Misplaced Pages

This is an old revision of this page, as edited by Nikodemos (talk | contribs) at 17:22, 18 September 2004 ("to be to be"). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

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 term flat tax is most often discussed in the context of income taxes.

(Poll taxes, in contrast, are not flat taxes but regressive taxes, because they usually refer to a fixed amount per individual, which is a decreasing percentage of income for higher-income individuals.)

Advocates say that a flat tax system may arguably have most of the benefits of a progressive tax, depending on whether the flat rate is combined with a significant threshold. Usually the flat tax is proposed to kick in at a certain income level, or to exempt income below that level, so that the lowest-income members of society pay no income tax. Some argue that this is technically a two-bracket progressive tax rather than a flat tax, but others maintain that the 'zeroth' bracket, having zero tax rate, does not count.

Additionally, proposed flat taxes usually allow little or no exemption of earned income besides the bottom-level exemption, which they claim makes the system more fair because exemptions favor the wealthy who can afford to hire accountants to find all the exemptions that they are eligible for.

Advocates of a flat tax claim that it will end unfair discrimination. They also argue that flat taxes are easier (and cheaper) to administer and comply with than complex, graduated taxes. Most political parties that advocate the introduction of a flat tax are on the right of the political spectrum.

Those who oppose a flat tax claim that it will benefit the rich at the expense of the poor. One argument is that, since most other taxes (sales taxes etc.) tend to be regressive in practice, making the income tax flat will actually make the overall tax structure regressive (i.e. lower-income people will pay a higher proportion of their income in total taxes compared with the affluent). Another argument can be made by looking upon the value of money to various groups and not simply the rate of taxation. While the monetary value of a dollar (or other unit of currency) is the same for everyone, it is argued to be "worth" a lot more to someone who is struggling to afford food than to a millionaire. Arguably, the complication of a tax system resides in the accounting of one's taxable income and in the possibilities for deductions, so that a flat tax would not substantially simplify a tax system — once the taxable income is determined, the tax amount can be computed automatically by a computer or looked up from a table, no matter how complicated the formula.

The amount of income the government receives from a flat tax depends entirely on the level of the tax. Usually flat taxes are advocated by parties that also believe in a tax cutting agenda, but a flat tax can also be used to increase government revenue by simply raising the tax rate.

An example of a flat tax proposal was that advocated by Canada's right wing Canadian Alliance party. The party's policy called for the elimination of Canada's three separate tax brackets for low, medium, and high incomes with a single 17% income tax on everyone beyond the 'zero bracket amount' (the very poor had to pay no taxes). This new tax structure would have greatly reduced average tax burden of Canadians and also shrunk government revenues considerably. The proposed flat tax turned out to be unpopular among Canadians, however, and the party dropped it at the beginning of the 2000 general election.

There are other tax system changes that are often proposed along with a flat tax. A common one is to eliminate most deductions, credits, and other means of avoiding the tax. This purports to avoid having millionaires with good accountants pay little or no income tax; however, it also reduces the deliberate use of tax deductions by governments to promote other desired ends.

The baltic country of Estonia has a flat tax of 26% with a tax exempt amount. On January 1, 2001, a 13 percent flat tax on personal income took effect in Russia and it is producing far more revenue than the former system, which included a large number of loopholes and suffered due to tax evasion.