By Flat Tax or Flat Rate Tax it is indicated that the taxes on household income and corporate profits are fixed at a constant rate. Generally household income below a statutorily fixed level on the basis of the type and size of the household, are exempted from paying Flat Taxes.
This type of Flat Taxes is not a proper Flat Tax as there is a discrepancy between the taxable income and the total income. Taxation on consumption can also be labeled as a Flat Tax. In the advanced economies, a tax is payable on the incomes of the households and corporate profits, as a result of which Flat Tax is not very common in these nations. The United States have initiated a quick move to reform its tax system as under the present condition of competition in the global economy the jobs and capital flow to with the initiation of better tax law. The nine countries of the former Soviet Bloc have taken up versions of the Flat Tax, which has been yielding excellent results for the growth and development of the respective economies.
In general, a Flat Tax is simple, fair, and sets a necessary parameter for the growth of a state economy. Flat Tax requires only two forms of postcard size, one for labor income and the other for business and capital income. Flat Tax provides equal treatment to all the taxpayers without any discrimination based on the source, use, and level of income. This is also beneficial, as Flat Tax would reduce marginal tax rates and abolish the tax bias against all forms of saving and investment. However, even this Flat Tax is not free from loopholes as the households on the basis of family sizes get an exemption from paying the stipulated tax.
The main features of a Flat Tax include the Single Flat Rate, which implies a single rate for all tax proposals, which is less than 20 percent. The reduced flat rate solves the trouble of high marginal tax rates by eliminating the penalties. Another important feature is the elimination of special preferences of the tax code that implies certain preferences on specific behaviors and activities. The avoidance of double taxation of saving and investment is another significant feature of the Flat Tax. This indicates that Death Tax, double taxation of saving, Capital Gains Tax, and double tax on dividends are not applicable in this case of Flat Tax. It is easy to enforce a Flat Tax and this tax is also preferred due to its positive effect on the development of job creation and capital formation. It is to be noted that the government can only tax the income earned within the national borders of that nation.
A Flat Tax is expected to reduce the ill effects of the global economy like heavy compliance costs on taxpayers and the power of the federal government over the taxpayers. In spite of certain loopholes, the Flat Tax is the only next to best possible solution for increasing the revenue.
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