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Pros and Cons for the U.S. of Flat vs. Progressive Taxes

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Glen is a professional writer and illustrator from Cape Cod who writes on an array of subjects including science, history, music, and more.

Flat tax success stories are fairly easy to find. A number of countries have seen impressive economic growth after adopting the flat tax idea. This is especially true since the fall of the Soviet Union. As countries formerly under Soviet communist control adapted to capitalism, many of them made the flat tax part of their system and saw great economic growth. Would a flat tax be equally successful in the United States?

Income taxes can seem overwhelming and unfair. Would the flat tax help?

Income taxes can seem overwhelming and unfair. Would the flat tax help?

This article will discuss the definitions of flat and progressive taxation, looking at the pros and cons of each, and then speculate as to the effectiveness of the flat tax for the US.

Flat Tax Definition

At first glance, the flat tax idea seems simple enough: one tax rate, which applies to everyone, regardless of income. No deductions, loopholes, or tax shelters—you multiply your income times the tax rate, and your taxes are done. Nothing could be easier!

In reality, it's not quite that simple. What constitutes income, for example? In the US, long-term capital gains are taxed at a lower rate than regular income, in part to encourage long-term investment. Should this continue under a flat tax plan?

Business income also complicates things, and not only for large corporations. If you have income from a small part-time business, for example, you currently deduct your expenses to determine the taxable amount. How would that work on a tax form that has no place to enter deductions? Clearly, business income requires additional rules.

Modified Flat Tax

A flat tax, applied across the board, would also increase the tax burden on those with lower incomes, many of whom currently pay little or no income tax. For all of these reasons, most current flat tax proposals are actually modified flat tax proposals. These modified plans usually include some variation of these elements:

  • an income level beneath which no taxes are paid.
  • a small number of allowable deductions—charitable contributions and home mortgage deductions are among the most common
  • different rules, or at least different rates, for business income

Some "flat tax" plans also have a small number of tax brackets. Technically, this makes them progressive tax plans, although they are far "flatter" than our current system.

Flat Tax Pros and Cons

ProsCons

easy to understand and comply with, thereby reducing errors and tax fraud

may shift tax burden away from the rich, to the middle and lower class

professional tax preparers and advisors no longer needed, saving money for taxpayer

elimination of deductions may have negative impact on taxpayers with lower income

lawmakers can no longer create tax loopholes in exchange for campaign contributions or other personal favors

government cannot use the tax code to encourage desirable activities, such as giving tax credits for making a home more energy-efficient

businesses can make decisions designed to better serve the marketplace and their stockholders, instead of trying to beat the tax code

thousands of government employees and tax professionals would lose their jobs, or suffer a large decrease in business

may encourage investment and expansion, as additional profit is not taxed at a higher rate

effects on government revenue of converting to a flat tax are difficult to predict accurately

Progressive Tax Definition

A progressive tax is one in which the tax rate increases as income increases. In the US, this is done using tax brackets, in which income is divided into ranges, with each range taxed at a higher rate than the range below.

As a taxpayer's income enters a higher tax bracket, only the portion of income that falls into that bracket is taxed at the higher rate, with the remaining amount taxed according to the lower tax bracket(s) that it falls into. Otherwise, it would be theoretically possible for a person to earn more money but actually end up with less, due to the entire amount being taxed at the higher rate.

Progressive tax systems often allow for a number of adjustments to taxable income, such as exemptions, deductions, and tax credits. These can be used to provide additional relief to low-income citizens, or to encourage certain types of behavior, such as business investment or higher education.

Progressive Tax Pros and Cons

ProsCons

shifts tax burden to those most able to pay

"bracket creep"—inflation can push taxpayer into a higher tax bracket, with no real increase in income after adjusting for inflation

those with greater influence in society pay more

can be used in corrupt manner by politicians

prevents political and social instability by limiting the gap between classes (at least in theory)

"brain drain"—individuals with high earning potential (often a nation's brightest and most talented people) leave to avoid high taxes

protects taxpayer during hard times - when income goes down, the tax rate also goes down

may discourage business investment and expansion, as additional profit is taxed at higher rates

many economists suggest that governments can get the most revenue from a progressive tax system

progressive taxation is arguably unconstitutional, in that it does not treat all citizens equally

Would Flat Tax Work in the US?

