Skip to main content

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

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.

Scroll to Continue

Read More From Toughnickel

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 !