By definition, a flat tax system refers to taxation on household income at a uniform rate regardless of the level of income level. In the US, this is implemented as a progressive tax system, which means that high-income earners would pay taxes at higher rates than low-income earners. While there are many advocates for this system, there are also those that oppose such. Here are the pros and cons of flat tax:
List of Pros of Flat Tax
1. It will eliminate other taxes.
With flat tax, a section of the tax code that is biased against capital formation will be removed, not to mention that capital gains tax, death tax, savings double taxation and dividends will be eliminated. Simply put, individuals and families will not be asked to submit dividend and interest reports, or that of other business-related income. So, taxpayers can do away with paying dividends, interest and other business tax.
2. It is simple.
When a flat tax system is implemented, other forms of taxes will be eliminated and replaced with just a single rate for everyone. This system would not be giving tax filers a difficult time, and those at the IRS would be introduced with easy computation. Flat tax will make everything easier to report and understand.
3. It helps promote economic growth.
Countries that have adapted flat tax have experienced economic growth. In fact, former communist countries were the first to apply this tax reform and saw better results. Beginning with Estonia in 1994, other countries that followed such a system include Latvia, Lithuania, Russia, Serbia and Slovakia.
List of Cons of Flat Tax
1. It is seen to only benefit the rich.
For example, one individual earns $1,000, while the other makes $10,000, but both of them are living in a country where a flat tax system is implemented with the rate of 10%. Now, the former would only have $900 left after taxation, while the latter would have $9,000. In this case, you will be able to spot the difference of how this system would only benefit the rich.
2. It would eliminate the IRS and lead to unemployment.
While this is not entirely accurate as flat tax propositions will not have everyone to be in agreement with retaining a small portion of the IRS, this system will cause the IRS to be re-adjusted, which means that some people will surely lose their jobs. Generally, this system could lead to unemployment.
3. It will penalize low-income earners.
As low-income earners receive much less than others, but have to spend on the same needs as the more well-placed folks, this system will lead to an issue where expenses are taken out of the picture. In simple terms, poor people will get poorer.
If you find the existing tax code overwhelming, it is safe to assume that many people feel the same. While many people recommend that the tax code should be scrapped and replaced by a flat tax system, other people argue otherwise. With the pros and cons listed above, we will be able to decide of the benefits outweigh the drawbacks.
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer and banker. If you would like to reach out to contact Natalie, then go here to send her a message.