Background
The flat tax rate policy is a policy that has elicited mixed reactions from policymakers, politicians, taxpayers, and governments across the world. The controversy of the flat tax rate lies in the effects on economic growth and fairness among taxpayers. Fundamentally, the flat tax rate is a form of the tax system in which individuals pay their income tax based on the same rate independent of their income. In the United States, the flat tax rate policy has triggered a raging debate owing to the diversity of opinions regarding reforms of the tax system.
Fundamentally, the tax policy is an economic policy that can spur economic growth and enable taxpayers to get value for their taxes if governments adopt it effectively. In capitalistic states such as the United States, the flat-rate tax system is appropriate because citizens earn income, unlike in communist states like China.
The flat-rate tax system is beneficial because it gives taxpayers an equal opportunity to contribute to the economic development of their respective nations.1 The nature of the tax system determines the capacity of a nation to grow economically and offer quality services to its citizens.
The idea of a flat tax rate does not constitute a unique policy as politicians often give their opinions. This explains why even presidential hopefuls in the United States, such as Ted Cruz, have been advocating for it. Though the flat-rate tax system is theoretically simple, it is very complex in reality. The quest to reform the tax system has been lingering in the minds of most people. According to O’Brien, a flat tax rate is, basically, a tax structure where everyone pays the same tax rate.2
Many benefits attributed to such a tax structure exist, which include economic growth, improved quality of life courtesy of better health index, and simplicity in tax filing.
O’Brien, on the contrary, asserts that a flat tax rate is easier said than done and goes on to cite the downside associated with it, such as extremely favoring the rich, but with potential negative tendency to plunge the poor deeper into poverty and economic frustrations.3 The flat tax rate would simply cut back the expenditure of the rich, who form 0.1% of the United States population, enabling them to save a lot and work less, while raising tax for the bottom 40% of the population.
Doubts about the consequences of implementing the flat tax rate have been raised by even one of the founders of the idea, Robert Hall, who now doubts its implementation.4 Eastern European countries that had adopted the flat tax rate system are now suffering and blaming the tax system, while economists have even started poking holes on the efficiency of the tax system.
In the United Kingdom, Murphy has joined the fray in highlighting the potential demerits of a flat tax rate when, in his report about the flat tax rate in the United Kingdom, he raises questions about the impact of such a tax system on trusts, national insurance, capital gains, inheritance tax, taxation of the family, choice of trading media, among others. Economists are grappling with the following questions, amongst others: would the flat tax rate be greater than the existing rate?
What would happen if the flat tax rate fails to meet Government expenditure? Would it mean the government would cut back on its expenses or increase taxes? Would the tax be beneficial to everyone if set at the current tax rate? If all stakeholders got favorable answers to these questions, it would alleviate contentious issues and promote the adoption of the flat tax rate system and related tax reforms in the United States.
Although most republicans like to propagate the ideology of the flat tax rate, the entire concept is misplaced. The major demerit about the flat tax rate is that it will reinforce economic inequality witnessed in the past decade by increasing rates on the middle class and low-income households while reducing tax rates for the rich households.5
Wealthy countries like the United States have high-income inequalities that result in high crime rates, and therefore, the flat tax rate would only act to widen the disparity in income, and thus, worsen the insecurity.3 Economists say that the deficits in the United States are as a result of the adoption of policies that favor the rich, but have a negative impact on the poor. The policies have contributed to making the United States the leading country in income disparity.
The flat tax rate also suffers from the demerits of not being progressive. In this tax system, the same rate of taxation will be applied to different income groups, whether low-income earner, middleclass, or millionaires. The flat tax rate also has a negative impact on the opportunities in a country’s political undertakings that influence national and individual decisions, for instance, taxing philanthropy.
Evidently, the flat tax rate system has a lot of stakeholders, who are deeply involved in the current tax system and are hesitant to adopt a new taxation structure.6 In this view, the proponents of the flat tax rate system need to convince these stakeholders effectively so that the intended tax reforms would take place gradually and successfully.
Internal Players
Different views on whether or not to adopt the flat tax rate system have been elicited by different politicians, presidential aspirants, and Americans. The idea of the flat tax rate is about embracing a constant tax rate for all forms of income. One argument advanced in favor of the flat tax policy is that this system would increase the efficiency of the current taxation regime. However, critics contend that the flat tax policy favors the wealthy while overtaxing the poor.
