A flat tax has received support from a variety of political sides.
Jerry Brown nearly won the Democratic nomination for president in
1992 with a flat-tax agenda. Steve Forbes campaigned on the flat tax
in his 1996 presidential bid. And now, President Bush may be
considering a flat tax. On his trip to Slovakia last month,
President Bush praised Prime Minister Dzurinda for the flat tax
system he introduced last year. So, what are the arguments for and
against a flat tax?

What is a flat tax? It's a single tax rate applying to all income
tax, but typically also applying similarly to corporate and sales
taxes. Currently, progressive tax rates are higher for those on
higher incomes, but there are many ways to avoid tax, e.g. by
deducting losses or expenses. A flat tax would apply without such
deductions. Estimates are that if all deducations were abolished and
all loopholes were closed, the federal tax rate could come down to
18% and still generate the same amount of revenues. To further
reduce bureaucracy and to protect the poor from paying an
effectively higher tax rate, a treshold would apply, i.e. the first
$10,000 or $15,000 of their income would not be taxed at all.

Opponents argue that a flat tax would reduce equity. They reject
claims that lower rates would result in more overall revenue. They
argue that it would hurt income currently spent on research and
other activities that can currently be deducted from tax. They argue
that there would be less funding for social services, making life
harder for the poor who currently pay little on no tax in the first
place, unless a generous tax-free treshold was applied - for those
on low incomes, a flat tax rate would be higher than the rate they
currently pay. Wherever the treshold is, a flat tax would create a
steep burden for those who currently depend on odd jobs and are just
under that treshold - they would have little incentive to work more,
even though they needed the extra money most.


Flat-tax advocates argue that it is simple and reduces red tape and
the bureaucratic burden for everyone, resulting in more productive
activities than seeking to avoid taxes by means of creative
accounting. A low rate encourages tax compliance and reduces the
black economy, resulting in higher total tax revenues and thus more
money available for social services. Currently, efforts to launder
black money nurture organized crime. Lower tax rates decrease the
black economy and thus decrease organized crime. Furthermore, a low
flat rate encourages investment and attracts foreign investments,
resulting in more employment opportunities and overall economic
growth and prosperity for all, including for the poor.

Whatever argument may appeal most, the flat tax turns out to be
increasingly popular. Hong Kong has long had a 15 percent flat tax
and has enjoyed perhaps the highest growth rate of any nation on the
globe over the past 40 years. The success of Hong Kong has led the
mainland to move toward Hong Kong's system, through tax-rate
reductions and incentives to save and invest.

Flat taxes used to be the norm in Western countries. Karl Marx
advocated a "heavy progressive tax" and the idea seemed unstoppable
ever since, or rather, until recently. Ironically, most flat-tax
countries have a Communist history. Indeed, most of the noise has
come from developments in Eastern Europe. Countries that once were
the strongholds of the Communist doctrine now seem the strongest
supporters of a flat tax.

Estonia was the first European country to introduce a flat tax, back
in 1994, at a rate of 26%. Latvia and Lithuania followed. Russia
introduced a flat tax of 13% on personal income in 2001. Serbia
followed with 14% and so did Ukraine with 13% and Georgia with 12%.
In Slovakia, a flat tax of 19% was introduced in 2003 for all
personal, corporate and sales taxes, which became the more
significant when Slovakia joined the EU in 2004. Romania, which is
to join the EU in 2007, has just introduced a flat tax of 16% and
the centre-right opposition parties in Poland and the Czech Republic
are both pushing for flat taxes of 15%.

Not surprisingly, opponents of flat tax in Germany and France are
calling for harmonization of taxes accross the EU. But the future
may be inevitable - as the old adage says: if you cannot beat them,
join them! So, will the inevitable result of harmonization efforts
be a flat tax with the same rate applying across the globe?


http://www.clubforgrowth.org/n­ews/040913.php
http://www.csmonitor.com/2005/­0308/p01s03-woeu.html
http://www.humaneventsonline.c­om/article.php?id=6709