NationMaster - Encyclopedia: Flat income tax

A flat tax (short for flat rate tax or proportional tax) taxes all household income, and possibly corporate profits as well, at the same marginal rate. A flat tax usually refers to the taxation of incomes but can be applied to consumption. A tax (also known as a duty) is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ... Corporate redirects here. ... Profit, from Latin meaning to make progress, is defined in two different ways. ... An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. ... A sales tax is a tax on consumption. ...

Flat taxes are uncommon in advanced economies, whose nationwide taxes typically include a graduated tax on household incomes and corporate profits, such that the marginal tax rate rises as the income or profit of the taxed entity rises. Flat taxes, implemented as well as proposed, usually exempt from taxation household income below a statutorily determined level that is a function of the type and size of the household. As a result, such a flat marginal rate is consistent with a progressive average tax rate. Otherwise, all income or consumption is taxed at the same marginal rate. A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ... In the tax system and in economics, the marginal tax rate refers to the increase in ones tax obligation as ones taxable income rises: marginal tax rate = Î”(tax obligation)/Î”(taxable income) This can be measured either by looking at the published tax tables (to get the official marginal... A tax exemption is an exemption to the tax law of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone. ...

The flat tax has been adopted in Estonia, Lithuania, Latvia, Russia, Serbia, Ukraine, Slovakia, Georgia, Romania,^[1] and Macedonia. Proponents believe the simplicity and efficiency of the flat tax is a key reason behind Eastern Europe's dramatic growth.

History and current use

Historically, a flat tax was seen as an improvement over a status quo featuring lower, including zero, tax rates for the nobility and clergy. Such a situation in 18th century France was one of the causes of the French Revolution. Over the course of the 19th century, most European nations adopted flat taxes applicable to most or all incomes. The causes of the French Revolution, the uprising that brought the regime of King Louis XVI to an end, were manifold. ...

After World War I, a progressive income tax was introduced in most countries to fund increased government spending for social programmes and, in particular, large-scale wars. In more recent years, it has been argued that very high tax rates for the highest income classes are ineffective in that the rich and mobile taxpayers are often able to avoid them. However, proponents of high taxes such as George Monbiot claim that they have worked quite well in, for example, Sweden, although detractors claim that Sweden's government programs are becoming a drain on its economy. Combatants Allied Powers: Russian Empire France British Empire Italy United States Central Powers: Austria-Hungary German Empire Ottoman Empire Bulgaria Commanders Nicholas II Aleksei Brusilov Georges Clemenceau Joseph Joffre Ferdinand Foch Herbert Henry Asquith Douglas Haig John Jellicoe Victor Emmanuel III Luigi Cadorna Armando Diaz Woodrow Wilson John Pershing Franz... A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ... George Monbiot. ...

The flat tax has made something of a "comeback" in recent years. In the USA, former House Majority Leader Dick Armey and FreedomWorks have sought grassroots support for the flat tax. Overseas, policymakers have had greater success, largely as a result of its application in several countries of the former Eastern Bloc, where it is generally thought to have been successful, although this assessment has been disputed (see below) ^[2]. This has elicited much interest from countries such as the US, where it has gone hand in hand with a general swing towards conservativism ^[3]. Wikipedia does not have an article with this exact name. ... Wikipedia does not have an article with this exact name. ... World map exhibiting the location of Europe. ... The Majority Leader of the United States House of Representatives acts as the leader of the party that has a majority control of the seats in the house (at least 218 of the 435 seats). ... Dick Armey on NBCs Meet the Press. ... FreedomWorks is a non-partisan conservative non-profit organization based in Washington D.C. with over 850,000 grassroots activists. ... A grassroots political movement is one driven by the constituents of a community. ... A map of the Eastern Bloc. ... Motto: (Out Of Many, One) (traditional) In God We Trust (1956 to date) Anthem: The Star-Spangled Banner Capital Washington D.C. Largest city New York City None at federal level (English de facto) Government Federal constitutional republic - President George Walker Bush (R) - Vice President Dick Cheney (R) Independence from... Conservatism is a political philosophy that usually favors traditional values and strong foreign defense. ...