On November 3rd, 2011, the Flat Tax Rate bill was sponsored in the United States Congress by the representative, Burgess Michael. This bill would have changed the Internal Revenue Code to allow individual businesspersons to be subjected to a tax rate of 19% during the first two years of election and 17% afterward.
A follow up on what happened to it indicates that the bill was not enacted, for it never attained the minimum number of votes required to make it pass in Congress.7 A possible explanation for this could be that the government fears a backlash from the numerous parties, who have invested heavily in the current tax system.
Other Stakeholders
The current tax scheme is replete with stakeholders, who are resistant to change simply because a majority of them think that the flat tax rate has benefits that outweigh the incumbent system.4 The list of stakeholders includes philanthropists, charity organizations, lawyers, and state officials, who are involved in the formulation of the current tax scheme.
Accountants in the United States allied to the American Institute of Certified Public Accountants posit that the flat tax rate can be perceived to be a deduction on the Value Added Tax, and may not be admissible to the General Agreement on Trade and Tariffs (GATT).2 The flat tax rate would, therefore, bring conflict between domestic and international business obligations.
Non-governmental organizations fear that the flat-rate tax would be detrimental to the prosperity of small businesses. The flat tax rate would lessen the burden on large companies but would increase the pressure on small businesses owned by moderate income-earners, predisposing them to collapse.8 The overall impact is that the government revenues would decrease considerably because low- and middle-income earners would shy away from investing in small businesses.
In contrast, the American Legislative Exchange Council (ALEC) advocates for the abolition of the current tax system and appeals for congress to replace it with a single tax rate scheme with personal exemption. ALEC supports flat tax rate, for it would lessen the burden of paying taxes and promote investments.
Charity organizations are still at crossroads on what the flat tax rate would be and if it would be imposed on funds meant for both domestic and international aid. In the United Kingdom, there is no taxation on both domestic and international aid, and pundits of the flat tax rate in the United States are wondering whether the government would adopt the same.2 Such unknown fears affect the adoption and implementation of policies related to tax reforms in the United States.
Opponents of the flat tax rate system are concerned that the decision to adopt the flat tax rate should not rest on the hands of the people concerned with tax policies, such as the tax policy department. They are also alarming taxpayers that politicians formulate incentives that are not sound from a taxation point of view and so they are misleading.
Some critics dominating the public debates have even labeled the crusaders for the flat tax rate systems as detractors and embracers of the former president George Bush’s policies that made the United States fight a futile war.9 The skepticism has made the public not embrace a flat tax rate as a way of reforming the progressive tax system.
Options
The fact that corporate lobbyists use their campaign money annually to convince congressional representatives to legislate laws that would increase deductions is a testament that the current tax system is flawed.10
There is no denying that the tax system needs to be revamped, but in a quest to remedy the situation, it is prudent to come up with ‘friendlier’ and amicable solutions. According to Frank, a possible solution would be to tax consumption, but this is highly unlikely because congressmen vowed not to approve any new tax changes no matter the situation.11
Even though President Barrack Obama strongly supports the progressive tax system, he claims that the system has only benefitted the rich and went ahead to give an example in the disparity in taxation between his secretary and him.12 So what are the probable solutions to the taxation issue? Well, Obama advocated for the adoption of the Buffet rule, named after the billionaire Warren Buffet, which aims at taxing millionaires at a rate of 30%.
Unfortunately, the Buffet rule never saw the light of day because it did not meet the vote threshold in Congress to be enacted into law.13 To implement a flat tax rate system, President Obama assented to the Job Creation Act (2012) and the Middle-Class Tax Relief with a view of protecting millionaires from taxation, while exposing the middle and low-income earners to heavy taxation, yet they need relief.
The Buffet rule appears plausible; it would discourage millionaires from investing and even compel them to close businesses leading to unemployment.
Increment of corporate income tax, which is based on progressive tax system, by 1%, would be a feasible option. Under this tax regime, a levy of thirty-six percent is imposed on earnings exceeding ten million dollars14. Proponents of this option say that it is simply because an increase in corporate income tax requires minimal changes to the current taxation scheme.15
The option would also increase the continuity of the current system to reach a point where corporate income tax would be paid by owners of capital, who have higher incomes compared to taxpayers. Opponents argue that the flat tax rate would reduce economic efficiency since the current system already discourages business structuring, and thus, it is difficult for investors to understand if they can finance their investments by issuing debt or equity.
