There is a general agreement that the prevailing system of taxation is a total failure which has led to a decline in the national growth while at the same time permitting the political class of people, who are well-connected to stage-manage the system so as to obtain special breaks which are unavailable to typical employees and enterprises. This idea has aroused a lot of interest for the need to shift to a more simple and unbiased flat tax. Nevertheless, the idea of a flat tax has continued to elicit a very hot debate concerning the distribution of flat taxes especially in the United States. The prevailing questions are directed towards tax deductions which are presumed to be eliminated when a flat tax is initiated, and the greatest beneficiaries of these deductions. Even though the proponents of the flat tax system allege that it is unbiased as compared to stepped marginal tax rates, the critics of this tax system argue that since it allows for the decrease of marginal income values, it is unfair to tax the last one hundredth of an income of a poor family on an equal basis with that of a rich family regardless of the existing differences in the marginal sums of money. Thesis statement
It is hypothesized that a flat tax is uncomplicated, unbiased and good for development. Nevertheless, many critics have a contradictory opinion concerning this assumption. The purpose of this paper is to seek and explain the loopholes that exist in the flat tax system, but before that, it gives a comprehensive definition of flat tax and some of its advantages.
A flat tax refers to a system of taxation which uses an invariable tax rate. It is a fractional charge that is applied on an equal basis to everyone in spite of their levels of income, investments and many other financial attributes (Nichols, 23). It is called a flat tax because it produces a flat line whenever it is plotted on a graph against all other factors. This means that the generated revenue is constant regardless of the budgetary situation of an individual. Flat taxes which consist of a tax exemption for domestic income which falls below a certain limit that is established by rulings are not proper percentage taxes since the taxable income may not be equal to the overall income.
Advantages of a Flat Tax
There are two major advantages of a flat tax as proclaimed by its proponents: growth and fairness (Steve, 46). To begin with, a majority of American economists are being drawn to the idea of a flat tax because of the failure of the existing tax system to trim down the biasness that exists in the taxation of savings and investments, its inability to reduce rates and enhance economic development and the incomes and occupations of individuals. Even though a flat tax is not able to abolish all the negative effects of taxes, it may lead to more economic growth as compared to the current system because of its ability to lower the rates gradually and reduce unfairness in the taxation of savings and investment (Nichols, 49).
The second and most convincing feature of a flat tax system for most Americans is its unbiased nature. The complex documentation, numerous forms and instruction guides that taxpayers are required to fill and read in the current system are replaced by very concise instructions in the flat tax system. This major transformation appeals to many citizens in terms of saving time and reducing biases (Hassett, 72).
Flat Tax Loopholes
Despite the fact that a flat tax system holds many advantages over the current system in existence, it has three major loopholes. First and foremost, it focuses on improving the existing system which is already absolutely equal. Secondly, it compels the most hardworking individuals in the society, who are the middle class people, to give support to the idle wealthy in terms of finances. Lastly, it mystifies tax generality and important tax reform processes in its definition of taxable income in conjunction with the disparate issue of whether a flat or a graduated rate is applied (Hassett, 78).
The flat tax has the capacity to augment the tax burden on the deprived people in the society i.e. it has a lopsided impact on the poor people. Since each and every person spends some money on basic requirements such as food, clothing and shelter, the deprived people in the society will remain with very little or no taxable income at all after considering these expenses, yet they have to pay the same amount of money as those who earn extra income. This is unfair because the wealthy people benefit more from the government and therefore they ought to pay more tax (Steve, 74).
In addition to that, the flat tax system denies the government the potential to aid the financially needy people as compared to the current system of taxation. On their part, the wealthy people do not have the motivation to assist charitable organizations. Lastly, even though many Americans favor the flat tax system over the existing one, this system might hinder their ability to attain a secure financial retirement. This is because it inevitably scales down the social security benefits (Hassett, 78).
In conclusion, it is very important to address the real theoretical frameworks of a true flat tax system. The existing loopholes which the wealthy classes use in avoiding tax payment on their higher level incomes should be closed. It is really unfair to use a framework which raises the taxes of the middle-class people while reducing them for the wealthy people. Therefore, the government ought to build a tax system which focuses on fairness and equitability.
Hassett, Kevin & Alan, Auerbach. Toward Fundamental Tax Reform. California: AEI Press, 2005.
Nichols, Nancy & John, Everett. Contemporary Tax Practice: Research, Planning and Strategies. Chicago: Cch Incorporated, 2008.
Steve, Forbes. Flat Tax Revolution: Using a Postcard to Abolish the IRS. Massachusetts: Regnery Publishing Inc, 2005.