The countries that have recently reintroduced flat taxes have done so largely in the hope of boosting economic growth. The Baltic countries of Estonia, Latvia and Lithuania have had flat taxes of 24%, 25% and 33% respectively with a tax exempt amount, since the mid-1990s. On 1 January 2001, a 13% 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 on most taxes (that is, on corporate and personal income, for VAT etc., almost without exceptions) in 2004; Romania introduced a 16% flat tax on personal income and corporate profit on January 1, 2005. Macedonia introduced a 12% flat tax on personal income and corporate profit on January 1, 2007 and promissed to cut it to 10% in 2008. The three Baltic states: Estonia, Latvia, and Lithuania The terms Baltic countries, Baltic Sea countries, Baltic states, and Balticum refer to slightly different combinations of countries in the general area surrounding the Baltic Sea. ... A tax exemption is an exemption to the tax law of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone. ... For the band, see 1990s (band). ... January 1 is the first day of the calendar year in both the Julian and Gregorian calendars. ... 2001 (MMI) was a common year starting on Monday of the Gregorian calendar. ... vat can be a type of barrel used for storage. ... January 1 is the first day of the calendar year in both the Julian and Gregorian calendars. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... January 1 is the first day of the calendar year in both the Julian and Gregorian calendars. ... This article or section does not cite its references or sources. ...

In the United States, while the Federal income tax is progressive, five states — Illinois, Indiana, Massachusetts, Michigan and Pennsylvania — tax household incomes at a single rate, ranging from 3% (Illinois) to 5.3% (Massachusetts). Pennsylvania even has a pure flat tax with no zero-bracket amount. Taxation in the United States is a complex system which may involve payments to at least four different levels of government: Local government, possibly including one or more of municipal, township, district and county governments Regional entities such as school, utility, and transit districts State government Federal government // Federal taxation... Official language(s) English Capital Springfield Largest city Chicago Area Ranked 25th - Total 57,918 sq mi (149,998 kmÂ²) - Width 210 miles (340 km) - Length 390 miles (629 km) - % water 4. ... Official language(s) English Capital Indianapolis Largest city Indianapolis Area Ranked 38th - Total 36,418 sq mi (94,321 kmÂ²) - Width 140 miles (225 km) - Length 270 miles (435 km) - % water 1. ... This article is about the U.S. State. ... Official language(s) None (English, de-facto) Capital Lansing Largest city Detroit Area Ranked 11th - Total 97,990 sq mi (253,793 kmÂ²) - Width 239 miles (385 km) - Length 491 miles (790 km) - % water 41. ... Official language(s) None Capital Harrisburg Largest city Philadelphia Area Ranked 33rd - Total 46,055 sq mi (119,283 kmÂ²) - Width 280 miles (455 km) - Length 160 miles (255 km) - % water 2. ...

Recent and current proposals

Greece (25%), Croatia, and the Czech Republic are planning to introduce flat taxes. Paul Kirchhof, who was suggested as the next Finance minister of Germany in 2005, proposed introducing a flat tax rate of 25% in Germany as early as 2007, which sparked widespread controversy. Some claim the German tax system is the most complex one in the world. Paul Kirchhof (* February 21, 1943 in OsnabrÃ¼ck) is a German expert in law and finance. ... Taxation is one of the most criticized matters in Germany. ...

On 27 September 2005, the Dutch Council of Economic Advisors recommended a high flat rate of 40% for income tax in the Netherlands. Some deductions would be allowed, and persons over 65 years of age would be taxed at a lower rate. September 27 is the 270th day of the year (271st in leap years) in the Gregorian calendar. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ...

In the United States, proposals for a flat tax at the federal level 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 Democratic 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 his party's nomination, their proposals prompted widespread debate about the current U.S. income tax system. Edmund Gerald Jerry Brown, Jr. ... The Democratic Party is one of two major political parties in the United States, the other being the Republican Party. ... Governors Arnold Schwarzenegger and Gray Davis with President George W. Bush (2003) Seal of the Governor of California (without the Roman numerals designating the governors sequence) See also: List of pre-statehood governors of California, List of Governors of California The Governor of California is the highest executive authority... For other uses, see President of the United States (disambiguation). ... Presidential electoral votes by state. ... Thomas Richard Tom Harkin (born November 19, 1939) is the junior United States Senator from Iowa. ... The Flat Earth Society is an organization first based in England and later in Lancaster, California that advocates the belief that the Earth is not a sphere but is flat (see flat Earth). ... The Republican Party, often called the GOP (for Grand Old Party, although one early citation described it as the Gallant Old Party) [1], is one of the two major political parties in the United States. ... Malcolm Stevenson Steve Forbes Jr. ...