I've tried to accurately present the pros and cons of both flat and progressive taxation in an objective way. There are advantages to both philosophies, and neither should be dismissed out of hand. In my opinion, however, the flat tax is not the answer for the US.

First, there's no way of knowing how much of the economic growth seen in flat tax success stories are actually due to the flat tax. Because of political changes and other economic reforms, many of these nations would have seen growth under almost any tax plan.

In addition, I'm not sure that a flat tax in the US could provide the same amount of revenue as the current tax system without increasing the tax burden on the middle class. Nor do I believe that anyone can predict the effects on the US economy of switching to a flat tax.

Flat Tax - What do You Think?

The workings of both the US economy and the current 11,000-page US tax code are extremely complicated. Anyone who says that they understand both well enough to accurately make predictions about the flat tax is, in my opinion, simply mistaken.

Simpler Tax

That uncertainty alone is reason enough not to switch to a flat tax—but this is not to say that there shouldn't be changes made. The current US tax code is 3.8 million words. Compliance is difficult even for those who want to. Callers to the IRS with tax questions receive the wrong answer more than 20% of the time, according to the US Treasury.

Clearly, the US tax code needs to be vastly simplified. Progressive taxation is fine, but it should meet these criteria:

  • everyone should actually pay the tax rate for their tax bracket—no loopholes, tax shelters, or other ways to avoid having to pay.
  • it needs to be simple—an average citizen should not have to pay a professional to figure out how much he owes the government in taxes.
Taxes are only part of the equation. Congress also needs to rein in spending.

Taxes are only part of the equation. Congress also needs to rein in spending.

  • the top tax rates should be low enough that they neither encourage "brain drain" nor stifle business investment.
  • it should not be open to tinkering by politicians to use for their own ends.

It's also important to realize that taxes are only part of the equation. In the long run, no tax plan, flat or progressive, can help the US until the government learns not to spend more than it takes in.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2012 Glen Nunes

Comments

:) on June 29, 2020:

Flat taxes BOO!!!

mya on December 05, 2019:

no more taxes!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Farida Saparova on September 18, 2018:

Here is my subjective opinion: It's very difficult to change a tax system.The US will use a Progressive Tax for the foreseeable future. It probably will be made simpler, but even the experts can't agree on how that can be accomplished, The new tax cuts implemented by the Trump administration promised a simpler process, but we still have to see the results in 2019 tax season.

Common Sense Party on June 03, 2018:

Fair Tax is the only solution. Flat tax is much better than the current tax code, but Fair Tax is the answer. It makes sense. You get to keep your hard earned money and you decide what you pay. Easy, no IRS, no mess. It won’t happen in our lifetime though. Too much corruption in Washington, Dem and Rep alike. None have our best interest at heart. I’m for pure democracy and common sense. Vote on everything. Popular vote wins out.

Evie1.234567891011121314151617181920 on March 21, 2018:

Yay for Flat Tax!

Brad on November 07, 2017:

Joe, don't be so hard on yourself, help is available. :)

Brad on January 31, 2017:

A Flat Tax is not good because it still involves Income and the IRS as well as the INternal Revenue Code.

A National Sales Tax to entirely replace the federal income tax would be more fair, eliminate the negatives of the Income Tax.

FICA should remain as a payroll tax, and not included in the NST. That tax could be set at 12 to 15%.

We need to get the Internal Revenue System out of the loop. A sales tax is impersonal while it can protect the poor, it fairly taxes the rest.

A Flat Tax is still income tax.

It has to be said again.

Jerry Pan on January 31, 2017:

I agree with the criteria above for a progressive tax. Pay the tax according to your tax bracket with no loopholes, shelters etc. That would eliminate most of the congressional corruption regarding special interests groups writing tax law that only favors those groups.

Buy a home because you want the freedom of ownership and it's a good investment. Give to charity because it's the right thing to do, not simply because we get a deduction.

