Pros and Cons of a Flat Tax

In almost any argument or debate for or against taxation, the subject of a flat tax often comes up. Simply put, a flat tax would tax citizens at equal rates, regardless of personal income. Currently the U.S. operates under a progressive tax system where high-income earners carry more of the tax burden than low-income earners. Despite numerous advocates for a flat tax system in the U.S., the current system remains progressive. This opens a line of debate on which method is better, more efficient and ultimately more “fair”.

Pros of a Flat Tax

A flat tax system would be more simplistic than a progressive system overall. One tax rate means easy computation and direct payment structures. A flat tax would only tax one income, making IRS paperwork easier to understand and easier to file, ultimately saving taxpayers the cost of compliance with current IRS regulations and tax codes; thereby virtually eliminating the need for tax professionals or attorneys for most Americans.

A flat tax would eliminate double taxation, eliminating the prevailing concept of the more you earn, the higher the tax penalty. A flat tax would end superfluous taxes such as the death tax, capital gains tax on home sales and would eliminate double taxation on savings accounts and investment dividends. Families and individuals would pay employment taxes separately from personal taxes, meaning that they would no longer have to report dividend earnings, earned interest or additional business-related income to the IRS because they would pay their business tax separately; also at a fixed rate.

A flat tax eliminates interest, dividends and other business tax to individuals. A flat tax would produce a system of territorial taxation; a system where the government only taxes income generated on U.S.soil, making it profitable for businesses to protect jobs in the U.S., by eliminating the tax benefits associated with hiring overseas.

Ultimately, a flat tax means a more equitable tax. For instance, a taxpayer who makes $10,000 annually pays the same tax as someone earning $100,000 annually. The individual grossing $100,000 a year still pays more taxes than his counterpart does because his income is greater, however, both taxpayers pay an equivalent tax rate. A flat tax system does not discriminate based on taxpayer income, unlike a progressive system does.

Cons of flat tax

Flat tax adversaries contend that implementing a flat tax system would come down like a ton of bricks on low-income taxpayers. They make this assertion because low-income individuals and families spend money on the same items that higher-income people do; things like groceries, gas and clothing. After the lower-income segment of the public purchases their necessities, they would conceivably have less money left over, because there is no favorable variation in the tax rate.

A flat tax could dismantle the IRS. Whatever your opinion of the IRS, the reality is that it employs thousands of people specifically trained to work in the tax industry. The potential job loss could be disastrous. In addition to IRS employees, individuals specializing in tax preparation, accounting or tax law could also find themselves unemployed in the wake of a flat tax.

Some opponents of a flat tax believe that the system favors the rich. As an example: if the tax rate were 10 percent, someone making $1,000 would have $900 spending income left after taxes. On the other hand, a person earning $10,000 is left with $9,000 after taxes; a disproportional picture, favoring higher-income earners. If the rich paid less tax, it could cause a rift in government revenue, as the top earners in the country currently hold the bulk of the tax burden. Uniform taxation treats individuals and corporations fairly, but eliminates other government revenue obtained from taxing higher-income earners at higher rates, accounting for a large amount of government money.

As it stands, the U.S. probably will not adopt a flat-tax system in the near future, if ever, due to the potential loss of revenue from high-income earners and possible loss of jobs in the tax industry.