The Flat Tax System: Explained

Political cartoon on the progressive tax income system, Illinois Policy

The progressive tax income system, simply put, is a mess. The U.S. Tax Code, everyone can agree, must be revisited. With legislators seeking new alternatives, the flat tax system has become one of the prominent leaders to replace the current system. Therefore, is it worth it, and will it ever happen? Let’s analyze.

The Pros:

• Tax Compliance — After a state adopts the flat tax income system, its compliance rates with tax authorities rise. This has been evident through nations across the globe. In Russia, after the flat tax system was adopted, the compliance of individuals in the two highest tax brackets rose from 52% to 68%. The U.S.’s current tax code has thousands of pages; a claim by the GOP Ways and Means Committee even argues that the whole process of taxation in the United States is more than 70,000 pages in length. As a result of this, ordinary citizens have a much difficult time in filing their taxes.
• Simplicity, Money Saved — Millions of dollars would be saved by average Americans in not hiring professional tax filers, which would be the case with the flat tax system. 50% of Americans pay a professional to file their taxes, and 7 in 10 worry about preparing their taxes. The mean cost in hiring a professional to file a simple Form 1040 (income tax return) + a state tax return was a staggering $176 in 2017. Further, if itemized deductions were also required (expenses that individuals can claim to reduce taxes — ex. charitable donations) the cost would rise to $273. On the other hand, once a flat tax system is adopted, only a simple calculation is needed. It is simple, the same rate for all, regardless of earnings; the rich pay still paying more. Ted Cruz’s flat tax proposal even called for the abolishment of the IRS.
• Economic Growth — A flat tax system would bring about massive economic growth to a state as well. Theoretically, a flat tax system would encourage more work productivity. Why? In the current progressive taxation system, you are penalized for earning more income. Pro-flat tax proponents argue that by establishing the flat tax system people would have more encouragement to work because they would be able to save more money. It would increase savings and investment. A flat tax system would benefit all classes as it spurs economic development. It would incentivize work which therefore helps the American economy and millions of lower-income families.
• Fairness and Politics — Another main argument put forward by pro-flat tax individuals is the idea of fairness. A flat tax would treat all people equally, and would not discriminate based on income. A wealthy taxpayer with 100 times the taxable income of another taxpayer would pay 100 times more in taxes. All individuals give their same percentage share, and one is not penalized for making money. In addition, politicians would lose all their power when it comes to the tax code, they would be forbidden from picking “winners and losers” and by no way could reward close friends.
• Global Examples — There are notable global examples that depict the efficiency of the flat tax. In Hungary, a progressive system was replaced with a flat tax of 16%. In the first year after such a change, the flat tax yielded 7% more tax revenue earned by the government, with total government revenues being 24% higher than the year prior to the adaptation of the flat tax. A number of European nations have adopted the flat tax system and witnessed its powerful results. The “Baltic Tigers” of Estonia, Latvia, and Lithuania all also decided to adopt a flat tax system after the collapse of the USSR. Since they adopted it, they have all continuously decreased their flat tax rate as well. To this day, 40 jurisdictions now have a federal flat tax or a subnational jurisdiction that enforces one.

“It’s not rocket science. Hong Kong has 95% tax compliance because its code is only four pages long with a 15% flat tax.”

- Ziad K. Abdelnour, Author/Financier

Benefits of a flat tax system explained, PragerU

The Cons:

• Hidden Aspects — Although it all seems great with the flat tax system, the majority of those proposals include an added sales tax. Not only that, but fact-checkers have confirmed that one of the flat tax proposals, set forth by Ben Carson in the 2016 primaries, would leave a $1 trillion hole in the U.S. Federal Government’s fund. Essentially, a major transition in tax systems would lose money that cannot be recovered.
• Hurts Middle/Lower Class — In many of the proposals put forward for the flat tax system, the rich would not pay as much as they do now. As a result, many who argue against the flat tax claim that it would only hurt the middle and lower class, who would be forced to pay the added sales tax seen in many of the proposals. The rich would benefit greatly in regards to their tax payments, whilst the poor would not. The argument against the flat tax, essentially, is based on the principle that such a proposal would lack wealth distribution, an ever-expanding problem in American society. Moreover, while the flat tax may be proportional, the impacts of it would not. For instance, take two households, one which earns 1,000,000 and one which earns 10,000 USD with 10% flat tax rate (they would pay 100k and 1k respectively). Nevertheless, the cost of living does not change, as it is inflexible. Therefore the aftermath of a flat tax would not be a proportional consequence.
• Logistical Complications — Not so simple after all? Whilst pro-flat tax individuals argue it is simple, many disagree with such a claim. In essence, many of the current legislation for a flat tax, in reality, add back aspects they are taking away from the progressive income system, primarily deductions. Plans such as the ones set by Sen. Rand Paul’s in the 2016 GOP primaries called for a flat tax with deductions and exceptions, being more of a progressive tax than a flat one. Therefore, many question whether the proposals are flat tax systems after all.

Negatives of a flat tax system explained, UT McCombs School of Business

Chances It Happens Federally:

The chances of a flat tax system actually occurring in the United States are slim. Nevertheless, the movement calling for the system is rapidly expanding. In the 2016 GOP Primary, numerous candidates had proposed establishing the flat tax system. Not only that, but a recent survey in Iowa also reported that a large portion of its constituents supported the flat tax over the progressive system. At the federal level, due to the fact that such a change would be a massive reform, the change would have to come from an elected president who would sponsor the flat tax. The progressive system’s reign is coming to an end, and the flat tax system may very well come out on top after it does.