Trinity on January 06, 2017:

A flat tax rate would help increase the equality that the groups of our nation need. Most people hate the rich because "they avoid paying their taxes". While I am sure that there are people in this world that avoid paying their taxes, it still does not deem it fair for people to work multipulde hours and still having to pay more taxes than the people that act lazy and do not make to contribution of having a well-rounded job.

Hamrabe on October 03, 2016:

I used this for a paper im doing in personal finance class and this helped out a lot thanks !

Larry Wall on December 07, 2015:

And each year congress could add exemptions to the national sales tax and people in states like where I live, would continue to pay9 percent sales tax on purchases and the taxes that exist on gasoline at the state and federal level would continue--with no deductions. Thus, we would pay more in taxes. Would we collect the corporate income tax?

Brad on November 30, 2015:

A Flat Tax is not good because it still involves Income and the IRS as well as the INternal Revenue Code.

A National Sales Tax to entirely replace the federal income tax would be more fair, eliminate the negatives of the Income Tax.

FICA should remain as a payroll tax, and not included in the NST. That tax could be set at 12 to 15%.

A Flat Tax is still income tax.

Daddy Paul from Michigan on October 26, 2015:

I vote for the flat tax. No one can understand all of the IRS rules.

Glen Nunes (author) from Cape Cod, Massachusetts on June 16, 2015:

rjdmanfredi, you've summarized the argument in favor of a modified flat tax pretty well. I agree with you completely that the 73,000-page tax code is a large part of the problem.

rjdmanfredi on June 12, 2015:

I believe a flat tax would have no deductions by definition . Since it would impose a far greater burden on low income earners ( assign any income number you like)could it pass the 'fair test '? This should be called a 'modified flat tax. ' How many of people exceed $36,000.00( to $60,000.00 ) in deductions ? I think there would have to be a large standard deduction to protect those with mortgages and other large expenses ; those without those expenses will benefit . The modified 'flat tax ' needs one standard deduction and one rate to 'be fair.'

A good question is , 'Why should one person pay a higher rate than another person ( regardless of income) ?

Part of the problem is to eliminate 73,000 pages of loopholes , and establish a ceiling on the tax rate hocus-pocus .With a modified flat

tax ,one standard deduction and one rate for all income over the standard deduction , no one can complain about fairness . The rich should not be treated either better or worse than anyone else. If a modified flat tax benefits them,good. The modified flat tax is progressive and stops at the stated rate for everyone without rate hocus-pocus .

Glen Nunes (author) from Cape Cod, Massachusetts on May 22, 2015:

Interesting analysis, Richard. It seems to me, however, that the effects you describe come about solely because of the standard deduction, and have nothing to do with the flat tax.

In other words, you present a good argument against there being deductions beyond a single standard deduction, so that wealthier taxpayers actually pay the percentage in taxes that they're supposed to pay. And that's a good point. I agree that there should be fewer deductions. I can see arguments for the existence of at least some deductions, but certainly far, far fewer than we have now.

I don't see, however, where your example really makes a statement either way regarding the flat tax itself.

Take the scenario you describe and make just one change: income above $500,000 is taxed at 15%. We now have a progressive tax with a standard deduction. All the numbers in your example are the same, except for the person making $1,000,000, who pays substantially more. If my math is correct, he'll pay $124,000: 10% 0f $490,000 (500,000 minus the $10,000 standard deduction), which is $49,000, plus 15% of $500,000, which is $75,000, for a total of $124,000.

As you see, the flat tax results in the wealthiest taxpayer paying less than he would pay under a progressive tax. This is why it's often suggested that a flat tax would benefit the rich.

Richard J Manfredi on May 20, 2015:

Why not a standard non transferable ( spouse to spouse) deduction of $48,000.00 t0 $60,000.00 , and one rate from 10% to 20% for all income above the ‘ standard deduction. With that , eliminate every other single deduction under the sun .

For income count everything : wages , capital gains less loses but no carryover - every year a clean slate , interest , residuals royalties , dividends, muni bond income ( needs phaseout ) ,

social security , pensions, cash inheritances, gifts , basically anything that can be deposited .

