Many feel that the current tax system is both unfair and complex. No tax is paid by some of the richest people in America , while a large amount of the tax burden falls on the rest. A mere look at the tax structure corroborates that it is far too composite, with dimensions of rules that no ordinary person could possibly comprehend. Although the current system gives tax professionals job security, it does lead many to believe that we can move to a more simplified system that would be fairer to flat rate tax system. This research essay analyses in depth the advantages and benefits of flat rate system than the existing tax system and how it improves the tax collection and compels the government to cater social needs.
I strongly recommend a flat rate of income tax of 17% shall be introduced in U.S.A to increase the tax revenue. All sections of society including upper-income, middle income, corporate’s will be much benefited because of the flat rate system. Under flat rate tax, the poor shell out lesser income taxes and attains extensive welfare gains. Flat-tax reform would usher significant gains in productivity and output. A flat rate tax system will be fair, not complex and confusing and will be stimulating people to save substantially on their income and above all, it helps US manufacturers to be of more competitive globally. It is to be remembered that how flat rate tax or tax cuts helped the federal revenue to soar and even revenues doubled in 1980 and 1990.
Flat tax system minimizes the intricacies and inequalities, tax credits, deductions, loopholes of the existing tax system. Further it also reduces the compliance cost and present disincentives to saving and investing are eliminated. Thus economic growth is attained through enhanced savings. The main purpose of flat rate tax structure is to prevent tax evasion and to drive more revenues by bringing more assessees or tax-payers within the tax bracket to pay tax without avoidance or evasion.
The complying cost of tax burden alone estimated to the tune of $ 205 billion annually or $ 705 per each individual To understand various statutory deductions available, tax credits and other special privileges available in the tax law, it needs a lot of expertise and an ordinary office going citizen or a small business owner may not have the enough talent to understand this complex tax structures.
Today, US Citizens are over-burdened with highest tax rates and major lion’s share of income is originating from the tax revenues. There are approximately about 890 forms under current tax system and the flat rate tax system only needs two post-card size forms to be filled in and it will be more users friendly. One of the studies has established that it cost to US government $ 1.40 for collection of 1$ under this existing tax system and flat rate would minimize compliance costs by 94%
Flat-tax system is an easy, simple, just and assures overall growth where as the current system is complex, ambiguous. Current tax system differentiates the tax payers on various categories like use, source and level of income but whereas under flat rate all assesses would be treated equally and equal justice is assured to all irrespective of their level of standing in the society.
Under flat rate tax system, from large corporations like Apple Inc to a small provision store would have to adhere identical rules and there is no longer separate tax rules for partnerships, sole proprietorships, regular corporations and S corporations and further all corporations earning income in US irrespective of the fact that they are US companies or not. Flat tax or fair tax as it is called exempt the have-nots and prescribe a low flat rate for all categories of tax payers. Fairness is determined by the tax payers or assessees. (Armey, 1994, p.4).
Under current tax system, taxable income is arrived at by deducting exemptions and standard deductions from AGI (Adjusted Gross Income). Then, taxable income is multiplied by the tax rate to arrive at the quantum of tax. However, under flat rate tax system, there will be no deduction, exemption etc and income tax will have to be paid on gross income. Under this system, middle class and poor people will pay less tax and wealthy people will be paying higher taxes.
The flat rate tax rates ensure lowering of marginal tax rates and reduce tax bias against saving and investment. However critics argue that flat tax would negate the employment of tax incentives to attain certain social objectives like medical care and charities. Some argue that tax incentives will act as pleasant way for government to deal with social needs. For instance, permitting deductions for employer-offered health benefits will limit need for government spending on medical care.
Tax incentives not only would offer resources for business investment but also used to provide for social needs like health insurance. As flat tax discourages tax incentives, the social needs like capital formation, health insurance and charities will be much affected. (Mucciaroni, 1994, p.18).Nevertheless, this is not true. With increased taxation income, government can spend more on health insurance and social needs. (Alterman, 1996, p.5).