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 Steve Forbes's variant of the flat tax would apply to wages only. Interest is the rent paid to borrow money. ... A dividend is the distribution of profits to a companys shareholders. ... In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ... Malcolm Stevenson Steve Forbes Jr. ...

In 2005 Senator Sam Brownback, a Republican from Kansas, stated he had a plan to implement a flat tax in Washington DC. This version is one flat rate of 15% on all earned income, unearned income (in particular capital gains) would be exempt. Furthermore, his plan also calls for an exemption of $30,000 per family and $25,000 for singles. Mississippi Republican Senator Trent Lott stated he supports it and would add a $5,000 credit for first time home buyers and exemptions for out of town businesses. DC Delegate Eleanor Holmes Norton's position seems unclear, however DC mayor Anthony Williams has stated he is "open" to the idea. 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... A senate is a deliberative body, often the upper house or chamber of a legislature. ... Samuel Dale Sam Brownback (born September 12, 1956) is the senior United States senator from the U.S. state of Kansas. ... The Republican Party is one of two major contemporary political parties in the United States; the other being the Democratic Party. ... Official language(s) none Capital Topeka Largest city Wichita Area Ranked 15th - Total 82,277 sq mi (213,096 kmÂ²) - Width 211 miles (340 km) - Length 417 miles (645 km) - % water 0. ... Flag Seal Nickname: DC, The District Motto: Justitia Omnibus (Justice for All) Location Location of Washington, D.C., with regard to the surrounding states of Maryland and Virginia. ... This article does not cite its references or sources. ... A senate is a deliberative body, often the upper house or chamber of a legislature. ... Chester Trent Lott, Sr. ... Eleanor Holmes Norton U.S. Delegate for the District of Columbia Eleanor Holmes Norton (born June 13, 1937) is the non-voting Delegate from the District of Columbia to the United States House of Representatives (map). ... Anthony Williams Anthony A. Tony Williams (born July 28, 1951 in Los Angeles, California) is a United States politician who has served as mayor of Washington, D.C. since 1999. ...

Flat taxes have also been considered in the United Kingdom by the Conservative Party. However, it has been roundly rejected by Gordon Brown, Chancellor of the Exchequer for Britain's ruling left wing Labour Party, who said that it was "An idea that they say is sweeping the world, well sweeping Estonia, well a wing of the neo-conservatives in Estonia", and criticised it thus: "The millionaire to pay exactly the same tax rate as the young nurse, the home help, the worker on the minimum wage" ^[4]. The Conservative Party (officially the Conservative & Unionist Party) is currently the second largest political party in the United Kingdom in terms of sitting Members of Parliament (MPs), and the largest in terms of public membership. ... James Gordon Brown (born 20 February 1951) is the Chancellor of the Exchequer of the United Kingdom and a Labour Party politician. ... The Chancellor of the Exchequer is the title held by the British cabinet minister responsible for all financial matters. ... The Labour Party has been, since its founding in the early 20th century, the principal political party of the left in the United Kingdom. ...

Possible implementations

A number of flat tax schemes have been proposed, with no scheme amounting to a "true" flat tax under which everyone would pay exactly the same rate regardless of income. Schemes also differ in how they define and measure what is subject to tax.

Flat tax with deductions

US Congressman Dick Armey has advocated a flat tax on all income in excess of an amount shielded by household type and size. For example, draft legislation proposed by Armey would allow married couples filing jointly to deduct $26,200, unmarried heads of household to deduct $17,200, and single adults, $13,100. $5,300 would be deducted for each dependent. A household would pay tax at a flat rate of 17% on the excess. Businesses would pay a flat 17% rate on all profits. Others have put forth similar proposals with various rates and deductions. Dick Armey on NBCs Meet the Press. ...

While campaigning for the American presidency in 1996 and 2000, Steve Forbes called for replacing the income tax by a tax at the flat rate of 17% of consumption, defined as income minus savings, in excess of an amount determined by the type and size of the household. For example, the exempt amount for a family of four would be $42,000 per year. Malcolm Stevenson Steve Forbes Jr. ... A sales tax is a tax on consumption. ...

A "pure" flat tax being admittedly hard to sell, "modified" flat taxes have been proposed which would allow deductions for a very few items, while still eliminating the vast majority of existing deductions. Charitable deductions and home mortgage interest are the most discussed exceptions, as these are popular with voters and often used. However, according to "Flat tax fiasco" by economist Douglas Dunn, this is not a true flat tax.