Let us understand a deduction is a subsidy for one person paid for by everyone else , as follows . Use water for money - some cannot do arithmetic . There are five men on an island with equal size pails and water is money . They each gather a pail of water and their government needs a pail of water to run . Each gives a fifth of a pail . Some one invents deductions ( a/k/a subsidies )

and loses his pail to the Bernie Madoff school of bad investments . The government still needs a pail of water so the remaining four now have to give one quarter of a pail ( subsidizing him) .

The next one gives a pail to charity ( a deduction /subsidy). The government still needs a pail of water so the remaining three must now give a third of a pail of water . The remaining three

are now subsidizing the other two . Hence , one non transferable deduction for each taxpayer .

Your statement - Flat tax benefits the rich - needs work . Lets use a 10% tax rate , and a $10,000.00 standard deduction . O.K.

Some one makes $10,000.00 and pays no taxes . Next person makes $11,000, and pays $100.00 ( the arithmetic is $11,000.00 less $10,000.00 , times 10% ). His real tax rate

is $100.00/$11,000.00 or 0.00909 or 0.909 % a repeating fraction. Next person makes $100,000.00 and pays $$9,000.00 ( $100,000.00 less $10,000.00 or $90,000.00 times 10% or $9,000.00).

His real rate is 9% 0r 0.09 the $9,000.00/$100,000.00 . $ Next person makes $1,000,000.00 and pays $99,000.oo ( $1,000,000.00 less $10,000.00 or $990,000.00 times 10%

or $99,000.00) . His real rate is $99,000/$1,000,000.00 for a real rate of 9.9% or 0.099 . Actually once you introduce a (standard) deduction the rate everyone pays approaches the

the stated amount . The “ rich “ end up almost paying the stated rate . The $1,000,00.00 ,taxes $99,000.00 ,and pays eleven times as much as much as $100,000.00 ( $99,000.00/$9,000.00) .

The $100,000.00 ,taxes $9,000.00 ,,and pays ninety times as much as $11,000.00 ( $9,000.00/$100.00 ) . With a flat tax and a standard deduction , the lowest income earners pay the least because the standard deduction excludes the greater/ greatest part of their income from taxation ( thus eliminating the different rate hocus-pocus ) . With a flat tax the rich pay their fair share

which approaches the stated rate .

This works with any set of numbers you care to try .

Thanks,

adam deskins on May 17, 2015:

How can any tax increase the tax burden on someone who is not required by law to pay tax?I am born free so my time is free to with as I please.If I take my free time and trade it for anything and someone has the right to take part of what I traded for that would be no different than slavery.Hence the reason that paying tax on wage labor is voluntary in the United States.

Adam on April 07, 2015:

the modified flat tax addresses the egalitarian concern. A base "exemption" amount required for necessities of life is exempt from paying any tax on. Thus the family of four with small net worth would pay little to no taxes, so as to avoid undue taxation-caused hardship. The affluent family would be treated equally fairly in getting the same "exemption" on that base amount for the necessities of life, while still being allowed to prosper.

On a corporate level, there would be no exemption... A corporation has no need for those basic necessities of living. However, a limited number of tax credits could be given for charitable contributions, creation of jobs, thus still giving incentive for business to be philanthropic.

Separate tax rules and exemptions should still apply for non-profit entities, as well, since they tend to be philanthropic in nature and taxation can significantly impede that function to the detriment of the causes they serve.

Jerry Lobdill on November 10, 2014:

I doubt we're likely to see a good solution before the broken system collapses. Thanks again.

Glen Nunes (author) from Cape Cod, Massachusetts on November 09, 2014:

Jerry, you raise some excellent points. I didn't directly address the egalitarian concerns regarding taxation (although I did briefly mention my concern that a flat tax would result in increased tax burden on the middle class). You're correct, it's an important element that should be considered. I think that the "progressive but simplified" tax that I argue for could be structured to meet both economic and egalitarian concerns.

