Flat Tax Debate

History and Debate of Flat Tax

A flat tax is a tax that is applied at a consistent rate with no variables in its application. In contrast with progressive or regressive taxes, where the rate levied varies by income or according to other parameters, a flat tax means that everyone pays the same percentage. Technically, flat taxes can be levied as sales or excise taxes, but usually the term refers to the proposal of a single rate for all taxes on personal income.

This proposal has been brought forward for debate in the United States on several occasions over the past few decades, at times in the form of a flat tax on consumption, at other times in a modified form of income tax allowing for some deductions or adjustments, and finally, as a true flat tax on income with absolutely no exceptions. Jerry Brown, Tom Harkin and Steve Forbes are among the American politicians who have brought flat tax proposals into the public eye, although despite their efforts, no flat tax has ever been passed at the federal level.

The Flat Tax Debate

The flat tax debate is a complex one. An intuitively obvious advantage of a flat tax is that no one receives special treatment; all people whether poor or rich are taxed in exactly the same way.

Proponents of Flat Tax

Proponents also claim that a flat tax system would be so much simpler that it would result in considerable savings to all parties; the time and energy businesses and individuals spend annually in preparing tax forms would be greatly reduced, as would the costs to the government of collecting revenue. The Internal Revenue Service, for example, could be substantially downsized with tax returns requiring no more space than a postcard. Flat tax proponents also feel that a flat tax would discourage government spending overall while actually increasing tax revenues, as has been shown to happen in the Russian Federation after it moved to a flat tax in 2001. Several of the Baltic countries also have flat tax systems that have fueled significant economic growth since the mid-1990s, and in fact, there are six U.S. states that also use a uniform tax rate on all income. However, the concept is also widely criticized.

Opponents of Flat Tax

Those on the opposing side of the flat tax debate argue that enforcing such a system is actually more complicated than it seems to be. For example, in the case of wealthier taxpayers, who often get a substantial portion of their money not from weekly wages but from stock dividends or capital gains, it is difficult to pinpoint precisely when that income occurs and thus when it should be taxed. Businesses, too, point out that they need some mechanism in the tax code that will allow them to deduct their expenses in order to be fairly taxed on their actual profits. There is also the complex question of how to deal with the tax components of imports and exports under a flat tax system. Another criticism is that one uniform tax rate also prevents the government from using tax advantages as incentives to engage in socially positive behavior, as it is currently done with the home ownership mortgage deduction or the saver's credit. These and other objections have so far prevented the United States from moving forward on any of the various flat tax proposals made by political leaders, although the simplicity and fairness of such a system continue to attract many.

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