The modern system of taxation is complicated at best. It’s thousands of pages of regulations, deductions, and reporting laws that is enough to even make an experienced accountant’s head spin. That’s why a flat tax is often proposed as a way to fix the problem. There are some pros and cons to initiating a flat tax rate, however, so here is a look at the key points to consider.
The Pros of a Flat Tax Rate
1. It creates a system of simplicity.
A flat tax rate completely eliminates the need for a progressive set of taxation percentages. For every bit of cash that is earned, no matter how much money is earned over the course of a year, a specific percentage of that would be sent to the government. This simplistic system would streamline the filing process, especially if deductions and credits were eliminated as well, that tax returns could be filed and processed in just a few minutes instead of a few hours.
2. It creates a system of fairness.
For a government to properly function, everyone should have some skin in the game. When someone sees a road, they should be able to say “I helped pay for that.” Even if all they contributed was $100 because they made $1,000 that year in a flat tax system, there is more pride that comes from knowing that something great was made from personalized work. That same rate would get applied if someone made $1 million as well, so everyone would get to keep the same amount of every dollar earned.
3. It could encourage economic growth.
One of the biggest issues that faces the current progressive taxation system is that a number of businesses are exempt from taxes because of credits or subsidies that are in place. Wealthy individuals can sometimes pay less in taxes than those who make $20k per year for the same reason. By having a flat system, economic growth is encouraged because a bigger pool of money is available to those who spend regularly.
4. It would boost government revenues.
Jobs in the public sector have had stagnant wages for nearly a decade because of income stagnation. Some public sectors, such as education, haven’t seen comprehensive increases in funding for more than 30 years. A flat tax system which creates a bigger pool of usable money offers the public sector more opportunities to do what it is that they do best.
The Cons of a Flat Tax Rate
1. It may favor the wealthy more than a progressive taxation system does.
A flat system of taxation may be fair from a percentage standpoint, but it’s also a system that may give the wealthy class a unique advantage. Because they would effectively receive a tax cut when implemented while working class families may see a tax increase, the burden of responsibility could shift from the wealthy to the working and the poor to support society. In the meantime, the wealthy have more money that they can use to create even more money.
2. It could double the tax burden for some families.
In the United States, the beginning of the progressive tax system starts at 10%. In comparison, for countries that have started a system of flat taxation, the percentage hovers around 20%. That means for a family earning $30k per year in the US, their tax bill would go from $3,000 to $6,000 and that doesn’t include sales taxes, fees, or state taxes that may also occur. That’s a hefty burden to place on a household while others see tax cuts.
3. Would investment income be exempt from taxation?
Many flat tax systems exempt investment income from the system of taxation. That would mean for the wealthy class, who often generate their income purely from investments, their total tax burden could become zero.
4. Pure flat tax systems harm small businesses.
A small business owner in a pure flat tax system would be unable to deduct expenses for travel, equipment, and other needs they may have. Their tax rate would be based on gross revenues instead. If they earned $22k in gross, but their net revenues after expenses was just $1,500, even a 10% flat tax would take them from being in the black to being in the red for that year and there would be nothing that could be done about it.
These flat tax rate pros and cons show why it is so difficult for the idea to catch on. There are a number of benefits that could be achieved, but it may come at a high cost.