Flat Tax

The flat tax is a proposal to replace the current federal income tax code with a simple one-rate tax on all earned income. Instead of a system of progressive rates in which the percentage of tax taken increases as income rises, all income would be taxed at the same rate, 17% in some proposals, and the only deduction allowed would be a personal deduction.

Proponents of the flat tax cite several advantages over the present system. Complexity would be reduced, making it possible for all individuals to fill out their own tax forms. The present tax code fills more than 60,000 pages, and most income tax returns are prepared by professionals. Complying with the tax code costs as much as $194 billion a year according to some estimates. The flat tax would eliminate virtually all compliance costs.

A second advantage claimed by proponents of the flat tax is more ethical government. Under the present system with its thousands of exemptions, deductions, credits, and special treatments, there is an incentive for special interest groups to lobby legislators for favorable treatment. A flat tax, it is claimed, would eliminate the rewards for manipulating the tax code and thereby reduce the temptations of government officials to be influenced by favors.

A third advantage cited by flat tax supporters is economic stimulus. Removal of the highest income tax rates would motivate people to work more, earn more, save more, and invest more, resulting in economic growth that benefits everyone. Some flat tax proposals include elimination of any taxes on dividends, interest, [Page 919]and other unearned income for further economic stimulus, although this is not necessary for a flat tax system.

A flat tax has been enacted in nine nations of Central and Eastern Europe, the major one being Russia, which has a flat rate of 13% on personal income. Supporters point to the growing economies of this region as evidence of the beneficial effects of the flat tax.