For instance, for the year 2009, for an individual who has an annual income of $400,000, the tax rate will be 35% Assuming that there is no deduction, an individual has to pay $ 140,000 as income-tax during the year 2009. Under flat tax rate, assuming that flat tax rate is 17%, he has to pay only $68,000. Hence, flat tax enhances the ability to pay tax. According to Hall and Rabushka, a flat rate of 19% would fetch a wider tax base and generate identical revenue as the present tax system.
There is a general misconception that flat tax would discourage home ownership, charitable, health insurance and savings for retirement. However, this is not true. Flat tax will end up in increased value of the nations’ assets and increased revenues that can be employed with the fiscally starving Medicare and social security programs. It is to be remembered when Regan introduced flat tax , states became the operators of the social welfare programs with significant reduced Federal supervision and involvement as Federal government was able to sanction liberally grants to states to administer social welfare programs.
Under flat tax, all revenues from assets would be summed together and individual assets need not to be reported. Under flat tax , estate tax will have no relevance as when people die as the IRS need not go through their assets and it is the income from the assets that is subject to tax and not the assets itself that is subject to tax when owner expires. In 1996, U.S Treasury department estimated that a pure flat tax with a 20.8% rate would have created as much revenue as the corporation and personal income-tax and the estate tax had generated in 1996. Hence, in today’s economy, abolition of estate tax would not have serious impact on tax revenue for U.S government. (Henry et al, 1999, p.252)
The cost to individuals of compliance with the personal income tax is estimated to be $ 157 billion by the Tax Foundation and this will reduce to $ 10 billion if flat rate tax is introduced due to simplified procedures. There are approximately about 890 forms under current tax system and the flat rate tax system only needs two post-card size forms to be filled in and it will be more users friendly. One of the studies has established that it cost to US government $ 1.40 for collection of 1$ under this existing tax system and flat rate would minimize compliance costs by 94%
In 1980 after Regan’s tax cut measures, federal revenues soared from $ 530 billion to $ 1031 billion in 1990. Likewise, tax revenue increased at a 20% faster snip in the 1980s than in 1990s, which witnessed two world record tax increases. Regan tax cuts had been criticized that the share of income earned by the wealthy 5% of the population increased from 17 % to 19% but they have disregarded the fact that segment’s share of the tax burden also augmented from 38% to 49% of cumulative federal income-tax collections.
Consumption tax attains significance nowadays since, by exempting savings or investment from taxation, it would promote savings and encourages capital formation. Under consumption tax, taxpayers would be assessed more on what they take out of the economy and not on what they produce. The encouragement of consumption taxes depends upon their inherent incentives to save and tax. Consumption tax discourages spending and encourages investment by exempting investment from taxes.
Erstwhile communist nations like Latvia, Lithuania, and Estonia have introduced the flat rate tax system along with free-market reforms to resurrect their economies. Russia also adopted a flat rate tax structure of 13% from 2001. This has resulted in a spurt in the Russian economy as revenues have risen due to cessation of tax evasion and avoidance. Serbia, Slovakia and recently Romania all joined the band wagon of flat rate tax system. It is expected that Bulgaria, Croatia and Hungary will shortly switch over to flat rate tax system
Thus this research has established that the flat rate tax system is a viable alternative to the existing federal income tax. If it is introduced, it will eliminate $ 250 million income tax industry. Further, it will be easier and helps to simplify the business accounting and reporting. As the cost of goods will be more competitive in the flat rate tax system, it makes the country’s product more economical in the international market and stimulates exports.
This will encourage the capital repatriation from tax heavens. Low tax rate helps to attract more investments from internally and also foreign direct investments. One of the salient features of the flat rate tax system is that it gets rid of the product tax build up in product cycle. A flat rate tax structure will result in lower interest rates. This form of tax system helps to avoid double taxation of gains from business. It also helps to attain major economic growth and industrial development.
Alterman, E. (1996). Deflating the Flat Tax. The Nation, 262, 5+.
Armey, R. K. (1994). Flat Tax – Flat Wrong? National Review, 46, 4.
Henry J, Aaron & Reischauer Danton Robert. (1999). Setting National Priorities: the 2000 election and beyond. Washington: Brookings Institution Press.
Mucciaroni, Gary. (1994). Reversals of Fortune. Washington: Brookings Institutional Press.