Flat Tax Pros and Cons

It has been found that the current taxation system in the country is biased against people who are at the lower rungs of income groups. The tax system in the country is progressive, which means that as there is an increase in income of an individual, the tax rates increases too. There are several tax brackets and everyone falls into one of them. Those in the lowest income group pays around 14% as income tax, and on the other hand people with the highest income pays about 38% as taxes. However, it's not that simple to file income tax returns due to the number of loopholes and exemptions. These exemptions benefit the rich as they can exploit these loopholes and pay less in taxes. This is what makes people frustrated, and this is where flat tax comes into play. Flat tax is nothing but a single taxation rate (around 17%) which would be applicable to all citizens of the country irrespective of whatever they earn. The tax system would change from a progressive to proportional. Here we give you some of the advantages and disadvantages of flat tax.

Flat Tax Advantages and Disadvantages

Advantages of Flat Tax
The aim of implementing a flat tax regimen is to make people pay a single tax rate. This would encourage people to pay taxes as there would be no differences in the rates applicable. Today, an individual earning more pays more and if the taxing system is changed to flat tax, it would encourage individuals to be more productive. A point to note here, exemptions are provided for people whose income is lower than a certain limit.

All forms of double taxation are removed if a flat tax system is followed. Taxes on dividends and capital gains are removed as they are incomes which after being taxed are again taxed. If these are removed, it would encourage people to invest thereby creating more jobs. Implementation of flat tax would get rid of this part of the tax code and allow to report interest, dividends and other business tax at business level rather than at individual.

Today's tax system makes tax payers spend on resources such as lawyers and accountant. On the other hand, flat tax system will help individuals to save on these expenses. It would consider the income generated within the national territory as taxable.

Filing for flat taxes would become easy and fair. As per records, taxpayers spend more hours every year filing income tax returns. The time spent to find exemptions and loopholes is wasted and can as well be used on productive activities. Yes, no doubt the rich can spend a lot of money on hiring lawyers and accountants to evade taxes, but this money can as well be spent on investing somewhere else so that it generates more revenue for the country. Moreover tax evasions would be unlikely due to the lowered taxes.

As per the plan proposed, there would no difference in the rates between individuals and corporations, thereby removing loopholes which may be gained if you change the status of business. A lower rate of taxes would attract corporations from different countries and set up bases in the country, resulting in increase in the revenue for the country.

Disadvantages of Flat Tax
There has been a lot of opposition to implementing flat tax rates, the main reason being reduction in tax rates, which would mean that individuals who earn higher would pay less. This would drastically reduce government revenues. Taking into consideration that most of the revenue generated is from income taxes the loss would be huge. If there is a uniform tax rate for individuals and corporations, the government is likely to lose a huge amount of revenue. If there is no backup revenue source, it's likely to have a catastrophic effect. Even though there are associated benefits of reducing the tax rates, there is still an opinion among people that the rich should pay more.

Thus there are several flat tax pros and cons, and there has been a lot of debate on the same. But from the overall debate it seems that implementation of a flat tax regimen would benefit the country as a whole.