Jerry Lobdill on November 09, 2014:

I don't mean to imply that I think a flat tax is a certain $ amount for all taxpayers. I am just illustrating that whatever the flat percentage rate may be, it will hit the poor's lives much harder than it will the rich. That's not an egalitarian way to raise taxes.

Jerry Lobdill on November 08, 2014:

I will be 77 in less than a month. I am a member of the Silent Generation, sometimes called "The Lucky Few". I have seen this nation go from one in which egalitarianism was at the all time maximum to one in which it has reached the all time minimum. That gives me a perspective that those born after me do not have. 

As the society has changed I have been motivated to identify and study the factors that have led to this transformation, hoping that I might learn something that could stop the slide toward fascism. What I found was that those who most are in need of an egalitarian society are hopelessly committed to supporting fascism, and cognitive dissonance has been exploited by the fascists to ensure that there will be no effective opposition to their license to plunder.

The flat tax is an idea that keeps coming back again and again. It is simple, and it is not amenable to tampering through loopholes, exceptions, credits, etc. Can it work, though? This question implies a definition of "work". Some will say it works if it results in economic growth. Others will say it works if it generates the needed revenue. Rarely does anybody ask if it is egalitarian. Likewise, rarely does anybody question the assumption that yearly taxes should depend only on income or net income for the year. 

If egalitarianism is imposed on the design of taxation, then a flat tax is not an option. There is a minimum income that a family must have in order to obtain the necessities of life and have some cushion for unforeseeable emergencies and future needs of family members. This cannot be a one-size-fits-all amount, and an exact formula cannot be constructed. However, when the tax creates real hardship, anxiety, and deprivation for lower income citizens it is not an egalitarian tax. 

We need to look at the impact of a specific change of tax amount on the lives of the taxed to understand why a flat tax is not fair. Consider a family of four with a small net worth and a yearly after tax income that leaves little for saving after basic food, clothing, shelter, medical, dental, and educational expenses are paid.  What happens to the quality of their lives when their after tax income increases or decreases by $1,000? The answer is that the effect is substantial.

Now consider the same size family with a net worth of, say, 1,000 times that of the previous family. This family does not have to make hard choices to stay afloat. They never have to choose to do without any basic necessities. In fact, they are accustomed to luxury. Their after tax income is sufficient not only for fundamental human needs, but also, even with their luxurious spending, their net worth increases every year.  What happens to their quality of life when their after tax income changes by $1,000? The answer is obvious. Not much.

It is not my purpose here to propose and defend a specific taxation plan. It is simply to point out that there is much more to consider than the effect on economic growth and whether sufficient tax revenue can be raised.

Thanks for your essay. It is a good start toward tax reform planning.

Glen Nunes (author) from Cape Cod, Massachusetts on September 20, 2014:

Thank you, adantley!

anonymous, this hub was published in April, 2012. I'm glad you've found it useful.

anonymous on September 20, 2014:

when was this originally posted i'm doing a report and I need it for my bibliography

adantley from West Virginia USA on September 19, 2014:

Good explanation. Thanks!

Glen Nunes (author) from Cape Cod, Massachusetts on September 02, 2014:

Thanks Cruncher. I'm with you regarding the need for a simpler tax code. The hybrid tax system you mention is an interesting idea.

Cruncher from UK on August 29, 2014:

Interesting read. Personally I'm not a big fan of a flat tax, but I would like to see taxes simplified. Simpler taxes would be fairer as the very wealthy would not be able to pay an army of lawyers and accountants to get around the tax code.

BTW There is another option between flat and progressive taxes... hybrid tax systems where tax payers pay the lower of a flat tax and a traditional progressive tax system. the idea is to protect the low paid.

Glen Nunes (author) from Cape Cod, Massachusetts on November 20, 2013:

That is definitely one of the best arguments in favor of a flat tax, Daddy Paul! Thanks for reading and commenting.

Daddy Paul from Michigan on November 15, 2013:

"lawmakers can no longer create tax loopholes in exchange for campaign contributions or other personal favors"

Sounds good to me.

Andy Celano on May 22, 2013:

Flat tax period If you make a dollar you pay a tax. Do away with the tax code and all the deducting and dodges

Timothy Ostrander from Taiwan on March 17, 2013:

Great outline of the issues, Doc. I found it informative and balanced. Thanks!

