6 Pros and Cons of Flat Tax

6 Pros and Cons of Flat Tax

One way to create a “fair” system of taxation is to charge every person and household the same percentage. Whether you earn $10,000 or $1 million, this idea would charge you a flat rate of a pre-determined percentage, such as 15%.

List of the Pros of a Flat Tax

1. A flat tax often increases government revenues.
During the first years of a flat tax, revenue gains can increase by as much as 10% for the government because of higher levels of consumption. When people have more of their money to keep, then they spend more of it at local businesses.

2. It would eliminate freelancer taxes.
If you are self-employed, then a progressive tax system will treat you as an employer and employee simultaneously. Moving to a flat tax system would eliminate the changes in withholdings, potentially saving independent contractors and freelancers a lot of money.

3. There would be less confusion with the tax code.
Progressive systems require taxpayers to send in a specific percentage of income based on where their income falls in each tax bracket. As you earn more, then you pay a greater percentage in each segment. A flat tax requires only one bracket.

List of the Cons of a Flat Tax

1. Lower income families pay a greater percentage of their discretionary income.
Although you would pay the same percentage with a flat tax, having a lower income is a disadvantage in this system. You would be asked to pay a significantly higher percentage of your discretionary income to meet your responsibilities.

2. It is a system that typically ignores dividends and interest.
Lower income families do not typically have interest and dividend income, which means they would always pay the flat tax. If these items are exempted (which happens with most proposals), then the wealthy could escape tax-free despite high income levels.

3. Incentives to behave in specific ways would be gone.
The tax system in the United States encourages home ownership and charitable donations because of the available deductions. Moving to a flat tax system would remove these benefits because everyone would be paying the same thing.

These flat tax pros and cons show the system can offer some significant benefits, but it can also place the burden for funding the government on those who can least afford it.