A flat tax basically refers to a particular income tax oriented system which applies a similar low taxation rate across the financial sectors. This throws light upon the fact that all the individuals are supposed to pay a similar rate irrespective of their source and amount of income.
The success behind this particular concept essentially lies upon the fact that it depends completely upon the proposed taxation rate. This happens because the flat taxes are seen to take up a significant amount of revenue for funding the government sector.
|Benefits of Flat Taxes||Drawbacks of Flat Taxes|
|Ensures to eliminate all confusions||Burden on low-income earners|
|Reduction in tax preparation expenses||Burden on low-income earners|
|Elimination of supplemental taxes||Eliminates governmental layers of bureaucracy|
|Ensures to encourage economic growth||Ignores income resources of the rich|
|Elimination of self-employment tax||Removal of incentives|
|Changes the financial profiles|
|Leads to a decrease in the GDP|
Advantages of Flat Taxes:
• Ensures to eliminate all confusions:
Under a system of progressive taxation policies, an access is supposed to be granted to the present income brackets. This should be done so as to carry out an accurate filing of the taxes. However, with the help of flat taxes, individuals can definitely earn benefits because they make use of a single tax bracket only. This ultimately helps in getting rid of all kinds of confusions.
• Reduction in tax preparation expenses:
A number of recent reports have stated the fact that there are nearly 50% cases of tax filers who are required to professional. This should be done so as to begin the preparation of their taxes as well as their respective files in return. But, the requirements of a flat tax are completely different which makes it much more helpful.
This is because they ensure to make use of a simple calculative process for determining all the wide range of taxation responsibilities.
• Elimination of supplemental taxes:
It is especially under the system of flat taxations that only the earned amount of money has to face the subjugation of the annual taxes. This throws light upon the fact that all the dividends, interest as well as the other types of generated wealth are given the option so that they can be excluded.
Therefore, flat taxes serves to benefit more than the progressive taxation system. They ensure to eliminate all the supplemental forms of taxes.
• Ensures to encourage economic growth:
The system of flat taxations ensures that all the individuals can theoretically be inspired as well as encouraged to indulge more in their working areas. This is done so as to make sure that all such tax filers are successfully able to withhold a larger amount of money. Thus, by doing so, it can lead to an overall increase in the revenue structure, economic stability as well as improve the wide scale business investments.
• Elimination of self-employment tax:
A flat tax ensures to get rid of all such penalties pertaining to self-employment taxes. This serves to benefit a large number of individuals from all over the world. This is because had it been under any other system of taxation, the person would have to pay more in terms of taxation.
Such amounts ranges to a higher note as compared to ones who are traditionally employed. Therefore, it is under the system of flat taxes that such penalties can be easily avoided.
Disadvantages of Flat Taxes:
• Burden on low-income earners:
Flat taxes serve as a drawback for most of the low-income earners who have to bear the burden of a greater amount of the taxation responsibilities. Although it seems quite fair from a particular percentage oriented standpoint, but it can create a negative impact upon the low-income earners.
This happens because a particular tax is seen to applied to all the incomes which goes on to affect the disposable income of such individuals.
• Eliminates governmental layers of bureaucracy:
Under the system of flat taxations, it leads to a lesser range of bureaucratic requirements for reviewing all the tax returns that have been submitted. As long as the income verification takes place in a particular way, the mandatory amount of flat tax percentage is set forward for determining the accuracy.
• Ignores income resources of the rich:
The flat system of taxation are mostly seen to propose only towards such taxes which help in income generation. It is for the wealthy sections of the society that most of their generated income are seen to arise from dividends as well as interest.
This highlights the fact that there might be a possibility for someone to earn money with the help of interest as well as dividend payment structures.
• Removal of incentives:
Flat taxes involve the removal of certain incentives especially from the taxation code. This acts as a backdrop for many because incentives serve to encourage people to work harder and earn higher income. However, with the implementation of flat taxes, it leads to an immediate absence of such incentives for people to benefit from.
• Changes the financial profiles:
A flat taxation system is seen to further the issues pertaining to changing the financial profiles of an extensive range of households. There are a number of residential properties which are owned with the help of 30-year old mortgages. This throws light upon the fact that a sudden change in the calculative finances can result in impacting the housing market in a negative way.
• Leads to a decrease in the GDP:
The system of flat taxations has also led to various economies undergoing a sudden drop in their gross domestic product (GDP). This generally happens because of the fact that the consumers are seen to be spending extra funds on necessary items as well as for clearing of any debts.
Flat taxes have been a prevailing aspect over a significantly long period of time. It does have its own share of ups and downs which have created an impact upon people’s lives in a striking manner. It has also resulted in an economic growth on a worldwide basis. However, at the same time, the lack of authentic information regarding the same can lead to economic hardships as well.