Glen Nunes (author) from Cape Cod, Massachusetts on December 04, 2012:

That's an interesting idea, Weekend Reader. If I understand your suggestion correctly, I think it could be a little harder to implement than you might think, unless the tax code is made a whole lot simpler first. A lot of manpower would be required to go through the tax code every few years and determine what percentage of taxpayers is affected by each item. If we could pare down the tax code first, then something along the lines of what you suggest might be a good idea.

Cindy D Whipany on December 02, 2012:

I've always been in favor of a flat tax; every such scheme I've seen would have me paying less than I do now.

What I think would be really cool and not that difficult to implement: Every bit of tax legislation gets reviewed with an eye to how many taxpayers it will affect / help / hurt. If at least five percent of the taxpayers in the country aren't affected, it cannot become law. This should also be reviewed a couple years after the law is passed, to see if it meets that goal. This would eliminate virtually all of the "holes" in the Tax Code that no one likes but everyone hopes to use.

Glen Nunes (author) from Cape Cod, Massachusetts on November 12, 2012:

Hank, you've obviously given the subject some thought. Your suggestions regarding social security have some merit, given the changes in life expectancy since the 1940s.

Hank Moodyxxx on November 10, 2012:

I would like to see a Modified Personal Flat Tax. Tax rate of about 20% (18-22) with no income tax paid on the first $5,200 of earnings. All income taxed at this rate (wages and investment). A small list of deductions (ie home mortgage interest) with a cap on all deductions of about $15,000 (12,000-18,000). We also need a progressive age increase on Social Security and Medicare. SS went from full retirement benefits at 65 to 67. We now need to make it 69 with Medicare following the same age requirements. Your Full retirement age would become your Medicare age of eligibility. We also need to remove the cap on SS payments, increasing the cap over a few years and ending with no cap on earnings.

A corporate Modified Flat Tax rate of about 28% (25-30) with again a small list of deductions.

PWalker281 on May 01, 2012:

Me, too :-)

Glen Nunes (author) from Cape Cod, Massachusetts on May 01, 2012:

Thanks again, Patrice. I love the flexibility that HubPages gives us to build web pages using the different capsules. That's one of the things that attracted me to HP in the first place.

PWalker281 on May 01, 2012:

You definitely have a knack for it, Doc, and you use the HP capsules very well, too. It also looks like you take time to edit your writing because I never see any grammatical or punctuation errors (something I can't say for a lot of writers here and elsewhere on the Internet).

Glen Nunes (author) from Cape Cod, Massachusetts on May 01, 2012:

Too complicated is right, PWalker! Thanks for the feedback. To answer your question, I don't have any formal education in tech writing, but I did a little bit of it during my years as a programmer-analyst. I think that what I have is just a knack for organizing information in a way that makes sense. Knowing of your background with language and writing, I really appreciate your comments.

PWalker281 on April 30, 2012:

Thanks for helping me understand the difference between flat and progressive taxes and for outlining some of the pros and cons of each system. I totally agree that our tax system is way too complicated. If not for tax prep software, I'd be lost, and I typically do taxes for myself and two other people. Voted up and (very) useful.

P.S. Your hubs are always so well-organized and written. Do you have a tech writing background?

Glen Nunes (author) from Cape Cod, Massachusetts on April 30, 2012:

Thanks for the comments, bankscottage. It looks like you clearly know something about taxes, so your comments mean a lot.

Mark Shulkosky from Pennsylvania on April 29, 2012:

Great discussion of the pros and cons of the flat tax and progressive tax systems. The bottom line, our current system is broken.

The flat tax seems to be working in Eastern Europe, but you are correct: are things getting better because of the flat tax or the political change.

In PA, our state tax is a flat tax. 3.07% on all income (except social security and retirement income). Few if any deductions. Makes the tax forms relatively simple.

I remember in civics class (tells you how old I am), we had to do a tax return by hand. If more people had to do this exercise, the more they would be upset with our current tax system.

Voted up, useful and shared.

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