In the United States, we have what is called a progressive tax rate, along with most other industrialized countries in the world. This is a tax plan where different levels of income are taxed at different rates. With it comes a complicated array of breaks, exemptions, and penalties. It has become complicated enough that we need an entire government organization to manage this tax code: the IRS. However, there is an alternative plan that is frequently discussed: the flat tax. It’s particularly being brought up in light of the upcoming presidential elections, especially by unlikely presidential hopeful Rand Paul, who is putting forth a flat tax system called the Paul Plan. Let’s take a brief look at the pros and cons of this purported tax system…
Simplifies the system
The biggest draw for people towards a flat tax system is its relative simplicity to the progressive tax system. The Paul Plan, for example, would put forth a 14.5% personal income tax and a 14.5% corporate tax on value-added. This would lead to the elimination of things like estate taxes, payroll taxes, tariffs, tax credits, tax deductions, and tax loopholes. Such a move would lead to an immense downsize of the IRS, as well. However, such simplicity does bring up further questions, such as the taxation of interest or imports/exports.
Inspires economic growth
In theory, a flat tax has been able demonstrate positive results in the countries that have utilized it. Such countries include Russia, Ukraine, Estonia, Georgia, Romania, and Slovakia. This growth inevitably led to higher government income, due to the fact that the taxes were now coming from a larger economy. However, opponents claim that the flat tax is not solely responsible for this growth. Each of these countries adopted the flat tax after the collapse of the Soviet Union, which wrecked their economies. The argument is that, with support from Western countries, their economies were going to experience growth, regardless.
The poor have the most to lose
Low-income earners would experience the greatest tax increase in such a system. This is due to the fact that they have much less disposable income, it adds an element of unpopularity to the flat tax. A flat-tax doesn’t take into account the means to pay for necessities, which is a purported benefit of the progressive tax system. Also, many sources of income for the wealthiest earners wouldn’t be taxed, which occurs from the state tax and capital gains taxes. In the meantime, low-income earners typically make all income from weekly-wages, which would always be taxes.
Handicaps the government’s ability to incentivize
Currently, the government uses its tax system to benefit positive social activity. This helps humanitarian causes like charities by using tax exemptible donations, or home ownership, by offering mortgage reduction. Putting in a flat tax system hampers the government’s ability to adjust to economic factors, as well. However, proponents of the flat tax argue that this is a good thing, as government activity doesn’t always benefit the economy.