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A flat tax is a fixed-rate tax imposed on all taxpayers regardless of their income. This stands in contrast to the current progressive tax system used in the U.S., which taxes people in lower income brackets less than those in higher income brackets. Flat taxes are uncommon in Western countries, but the German Institute for the Study of Labor (IZA) found that the imposition of a low flat tax would lead to small welfare gains and increases in the labor supply in Germany based on simulation models. Simply put, this means that a low flat tax would be a good idea for an economy at the national level, but the paper also states that a flat tax would lead to greater income inequality. See the IZA’s paper for more information.
Arguments for a Flat Tax
As a flat tax would decrease the amount of taxes people in higher income brackets would have to pay, higher-income taxpayers are likely to support it. Arguments made on the U.S. News and World Report’s Debate Club in favor of a flat tax include one by Representative Michael C. Burgess, Republican of Texas, who states that a flat tax would make simplifications to an overly complex tax code. Rick Perry, another Texas Republican, claims that a flat tax will lead to increases in foreign investment, job creation, and economic growth.
The main points of each argument all hold true. A flat tax is likely to reduce the complexity of the nation’s tax code. Arguments that a flat tax would improve the economy are also in accordance with the study by the IZA, but the IZA also points out that the gains would be small, and they would only be effective if the flat tax rate is low. No research has been conducted, however, on whether or not flat taxes would increase foreign investment, but lower corporate tax rates would provide an incentive for foreign companies to open offices in the U.S.
Arguments Against a Flat Tax
Flat taxes will raise taxes on the poor, and therefore most lower-income populations would likely oppose them. Debate Club participants opposed to the implementation of a flat tax are relatively united on their stance that a consistent tax rate would primarily benefit those with higher incomes and shift taxation burden to middle and low-income individuals. Those making these arguments include Democratic Representative Charles B. Rangel of New York and John Irons, Research and Policy Director at the Economic Policy Institute.
Imposition of a flat tax would decrease tax rates for higher-income populations and increase them for lower-income populations, so the premise that taxation burdens would be shifted to those with lower incomes is correct. Whether they would also be shifted to middle-income populations depends on the whether the flat tax rate is higher or lower than the current progressive rates for middle income brackets.
For information on this debate on the U.S. News & World Report’s Debate Club, please refer to its webpage here.
Conclusion
Arguments that state a flat tax would lead to economic benefits and tax code simplification are valid assuming the tax rate is kept low, but it would do so at the expense of lower-income individuals, who would have to pay more in taxes. Though a flat tax is a good idea for the general population from a strictly economic point of view, in order to figure out if a flat tax is a good idea in general, you’ll need to determine if the relatively small economic development that would result justifies shifting taxes to lower-income groups.