Hall-Rabushka Flat Tax

Designed by economists at the Hoover Institution, Hall-Rabushka is a fully developed flat tax on consumption (taxing consumption is thought by economists to be more efficient than taxing income).[1] Loosely speaking, Hall-Rabushka accomplishes this by taxing income and then excluding investment. An individual could file a Hall-Rabushka tax return on a postcard. Hoover Tower at the Hoover Institution The Hoover Institution on War, Revolution, and Peace is a public policy think tank and library founded by Herbert Hoover at Stanford University, his alma mater. ... A sales tax is a tax on consumption. ...

In the United States, extensive tax reform has not taken place since the Tax Reform Act of 1986, and like other tax reform, the flat tax has not advanced far in the U.S. political process. However, Eastern Europe has enthusiastically embraced the flat tax after the fall of the iron curtain. Robert Hall and Alvin Rabushka have consulted extensively in designing these flat taxes. President Ronald Reagan signs the Tax Reform Act of 1986 on the South Lawn. ...

Negative income tax

The Negative Income Tax (NIT) Milton Friedman proposed in his 1962 Capitalism and Freedom is a type of flat tax. Under an NIT, the flat tax rate and the deduction system would be quite similar to those of other flat tax programs. The basic idea is the same as a flat tax with personal deductions, except that when deductions exceed income, taxable income is allowed to be negative rather than set to 0. The flat rate is then applied to the resulting "negative income," resulting in a "negative income tax" the government owes the household, unlike the usual "positive" income tax, which the household owes the government. In economics, a negative income tax (abbreviated NIT) is a method of tax reform that has been discussed among economists but never fully implemented. ... Milton Friedman (July 31, 1912 â€“ November 16, 2006) was an American economist and public intellectual who made major contributions to the fields of macroeconomics, microeconomics, economic history and statistics while advocating laissez-faire capitalism. ... Capitalism and Freedom is a non-fiction book written by Nobel Prize in Economics recipient Milton Friedman. ...

For example, let the flat rate be 20%, and let the deductions be $20,000 per adult and $7,000 per dependent. Under such a system, a family of four making $54,000 a year would owe no tax. A family of four making $74,000 a year would owe tax amounting to 0.2(74,000-54,000) = $4,000, as under a flat tax with deductions. But families of four earning less than $54,000 per year would owe a "negative" amount of tax (that is, it would receive money from the government). E.g., if it earned $34,000 a year, it would receive a check for $4,000.

The NIT is intended to replace not just the USA income tax, but also many benefits low income American households currently enjoy, such as food stamps, Medicaid, etc. The NIT is designed to avoid what is called the welfare trap--effective high marginal tax rates arising from the rules reducing benefits as market income rises. Some of what the NIT seeks to achieve has already been achieved via the Earned Income Tax Credit. Some object to the way the NIT is, in effect, welfare without a work requirement. Those who would owe negative tax would be receiving a form of welfare without having to make a good faith effort to obtain employment. Others claim that the NIT effectively subsidizes industries employing low cost labour. The only answer to this objection is a true flat tax. Moreover, the NIT is no more a subsidy to low skill labour-intensive industry than extant benefits for the working poor. The Food Stamp Program serves as the first line of defense against hunger. ... Medicaid is the US health insurance program for individuals and families with low incomes and resources. ... The welfare trap is a name for a situation in which taxation and welfare systems create strong incentives for people to stay on social welfare payments. ... The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. ...

True flat tax

No elected official or policy intellectual has advocated a "true" flat tax, no doubt because it is widely seen as a nonstarter. In an article titled The flat-tax revolution, dated April 14, 2005, The Economist argued as follows. If the goals are to reduce corporate welfare and to enable household tax returns to fit on a postcard, then a true flat tax best achieves those goals. The flat rate would be applied to every dollar of taxable income and profits without exception or exemption. Under such a tax, it could be argued that nobody enjoys a preferential or "unfair" tax treatment. No industry receives special treatment, large households are not advantaged at the expense of small ones, etc. Moreover, the cost of tax filing for citizens and the cost of tax administration for the government would be further reduced, as under a true flat tax only businesses and the self-employed would need to interact with the tax authorities. The Economist is a weekly news and international affairs publication owned by The Economist Newspaper Ltd and edited in London, UK. It has been in continuous publication since September 1843. ... Corporate welfare is a pejorative term, first coined by Ralph Nader in 1956, describing a governments bestowal of grants and/or tax breaks on corporations or other special favorable treatment from the government. ...