Moreover, there is a great concern that this option would increase tax rates on corporations, and thus, some corporations would venture and invest in countries with low taxes to reduce their tax burden. The shift to other countries, in turn, would reduce the economic efficiency because resources will not be allocated to where they are utilized appropriately.
Recommendation
Though Eastern European countries like Russia and Estonia have succeeded with the flat tax rate system, it is not a guarantee that the United States will attain the same success. Experts warn that if the United States adopts a flat tax rate system, there will be a decrease in revenue for the first several years. The success of the flat tax rate system in the eastern European countries is due to a number of factors, such as a transition from a capitalist to a free market.
Although the taxation scheme in the United Kingdom is different from that in the United States, there are four options for a flat tax rate, namely, a tax flat rate with income tax and National Insurance Contributions (NICs), a flat-rate income tax with universal tax credits, and a flat tax rate with NICs and with universal tax credits.16 The models suggest the flattening of income tax, national insurance, and combinations of income, and national insurance.
The options are simply models of the flat tax scheme that are imposed on different categories of incomes, which are applicable only to the working population. The problem with the proposed flat tax rate models is that they are only concerned with the tax rate structures and not the tax base.17 Perhaps the United States should consider the tax models as a viable alternative to a general flat tax scheme.
Reference List
Ambrus, Attilane. “The advantages and backdraws of the flat-rate personal income tax.” Journal of International Studies 5, no. 2 (2012): 47-57.
Congress. “H.R 1040: Flat Tax Act.” Web.
Frank, Robert. “The Problem with Flat-Tax Fever.” The New York Times. 2011. Web.
Harremi, Marsida. “The flat tax and efficiency of fiscal system.” Academic Journal of Interdisciplinary Studies 2 no. 8, (2013): 446-450.
Lowell Barrington, Comparative Politics: Structures and Choices. New York: Cengage Learning, 2012.
Obama, Barrack. “Obama on Taxes.” State of the Union Address, 2012. Web.
O’Brien, Matt. “Ted Cruz’s Flat Tax Couldn’t Even Work in Your Imagination.” The Washington Post, March 2015. Web.
Pollack, Sheldon. Failure of U. S. Tax Policy: Revenue and Politics. Pennsylvania: Penn State Press, 2010.
Footnotes
- Marcia Harremi, “The flat tax and efficiency of the fiscal system,” Academic Journal of Interdisciplinary Studies 2 no. 8, (2013): 446.
- Matt O’Brien, “Ted Cruz’s Flat Tax Couldn’t Even Work in Your Imagination,” The Washington Post, 2015.
- Matt O’Brien, “Ted Cruz’s Flat Tax Couldn’t Even Work in Your Imagination”.
- Sheldon Pollack, Failure of U. S. Tax Policy: Revenue and Politics (Pennsylvania: Penn State Press, 2010), 280.
- Robert Frank, “The Problem with Flat-Tax Fever,” The New York Times.
- Attilane Ambrus, “The advantages and backdraws of the flat-rate personal income tax,” Journal of International Studies 5, no. 2 (2012): 47.
- Congress, “H.R 1040: Flat Tax Act”.
- Matt O’Brien, “Ted Cruz’s Flat Tax Couldn’t Even Work in Your Imagination”.
- Sheldon Pollack, Failure of U. S. Tax Policy: Revenue and Politics (Pennsylvania: Penn State Press, 2010), 282.
- Sheldon Pollack, Failure of U. S. Tax Policy: Revenue and Politics (Pennsylvania: Penn State Press, 2010), 283.
- Robert Frank, “The Problem with Flat-Tax Fever,” The New York Times.
- Barrack Obama, “Obama on Taxes,” State of the Union Address, 2012.
- Barrack Obama, “Obama on Taxes”.
- Robert Frank, “The Problem with Flat-Tax Fever.
- Robert Frank, “The Problem with Flat-Tax Fever”.
- Attilane Ambrus. “The advantages and backdraws of the flat-rate personal income tax.” Journal of International Studies 5, no. 2 (2012): 47.
- Attilane Ambrus. “The advantages and backdraws of the flat-rate personal income tax.” Journal of International Studies 5, no. 2 (2012): 48.