There has been a recent trend in the global economy. Many nations are moving towards a system of letting people keep their hard-earned money to spend as freely as they please.
Known in America simply as a flat tax, the idea of reducing a progressive, bracket based tax system, where the more money one makes results in more taxes being paid, to a simple, uniform rate for all incomes has grown in popularity over the years. Since 1994, countries like Lithuania, Slovakia and Estonia have started to enforce an overall flat tax that has greatly simplified their tax codes while simultaneously creating strong economic prosperity.
Estonia’s economy grew substantially throughout the 1990s and repealing the high tax rate on the rich actually increased government revenues from 39.4 percent of the gross domestic product to 39.6 percent in 2002.
In fact, we see this idea of a flat tax either keeping current revenue quotas the same or actually increasing them in a very interesting example — Russia. Their implementation of a flat tax rate in 2001 led to an overall increase in 26 percent more revenue to government programs once those in charge reduced personal income taxes to a uniform 13 percent rate.
Believe it or not, it turns out that governments that try to keep tax rates high tend to experience more joblessness and overall economic stagnation. A pro-growth tax reform such as a flat tax leads to the creation of more jobs and a steady progress of economic growth.
The most appealing thing about a flat tax is how radically it would simplify the current tax system. Have you ever tried to fill out your own taxes before and realized that the forms were so convoluted that they seemed to be written in a foreign language? As stated in a previous column that I worked on last semester, with our current progressive tax system, Americans waste nearly 6.1 billion hours complying with tax code every year.
With a flat tax, households would only get one exemption, which would be an allowance determined on family size, and then pay a low rate on any income above that amount. No longer would the average American need to worry about reporting dividends, double taxation, capital income or even interest on their tax forms.
That’s right, there are actually situations where businesses and individuals have a tax levied on them by two or more jurisdictions on the same income, at the same time!
Once the entire process becomes easy to comply with, this flat tax policy will lead to more people reporting their taxes and the government collecting more revenue. According to The Economist, the IRS estimates that for every dollar it collects, another 19 or 20 cents is owed, but not paid, resulting in a shortfall amount between $312 billion and $353 billion in 2001.
Our government is losing out on all that money every year because people would rather pay to hide their taxes from the government in security funds and off-shore accounts. Instead, with a low tax, it will just be cheaper to pay the stumpy taxes than hiring a lawyer to put one’s money in those specific funds and accounts.
With a flat tax, every loophole will be eliminated and less people will seek to avoid paying their fair share. Income tax has made more liars out of the American people than golf or fishing.
Opponents contend that establishing a uniform tax rate for all Americans to pay benefits high-income earners, creating an even wider gap between the rich and poor. How is there evidence that such an increasing gap exists in the first place when statistics that measure income inequality like the Gini coefficient haven’t increased in nearly 30 years?
If anything, a flat tax would establish the idea that savings and investment are the keys to both growth and higher living standards. The EU model proves that giving the government more money to spend doesn’t necessarily lead to any sort of economic prosperity or progress.
So, is it really fair to limit and punish economic productivity with the current code’s enormous amount of dubious practices like double taxation? I would rather keep that same money within the fiscally responsible realm of private sector, instead of it circling in the endless bureaucratic cycles of the government.
Well, a fool and his money are soon parted. The rest of us wait until income tax time.
Related Links:
Capital gains tax more important than you believe
Reach the columnist at ndsmit12@asu.edu or follow @noahsmith1996 on Twitter.
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