Question

Please research and post your opinions surrounding a "flat tax" federal income option. Be sure to include your thoughts on overall tax revenue, labor supply, etc. As always, in addition to your own post please respond to the posts of at least two of your classmates either in support or opposition.

Answer 1

                        Taxation is always the best means for a government to a revenue option. There are different ways of taxation and flat tax system is one among them. A ‘flat tax’ regime refers to an economic taxation in which all the tax payers gives an equal share of tax irrespective of their economic conditions in the society. Thus, the taxation is regardless of the income of the individual in the economy. In USA< nine states imposes a flat tax system whereas the other states depends on the progressive taxation system. Social security tax and medicare tax are examples of the flat tax rate system in the state economy.

                        A flat tax rate system has the following advantages in the economy

· It leaves more money for the wealthy class in the society and thus those money could be used up for more investments in the economy thereby causing economic development and growth

· It gives priority for those individuals with higher income in the society

· The principle of equality is being practised here which would encourage the wealthier class to make more investments in the economy.

· It is a single scale system and is easier to manage as there is only one form of taxation and everything is taxed only once.

The following are the major disadvantages of the flat tax system in an economy

· The dimension of redistribution of income is eliminated as everyone have to pay an equal share of tax in the system.

· As all the sections are being taxed at a same rate, this would mean that the below poverty class and the poor sections of the society would be affected in this case.

· There is no proven evidence that this type of an economy would stimulate growth and productivity in the economy and hence shifting to a new economic base would be a costly affair unless there is an evident advantage caused to the system.

· The whole idea of the new system would have to change the existing tax base and thus may result in discrepancies in the economic system

Thus, on the above analysis of the merits and the demerits of the ‘flat rate’ taxation system, we can see that the overall tax revenue would decline in the short run economy as the tax revenue from the wealthier class would decline in the short-run. But with progress of time, we can see that the decrease in the taxation for the wealthy class would mean that their investments in the economy would increase and this may lead to increase in the economic growth of the nation. As the investments in the economy increases, the labour requirements in the market would increase and hence the labour supply in the market would also increase in such a system in the longer run.