Nova workboard

a blog from young economists at Nova SBE

Flat Tax: A Question of Equality

Steve Forbes campaigned back in 1997 with the promise of a 17% flat tax and defended this policy again at an article back this year. He argued that with the simplification of the income taxation the tax payers would save 200 billion dollars and 6 billion hours in tax forms and complying. Simplicity is the main argument in favor of the flat tax!!

But what is a flat tax? A flat tax is a proportional tax, the one that earns more pays more dollars but at the same percentage rate, so everybody pays the same relative amount of the wage. Besides the simplicity we can find other arguments in favor of the tax. The flat tax obliges the rich to pay a very little amount of money in taxes and this can be important to attract foreign investment, this is what is happening in east Europe countries like Estonia.

In under development countries the flat tax can also be helpful in order to easy the tax collection because it reduces the incentives to avoidance of income tax by individuals. But in developed countries like USA this is a lazy option and doesn´t takes in account the real problems of the population but instead responds to other type of incentives.

Fairness isn´t a quality of the flat tax. In terms of utility the income has diminishing returns, so if I take 100 dollars from a lower income citizen I will reduce their well-being by a lot more than if I take the same amount to richer one.  So when applying the same rate of income tax to everybody I don´t take in account that a loss of 10% of the income in the poorer will lead to a loss of well-being higher when compared to the loss of the richer if we take then the same relative amount of income. Concluding, it isn´t fair!

Robert Reich defended back in 2011 that “We already have a flat tax- flat within bracket”. In USA a “worker pays a base rate on the first dollar earned”. So for example, if someone earns 251,000$ dollars it will “have to pay the 39 percent rate on $1,000” and 35% on the $250,000, and not the 39 % on the entire income like some republicans have trying to sell.

In a country like USA, where 15% of the population live in poverty and where the richer 1% percentile earns more and more, the application of a policy that increases taxes on the poor and decreases then at the richer is a perverse decision. Of course there is a lot that can and should be done to improve the progressive tax system, for example make it even more fair because it still taxes with the same percentage a doctor that earns $480,000 a year and millionaires like Steve Forbes, but this millionaires want a reduction of what they pay using the argument that then they will have more to spend (or to lend). However, the richer are spending less or/and badly, so let’s leave that to the Government.

 

João Gonçalo Silva

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Author: studentnovasbe

Master student in Nova Sbe

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