None of the flat tax proposals in the U.S.A. approach a "true" flat tax. Most proposals still distinguish between "earned" and "unearned" income, and tax "earned income" more heavily. In addition, no flat tax proposes to replace the regressive FICA (Social Security) tax, which does not apply to "earned" income above $90,000 and unearned income. A "true" flat tax would address these shortcomings.

Fairness

This is a hotly debated aspect of flat taxes. Real and perceived fairness hinges crucially on what tax deductions are abolished when a flat tax is introduced, and who profits the most from those deductions.

Proponents of the flat tax claim it is fairer than progressive taxation, since "everybody pays the same." Opponents point out that for the state to raise the same amount of money under a flat rate tax requires that the rich pay less and the poor pay more than they would under a progressive tax system. The issue comes down to how one defines "fair". Proponents claim that since everybody pays the same rate, it treats everyone equally and thus is "fair" to everyone. Opponents of the flat tax, on the other hand, claim that since the marginal value of income declines with the amount of income (the last $100 of income of a family living near poverty being considerably more valuable than the last $100 of income of a millionaire), taxing that last $100 of income the same amount despite vast differences in the marginal value of money is "unfair". Many flat-tax proponents actually concede this premise since most proposals are not truly totally flat but have a threshold where income below that threshold is not taxed at all. Therefore, with the exception of flat-tax proponents who argue for no deductions and taxation of all income at one flat rate, both proponents and opponents agree in principle if not in degree with the basic premise of this concept. A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ... Marginalism is the use of marginal concepts within economics. ...

However, the sizable exemptions provided under most flat tax proposals go far in restoring effective progressivity. As income for an individual increases, the exempt income becomes an ever smaller percentage of total income.

Arguments in favor

In addition to the controversy over which kind of tax system is fairest to both high and low income earners, there are other arguments favouring or opposing a flat tax.

Simplicity

A flat tax taxes all income once at its source. From this fact huge gains in simplicity flow. Hall and Rabushka (1995) includes a proposed amendment to the US Revenue Code implementing the variant of the flat tax they advocate. This amendment, only a few pages long, would replace hundreds of pages of statutory language. As it now stands, the USA Revenue Code is over 9 million words long and contains many loopholes, deductions, and exemptions which, advocates of flat taxes claim, render the collection of taxes and the enforcement of tax law complicated and inefficient. It is further argued that current tax law retards economic growth by distorting economic incentives, and by allowing, even encouraging, tax avoidance. With a flat tax, there are fewer incentives to create tax shelters and to engage in other forms of tax avoidance.

Under a pure flat tax without deductions, companies could simply, every period, make a single payment to the government covering the flat tax liabilities of their employees and the taxes owed on their business income [2]. For example, suppose that in a given year, ACME earns a profit of $3 million, pays $2 million in salaries, and spends an added $1 million on other expenses the IRS deems to be taxable income, such as stock options, bonuses, and certain executive privileges. Given a flat rate of 15%, ACME would then owe the IRS (3M + 2M + 1M) x0.15 = $900,000. This payment would, in one fell swoop, settle the tax liabilities of ACME's employees as wells as taxes it owed by being a firm. Most employees throughout the economy would never need to interact with the IRS, as all tax owed on wages, interest, dividends, royalties, etc. would be withheld at the source. The main exceptions would be employees with incomes from personal ventures. The Economist claims that such a system would reduce the number of entities required to file returns from about 130 million individuals, households, and businesses, as at present, to a mere 8 million businesses and self-employed.

This simplicity would obtain even if, contrary to the spirit of the flat tax, realized capital gains were subject to the flat tax. In that case, the law would require brokers and mutual funds to calculate the realized capital gain on all sales and redemptions. If there were a gain, 15% of the gain would be withheld and sent to the IRS. If there were a loss, the amount would be reported to the IRS, which would offset gains with losses and settle up with taxpayers at the end of the period.

