One might ask how many wealthy people would really choose to uproot their lives just to pay slightly less tax?

Perhaps the most important argument against flat rate taxes, and other schemes that reduce taxes for the rich, is to note the predictable result that occurs if every country adopts this view, and lowers taxes to attract wealthy foreigners. This is a race to the bottom in which countries compete to offer ever-lower taxes for the rich, so that the rich become ever richer, while the poor and middle classes, who are less mobile, are left to shoulder the entire cost of all government services, which themselves are subject to ever-worsening under-funding and neglect.

This race to the bottom, many would argue, has indeed been accelerating since the 1970s throughout much of the world. The case is often made by anti-globalization activists that this process severely impacts funding for health, education, and other government functions, especially in the developing nations but increasingly in the richer countries too. It can therefore be argued that the race to the bottom on taxation for the rich is a major contributing factor to the 20-40,000 deaths which occur, on average, per day from malnutrition, according to World Health Organisation figures.

Opponents of lower taxes for the rich argue that the predictable end result of the race to the bottom is complete social collapse (see also failed states), a situation from which even the richest people in society will derive no benefit. In order to prevent this, they argue, it is the responsibility of local and national governments everywhere to ensure that the rich continue to pay a fair share of the tax burden. Schemes such as "flat rate taxes", therefore, are said to be irresponsible at a global level, even if they may seem to offer the prospect of a temporary advantage at a national level.

Uses of the flat tax

Missing image
Flat-tax-in-Europe-map.png

Countries using a flat tax in Europe. Those shaded more lightly have a single tax rate lower than 20%, those shaded more darkly have a tax rate greater than 20%

An example of a flat tax proposal was that advocated by Canada's Canadian Alliance party. The party's platform called for the elimination of Canada's three separate tax brackets for low, medium, and high incomes with a single 17% income tax on everyone beyond the 'zero bracket amount' (the very poor would not have to pay taxes). However, this proposed flat tax turned out to be very unpopular among Canadians, and the party dropped it at the beginning of the 2000 general election. Still, a flat tax with a rate of 10.5% was introduced in the province of Alberta, the stronghold of the Canadian Alliance.

The Baltic countries of Estonia and Latvia have had flat taxes of 24% and 25% respectively with a tax exempt amount, since the mid-1990s. On 1 january 2001, a 13 percent flat tax on personal income took effect in Russia. Ukraine followed Russia with a 13% flat tax in 2003. Slovakia introduced a 19% flat tax in 2004; the government was then able to collect 10 percent more income tax than it had expected, and the number of new firms registering in Slovakia jumped 12 percent. Romania introduced a 16% flat tax on personal income and corporate profit on January 1 2005.

In the United States, although the national income tax is a progressive one, the flat tax is sometimes found in income taxes for smaller juridictions. Five US states — Illinois, Indiana, Massachusetts, Michigan and Pennsylvania — have a flat state tax on personal income, with rates ranging from 3% in Illinois to 5.3% in Massachusetts (Pennsylvania's is a pure flat tax, with no zero-bracket amount). Proposals for a flat tax for the federal government have emerged repeatedly in recent decades during various political debates. Jerry Brown, former Democratic Governor of California, made the adoption of a flat tax part of his platform when running for President of the United States in 1992. At the time, rival candidate Tom Harkin ridiculed the proposal as having originated with the "Flat Earth Society". Four years later, Republican candidate Steve Forbes proposed a similar idea as part of his core platform. Although neither captured their party's nomination, in both cases their proposals prompted widespread debate about the current U.S. income tax system.

Flat tax plans that are presently being advanced in the United States also seek to redefine "sources of income"; current progressive taxes count interest, dividends and capital gains as income, for example, while the flat tax plan advanced by Steve Forbes narrows the definition of income to apply only to employer wages.