Question

Let's say that our lawmakers pass a flat tax system that sets a flat rate so that the revenue received by the government is exactly the same as the revenue earned in our current progressive system. Which of the following is true?

In a flat tax system, the economy doesn't need as many accountants and government (IRS) auditors. This increases the overall unemployment rate in the country because the jobs times the multiplier effect causes an overall decrease in real GDP.

Regardless of the percentage of tax charged by the government, the flat tax system provides more revenue to the government than the current progressive tax system.

Because of its simplicity, the flat tax system will cause accountants and other tax related professions to lose jobs. It also saves people and the government time and money in preparing and looking over tax returns. This frees up money that people can spend on other goods and services.

The flat tax system favors special interest groups and supports politicians who give special considerations to these special interest groups.

The flat tax system provides less incentive for people to work than the current progressive tax system because the top marginal tax rate in the flat tax system is higher than the top marginal tax rate in our current progressive system.

Answer 1

In a flat tax system, the economy doesn't need as many accountants and government (IRS) auditors. This increases the overall unemployment rate in the country because the jobs times the multiplier effect causes an overall decrease in real GDP. FALSE

Although it is true that most employees throughout the economy would never need to interact with the IRS, as all tax owed on wages, interest, dividends, royalties, etc. would be withheld at the source. But there are exceptions one of them being employees with incomes from personal ventures. Also, a flat tax system and income taxes overall are not inherently border-adjustable; meaning the tax component embedded into products via taxes imposed on companies (including corporate taxes and payroll taxes) are not removed when exported to a foreign country. Such a system would definitely reduce the number of entities required to file returns from about 130 million individuals, households, and businesses, as at present, to a mere 8 million businesses and self-employed. However, if income of differing types are segregated (e.g., pass-through, long term cap gains, regular income, etc.) then complications ensue. For example, if realized capital gains were subject to the flat tax, the law would require brokers and mutual funds to calculate the realized capital gain on all sales and redemption. If there were a gain, a tax equal to 15% of the amount of the gain would be withheld and sent to the IRS. If there were a loss, the amount would be reported to the IRS. The loss would offset gains, and then the IRS would settle up with taxpayers at the end of the period.

Also with Flat tax, a government is sending a signal to young, aggressive who want to take risks, who want to start businesses, who want to save and invest unleashing that entrepreneurial spirit, so the argument goes, will create more investment, jobs and opportunities which will, in turn, increase government tax revenues.

Regardless of the percentage of tax charged by the government, the flat tax system provides more revenue to the government than the current progressive tax system. TRUE

Tax evasion through the many loopholes created in progressive systems costs the state a substantial amount of revenue. A flat tax would eliminate this lost revenue.

We begin this progress report on the global flat tax revolution with the curious case of the Pridnestrovie Moldavian Republic it has adopted a flat tax - at a rate of 10 per cent - on all personal and corporate income. The others: Georgia, Estonia, Latvia, Lithuania, Ukraine, Romania and Russia itself.) The countries that have recently reintroduced flat taxes have done so largely in the hope of boosting economic growth.The Russian Federation is considered a prime case of the success of a flat tax; the real revenues from its Personal Income Tax rose by 25.2% in the first year after the Federation introduced a flat tax, followed by a 24.6% increase in the second year, and a 15.2% increase in the third year.

The Russian example is often used as proof of the validity of this analysis, despite an International Monetary Fund study in 2006 which found that there was no sign "of Laffer-type behavioural responses generating revenue increases from the tax cut elements of these reforms" in Russia or in other countries.

Because of its simplicity, the flat tax system will cause accountants and other tax related professions to lose jobs. It also saves people and the government time and money in preparing and looking over tax returns. This frees up money that people can spend on other goods and services. TRUE

It is true that most employees throughout the economy would never need to interact with the IRS, as all tax owed on wages, interest, dividends, royalties, etc. would be withheld at the source. Such a system would definitely reduce the number of entities required to file returns from about 130 million individuals, households, and businesses, as at present, to a mere 8 million businesses and self-employed.

The flat tax system favors special interest groups and supports politicians who give special considerations to these special interest groups. FALSE

Flat tax system favours the rich and the poor equally. For rich, it is unfair that people who earn more should pay at a progressive rate. Even on a standard rate, they already pay more tax, because they have a higher taxable income. Therefore progressive tax rates are a form of double taxation, as higher earners pay tax on more income, and then at a high level. For the poor, Britain presents the best example, where the most severe losses to the taxman from additional earnings are encountered by families on lower incomes: these stand to gain the most from a flattening of income tax rates. The system would mean families with children in 'modest to middle' income brackets seeing their income rise by 10%, while families without children in the top-earning tenth of the population would lose out by around 8%."

The flat tax system provides less incentive for people to work than the current progressive tax system because the top marginal tax rate in the flat tax system is higher than the top marginal tax rate in our current progressive system. FALSE

I think by definition it is a huge boon for the rich because, obviously, the top marginal rate would be cut down. A recent study of a revenue-neutral flat tax proposal for the US (Ventura, 1999) shows that, due to the positive effects on individual incentives to invest in productivity enhancing learning and greater hours of labour supply, a flat tax system yields up to a 9% increase in the aggregate efficiency adjusted labour force.
A flat tax would increase the incentive for people to work, earn more money and, in turn, invest that money back into the economy. The current system of progressive systems takes a larger percentage of a person’s income the more money they make, and this is a disincentive for hard work, Also with Flat tax, a government is sending a signal to young, aggressive who want to take risks, who want to start businesses, who want to save and invest unleashing that entrepreneurial spirit, so the argument goes, will create more investment, jobs and opportunities which will, in turn, increase government tax revenues.