Economic Efficiency

A simple but powerful result in economics is that the economic distortion from a tax is proportional to the square of the tax rate. A 20 percent tax rate doesn't cause twice the deadweight loss of a 10 percent tax, but 4 times the deadweight loss. Broadly speaking, this means that a low uniform rate on a broad tax base will be more economically efficient than a mix mash of high and low rates on a smaller tax base. This leads to the idea of a flat tax. A tax (also known as a duty) is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ... In economics, a deadweight loss (also known as excess burden) is a permanent loss of well being to society that can occur when equilibrium for a good or service is not Pareto optimal, (that at least one individual could be made better off without others being made worse off). ... There are several measures of economic efficiency: Pareto efficiency Kaldor-Hicks efficiency X-efficiency Allocative efficiency For applications of these principles see: Efficient market hypothesis Welfare economics Production theory basics See also Business efficiency Inefficiency ...

Dividend taxation

Some opponents of the dividend tax support a flat tax, since this would eliminate taxation on income in the form of cash dividends on corporate stock and realized capital gains. Under the flat tax, dividends and interest paid by businesses would be taxed only at the business level, and not at the shareholder level. A dividend tax is an income tax on money paid to the owners of a company through dividend payments. ... A dividend is the distribution of profits to a companys shareholders. ... In [[finance]], a capital gain is profit that results from the appreciation of a capital asset from its purchase price. ... Interest is the rent paid to borrow money. ...

Other taxes

A flat tax might also serve as a substitute for taxes of Social Security benefits, if FICA tax liabilities are not a deductible expense for employers. It may also enable the reduction or elimination of estate or bequest taxes, though income tax reform does not necessarily entail the reform of other types of taxes. Social Security, in the United States, refers to the Federal Old-Age, Survivors, and Disability Insurance (OASDI) program. ... Federal Insurance Contributions Act (FICA) tax is a United States tax levied in an equal amount on employees and employers to fund federal programs for retirees, disabled, and children of deceased workers. ... Inheritance tax, also known in some countries outside the United States as a death duty and referred to as an estate tax within the U.S, is a form of tax levied upon the bequest that a person may make in their will to a living person or organisation. ...

Increased tax revenues

Some claim the flat tax will increase tax revenues, by simplifying the tax code and removing the many loopholes corporations and the rich currently exploit to pay less tax. The Russian Federation is a claimed case in point; the real revenues from its Personal Income Tax rose by 25.2% in the first year after the Federation introduced a flat tax, followed by a 24.6% increase in the second year, and a 15.2% increase in the third year ^[5]. The Laffer curve predicts such an outcome, but attributes the primary reason for the greater revenue to higher levels of economic growth. The Russian example is often used as proof of this. This article or section is in need of attention from an expert on the subject. ...

Minor matters

Under a flat tax, the government's cost of processing tax returns would become much smaller, and the relevant tax bodies could be abolished or massively downsized. If combined with a provision to allow for negative taxation, the flat tax itself can be implemented in an even simpler way. In addition, such a tax reduces the cost of welfare administration significantly. In economics, a negative income tax (abbreviated NIT) is a method of tax reform that has been discussed among economists but never fully implemented. ...

It is also argued that a flat tax will help lessen outsourcing, a growing problem in recent years, because under a flat tax, businesses will be able to pay taxes more easily and to deal with fewer regulations.

The effect of a shift to flat taxation on charitable giving is unclear. Those whose after-tax incomes will rise under a flat tax may give more. On the other hand, the net of tax "price" of donating to charity will rise, which would discourage giving. A survey ranked tax deductibility #7 among the reasons people give for donating money to worthy causes ^{[citation needed]}.

Arguments against

Overall tax structure

Some taxes other than the income tax (for example, taxes on sales and payrolls) tend to be regressive. Hence making the income tax flat could result in a regressive overall tax structure. Under such a structure, those with lower incomes tend to pay a higher proportion of their income in total taxes than the affluent do. It is a fact that the fraction of household income that is a return to capital (dividends, interest, royalties, profits of unincorporated businesses) is positively correlated with total household income. Hence a flat tax limited to wages would leave the wealthy much better off. Similarly, the loss of deductions will adversely affect some middle income households. The upshot could be a regressive shift in the tax burden. Hence opponents of the flat tax conclude that it is deceptive to advertise that tax as fair, when in fact it shifts the tax burden from the well off to the middle class. The real issues are deductions and what money counts as taxable income, not the flatness of the tax rate schedule. A regressive tax is a tax imposed so that the tax rate decreases as the amount to which the rate is applied increases. ...

