also known as flat-rate tax, it is a single-rate tax that is generally applied to taxpayers' taxable amounts regardless of their income status.
Flat Tax Details
Typically, a flat tax system applies the same tax rate to all taxpayers without any exemptions or deductions allowed. However, most of the flat-rate tax systems or proposals avoid taxing income from distributions, dividends, capital gains, or other investments. Usually, we would discuss a flat-rate tax in the context of the taxpayer's revenue per year. However, it may also apply to taxes on transfers, consumption, or property. Supporters of a flat tax system in the United States propose that it will give taxpayers an incentive to earn more because a higher tax bracket will not penalize them.
A flat tax system makes tax filing a bit easier because of its simplicity; it would virtually eliminate all compliance costs and create a significant reduction to the red tape. It is also fairly straightforward compared to traditional tax systems. Households acquire a generous allowance based on family size and then pay a low rate on any income above that amount. There's no need to worry about reporting interest, dividends, and other capital revenue forms. The government imposes flat taxes on wages mostly. This means there won't be any taxation on investments or capital gains.
Various tax systems are flat-rate tax systems, even when they are significantly different. The most fundamental characteristic is the existence of only one tax rate—other than zero. Critics of flat-rate taxes argue that the system places a very unfair burden on low-wage earners to reduce tax rates on the wealthy people, concluding that it's a perfect example of a regressive tax. A regressive tax is a system in which the government imposes a lower percentage of taxation on high-income earners and a higher rate of surcharge on low-income earners, making it unfair.
A Real-World Example of a Flat Tax System
Russia, which imposes a 13% flat-rate tax on personal income, is the world's largest nation to use a flat rate taxation system. It introduced this fairly dramatic reform of its income tax in January 2001, becoming the first large economy to adopt a balanced tax system. This 2001 tax code replaced a conventional progressive rate structure with a flat tax rate of 13%, leading to Russia's economic growth by almost 5%. It also increased the revenues from the income of the personal income tax by over 25% in real terms, yielding performance and beneficial changes in the economy.
The flat tax reform in Russia was very instrumental in tackling and decreasing tax evasion. To a certain extent, you could link increased fiscal revenues in 2001 to voluntary tax compliance and reporting. The adoption of this taxation system signaled the taxpayers' commitment to their patriotic role.
Russian taxpayers are supposed to pay an income tax of 13%, a land tax of 0.3% usually calculated on the cadastral plot using a unique formula, and a vehicle tax linked to the vehicle's engine power. Small business owners are eligible for simplified taxation and could choose any of the following:
- The profits tax at 15%
- The income tax at 6%
- A unified agricultural tax at 6%, which only applies to farmers
- An imputed tax income customarily calculated using the unique formula and only applies to individual companies
Significance of Flat Rate Tax
One of the tremendous significances of flat-rate tax is its simplicity. The fact that everyone pays their taxes at the same time and in the same way makes it easier to calculate than the progressive tax rate, which implies a different tax rate at different income levels. For instance, in the United States, the advanced tax system's complexity leads to lost hours and high implementation costs.
Proponents of this type of taxation system claim that the system is fair compared to other taxation systems. The government charges every taxpayer a uniform tax rate. It is different from the progressive tax system and the regressive tax system, where additional taxpayers' groups are set at different tax rates.
As observed in Russia, flat rate taxation makes it possible to curb tax evasion among the taxpayers. It was very instrumental in fighting and decreasing the tax evasion crime which had spread across the country. It also increased fiscal revenues in 2001 and several years following. It increased personal income tax gains by over 25% in real terms, yielding performance and beneficial changes in the Russian economy.