Tax codes are often confusing, copious and controversial. Between regressive, progressive, and flat taxes, politicians and economists are always debating which one best generates government revenue while not putting a burden on the citizens. In simple terms, a flat tax has a constant marginal rate that does not change due to outside factors like income, assets, or estates.
Though a flat tax is constant and simple, it can negatively affect taxpayers at the lower end of the income spectrum. For example, a flat tax may shift the burden away from strictly the wealthy and toward the middle and even the lower class. A tax without deductions may also put lower income individuals in the same scale as higher income earners, even though they make vastly different amounts of money. In addition, a flat tax negatively affects how a government operates on many different levels. This could include the loss of jobs for many tax professionals, especially those at the IRS. But more superficially, the government would not be able to use the tax code to encourage their own outside policies, such as a tax credit to a home that was more energy efficient. Lastly, the large-scale effects on government revenue when converting to a flat tax are monumentally difficult for economists to predict accurately.
But like every issue that economists try to predict, the idea of a flat tax has two sides. Even though its simplicity can cause inequity problems, it is also easier to understand and therefore makes tax errors less likely. Instead of copious tax codes, a flat tax would allow Americans to fill their taxes out on a post card. A flat tax would also reduce the amount of fraud perpetrated by lawmakers who use tax loopholes for campaign contributions or personal favors. Beyond fraud and error, flat taxes may encourage investment and expansion in business, because additional profit would not be then taxed at a higher rate. But most importantly small businesses - who make up nearly 65% of all new private-sector jobs - would be able to focus on better serving the marketplace as opposed to trying to beat a bureaucratic tax code.
The Laffer Curve of tax revenue indicates that higher rates - like those associated with a progressive tax - actually decrease the amount of revenue generated because people are holding on to less of their income and therefore, refrain from investing in capital ventures that benefit the economy. A flat tax no higher than 15% may, in fact, have the best impact on government revenue. If the government brings in more money, they may be able to put it toward social programs that help those who are struggling as a result of no progressive tax. It would also force the federal government to use tax revenue more wisely. And in this case, the middle and upper class aren’t being squeezed by the copious tax code and the lower class is actually benefiting more from the newly generated revenue as a result of a fixed marginal rate.
Just food for thought.