Conflating Concepts

It is invariably argued that a flat tax will greatly simplify tax compliance and administration. In fact, simplicity does not so much stem from the structure of tax rates (a progressive rate structure is nothing more than a look-up table filling at most one page) as from the definition of what is subject to tax. Tax simplification - getting rid of all the deductions, exemptions, and special rules added over the years - is an issue wholly separable from that of the rate structure. A nation can vastly simplify its tax code while keeping its rate structure progressive: New Zealand is a case in point.

Ensuring Simplification

Adopting a flat tax with its attendant simplicity may be all well and good, but it is unlikely that it will remain simple over time, given the realities of interest group politics. While all flat tax proposals propose to eliminate nearly all deductions and credits, most envision keeping the mortgage interest deduction and possibly some others (note that Hall and Rabushka 1995 do not). Legislatures will be unable to resist the annual temptation to tinker with the tax code in order to advance certain policy objectives and to buy votes. Eventually, the tax code will become bloated and complex again.

Influence on particular investments

Through tax deductions and credits, the government can stimulate investments in activities it deems worthy, for example, renewable energies. Under a flat tax without deductions, the government loses this option.

Border adjustable

A flat tax system and income taxes overall are not border-adjustable; meaning the tax component embedded into products via taxes imposed on companies (including corporate taxes and payroll taxes) can not be removed when exported to a foreign country (see Effect of taxes and subsidies on price). Taxation systems such as a national sales tax or value added tax remove the tax component when goods are exported and apply the tax component on imports. Under a flat tax, domestic products are at a disadvantage to foreign products (at home and abroad). Such a system greatly impacts the global competitiveness of a country. For example, the United States is the only one of 30 OECD countries with no border adjustment element in its tax system.^[6] Due to this tax structure, it is estimated that U.S. goods are at a 17% competitive disadvantage, on average, to foreign producers.^[7] Corporate tax refers to a direct tax levied by various jurisdictions on the profits made by companies or associations. ... In the United States, payroll tax is tax that pays for two social insurance systems: Medicare and Social Security. ... Taxes and subsidies have the effect of shifting the quantity and price of goods. ... The FairTax Book, co-authored by Neal Boortz and John Linder, was published on August 2, 2005, as a tool to increase public support for the FairTax Plan. ... Value added tax (VAT) is tax on exchanges. ... The Organization for Economic Co-operation and Development (OECD) is an international organization of those developed countries that accept the principles of representative democracy and a free market economy. ...

Race to the bottom

The argument that corporations or wealthy persons might move to countries with lower taxes may seem irresistible at first blush, especially in a single country context. Yet how many wealthy people would gladly uproot their lives just to pay slightly less tax? Still, some claim it might lead to 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, less mobile by assumption, are left to shoulder the entire cost of all government services. A consequence would be an ever-worsening under-funding and neglect of the public sector. In government regulation, a race to the bottom is a theoretical phenomenon which occurs when competition between nations or states (over investment capital, for example) leads to the progressive dismantling of regulatory standards. ...

Opponents of lower taxes for the rich argue that the end result of this race to the bottom is social disintegration (see also failed state), a situation from which even the richest cannot benefit. In order to prevent this, it is argued, it is the responsibility of local and national governments everywhere to ensure that the rich 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 grant a temporary advantage at a national level. A failed state is a controversial term intended to mean a weak state in which the central government has little practical control over much of its territory. ...

Inequality

Social democrats in particular oppose flat tax schemes since they weaken the redistributive effect of progressive taxation. Irrespective of economic growth, a rise in inequality is seen as undesirable in developed nations as it is linked to poorer health, higher crime and more social unrest (See economic inequality). Since the health of a population, for instance, takes many years to respond to economic realities, the negative effects of a flat tax may not be immediately observable. However, proponents argue that this does not consider the effects of the sizable exemptions included in most flat tax proposals. Differences in national income equality around the world as measured by the national Gini coefficient. ...

Flat Taxation effects in Eastern Europe

Advocates of the flat tax point to the former-Communist countries of Eastern Europe as examples favourable to the adoption of a flat tax. Some of these nations, particularly the Baltic Countries, have experienced exceptional economic growth in recent years. However, there is a growing concern over the effect that flat rates of taxation are having on these countries, both socially and politically, and arguments have been made that flat tax has had less influence on economic growth than previously thought. This article is about communism as a form of society and as a political movement. ... Regions of Europe as delineated by the United Nations (UN definition of Eastern Europe marked salmon): Northern Europe Western Europe Eastern Europe Southern Europe Pre-1989 division between the West (grey) and Eastern Bloc (orange) superimposed on current national boundaries: Russia (dark orange), other countries of the former USSR (medium... The three Baltic states: Estonia, Latvia, and Lithuania The terms Baltic countries, Baltic Sea countries, Baltic states, and Balticum refer to slightly different combinations of countries in the general area surrounding the Baltic Sea. ...

