A flat rate tax is a payment made to the local government on income earned. The rate is the same for every citizen and business, regardless of how much money is earned. Like most tax revenue, the collected money is most often used to improve the local community in various ways. A few countries have instituted the flat rate tax, including several in eastern Europe, such as the Baltic countries; other countries are considering it, since some people believe a flat rate tax is the fairest type of taxation program available. An ongoing debate among groups, individuals, and politicians exists over whether or not a flat rate is the best system as it can be difficult for the lower class to pay any amount of income tax.
Similarities to a Progressive System
The flat rate tax can be compared to a progressive tax rate. Under a progressive system, the percentage of income deducted for taxes increases as the income amount rises. A flat rate system is similar in that taxpayers with the lowest income pay very little in taxes, while those with higher incomes pay a far greater amount towards taxes. These percentages can be lessened in part by the number of deductions and tax breaks a person is able to take, lowering the amount of income that is considered to be taxable. A flat rate system is set apart from other progressive systems, however, because the tax rate is constant across the board and does not change depending on a person's income.
Pros and Cons
What tends to concern people when they argue against this system is the idea that the overall tax rate might have to significantly increase to give the government the amount of revenue needed to support the community. Proponents for the plan suggest that a constant rate wouldn’t necessarily mean tax percentages would need to be raised, since there would be a more constant rate of collection from all individuals and corporations, with fewer tax shelters and loopholes for those who make larger income amounts.
Most propositions for a flat rate tax suggest built-in deductions for people, especially in the lower income spectrum. The percentage of tax applied would only be deducted from taxable income, and would be applied to individuals and corporations alike, and this percentage would remain constant for all people. Some plans call for incomes near the poverty level or below it to be exempt from taxation.
Others suggest that taxable income for people at the poverty level would be almost non-existent because of standard deductions. There are some questions as to whether flat rate taxes would pose an undue burden on the lower middle class. Depending upon the actual amount of money earned that is considered “income,” people in the lower middle class might find themselves with much less spendable income, and have difficulty purchasing basic necessities.
Any evidence that shows economic growth in a country as a result of a flat tax rate is usually argued by proponents to be caused by some other factor, such as additional reforms or rapid market expansion. In countries where this system is in place, such as many countries in Eastern Europe, other factors may also play a part in any economic growth the country experiences. As a result, it is difficult to reach an agreement on whether or not this type of tax system is effective.
There are a few states within the US that have flat rate tax for state taxation. These include Indiana, Massachusetts, Maryland, and Illinois. Many countries throughout the world are considering adopting this method of taxation, or already have it in place — Russia, Mongolia, the Baltic States, and Hungary impose a flat rate system on their citizens.