An 1837 political cartoon about unemployment in the United States. ... This article or section is in need of attention from an expert on the subject. ... A common understanding of Western Europe in modern times. ... The European Union (EU) was created by six founding states in 1958 (following the earlier establishment by the same six states of the European Coal and Steel Community in 1952) and has grown to 27 member states. ... The United States Department of State, often referred to as the State Department, is the Cabinet-level foreign affairs agency of the United States government, equivalent to foreign ministries in other countries. ... The flag of the International Monetary Fund (IMF) The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring foreign exchange rates and balance of payments, as well as offering technical and financial assistance when asked. ... The term real wages refer to wages that have been adjusted for inflation. ... Value added tax (VAT) is tax on exchanges. ...

U.S. libertarian and conservative tax debate

There is a heated debate within Libertarian and Conservative circles between advocates of the Flat Tax and advocates of the FairTax (national retail sales tax). Advocates of the FairTax are concerned that the Flat Tax: The FairTax Book, co-authored by Neal Boortz and John Linder, was published on August 2, 2005, as a tool to increase public support for the FairTax Plan. ...

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 on income), as opposed to a graduated, or progressive, scheme. ... The Organization for Economic Co-operation and Development (OECD) is an international organization of those developed countries that accept the principles of representative democracy and a free market economy. ... Ronald Wilson Reagan (February 6, 1911 â€“ June 5, 2004) was the 40th President of the United States (1981â€“1989) and the 33rd Governor of California (1967â€“1975). ... 1986 (MCMLXXXVI) was a common year starting on Wednesday of the Gregorian calendar. ... The United States imposes an income tax on the taxable income of individuals, corporations, trusts, decedents estates and certain bankruptcy estates. ... The Alternative Minimum Tax (AMT) system is part of the federal income tax system in the United States. ... Official language(s) None See: Languages of Texas Capital Austin Largest city Houston Area Ranked 2nd - Total 268,581 sq mi (695,622 kmÂ²) - Width 773 miles (1,244 km) - Length 790 miles (1,270 km) - % water 2. ... (Another Michael Burgess is a coroner investigating the death of Diana, Princess of Wales) Michael Clifton Burgess, M.D. (born December 23, 1950) is a physician and politician from the state of Texas, currently representing the states 26th Congressional district (map) in the United States House of Representatives. ... A Baby boomer is someone who was born during the period of increased birth rates when economic prosperity rose in many countries following World War II. In the United States, the term is iconic and more properly capitalized as Baby Boomers and commonly applied to people with birth years after... Payroll tax generally refers to two kinds of taxes: Taxes which employers are required to withhold from employees pay, also known as withholding, Pay-As-You-Earn (PAYE) or Pay-As-You-Go (PAYG) tax; or taxes directly related to employing a worker paid from the employers own funds... A regressive tax is a tax imposed so that the tax rate decreases as the amount to which the rate is applied increases. ...

Contents

History and current use

Recent and current proposals

Possible implementations

Flat tax with deductions

Hall-Rabushka Flat Tax

Negative income tax

True flat tax

Fairness

Arguments in favor

Simplicity

Economic Efficiency

Dividend taxation

Other taxes

Increased tax revenues

Minor matters

Arguments against

Overall tax structure

Conflating Concepts

Ensuring Simplification

Influence on particular investments

Border adjustable

Race to the bottom

Inequality

Flat Taxation effects in Eastern Europe

U.S. libertarian and conservative tax debate

See also

Notes

References

External links

Contents

History and current use GA_googleFillSlot("encyclopedia_square");

Recent and current proposals

Possible implementations

Flat tax with deductions

Hall-Rabushka Flat Tax

Negative income tax

True flat tax

Fairness

Arguments in favor

Simplicity

Economic Efficiency

Dividend taxation

Other taxes

Increased tax revenues

Minor matters

Arguments against

Overall tax structure

Conflating Concepts

Ensuring Simplification

Influence on particular investments

Border adjustable

Race to the bottom

Inequality

Flat Taxation effects in Eastern Europe

U.S. libertarian and conservative tax debate

See also

Notes

References

External links

History and current use