MSG Team's other articles

10384 Money Markets vs. Capital Markets

Financial markets are markets where financial instruments or securities are traded. Financial markets can be classified based on various parameters. In order to understand the types of financial markets, we need to first understand the broad categories in which it is subdivided. The broadest classification divides financial markets into two types’ viz. money markets and […]

12681 Central Banking in the United States

The United States is economically the most powerful nation in the world today. This is what makes the study of central banking in the United States all the more interesting. Almost all other countries in the world adopted central banking without any major hassles. However, in the United States, a lot of conundrum took place […]

11761 Valuing Cash Flows in Different Periods

Cash flows vary from project to project. In some cases cash flows will occur evenly over time. There might be payments of similar amounts that will be spread out over a time period at regular intervals. On the other hand, there might be payments which are irregular and have no pattern whatsoever. The challenge in […]

11814 What are Hard Forks?

In the previous article, we learned about the concept of forking in the cryptocurrency universe. We also understood that we can distinguish between soft forks and hard forks. Soft forks do not lead to radical changes in the fundamentals of a cryptocurrency. Hence, the volatility is not said to be that high. This is not […]

9362 Fixed-Rate Mortgage vs. Adjustable Rate Mortgage

We already know that a mortgage is one of the biggest expenses that any investor has. It is also common knowledge that the interest rate is the biggest determining factor of the dollar value of each month’s mortgage payments. The interest rate of the mortgage is often the subject of a lot of discussions. This […]

Search with tags

  • No tags available.

Governments all over the world generally levy graduated taxes on their population. This means that as the income being taxed increases, the tax rate also increases. Under a graduated tax structure, some amount of income is exempted from the tax. Then, there is a different tax slab, which becomes applicable as soon as the income increases. This progressive structure is supposed to help the government earn more money from corporations that earn more.

There are many governments that are now choosing to break away from this pattern. These governments do not levy taxes, where there are multiple tax rates for different incomes. Instead, these governments levy taxes based on a single rate. This is why the system is called a flat tax system. Flat tax systems have become very popular, particularly in countries that were earlier communist.

There are several benefits of having a flat corporate tax system. Some of these benefits have been listed below:

  1. Equality: Flat tax systems treat all taxpayers equally. A basic threshold limit is set. Corporations with income below this limit are not taxed. After this exemption, all companies are taxed at the same rate regardless of the type of business or the size of the company. Many economists believe that this is the best way too tax using the “laissez-faire” policy of economics. When countries use flat-rate tax systems, they do not interfere in the natural process of capital allocation, which takes place in capital markets. As a result, it is believed that flat-rate tax systems help the economy achieve its full potential by achieving an optimum allocation of resources.

  2. High Compliance: Countries which levy flat taxes also see a high degree of compliance. Since all the earnings are taxed at a flat rate, the incentive to show less income than the company makes is less. If the tax rate set is reasonable, then the companies are more than willing to pay the tax upfront. This is because evading taxes is also complicated, and companies have to hire experts and spend a lot of time and money in non-productive activities. Countries like Hong Kong have traditionally maintained a flat tax structure and have one of the highest compliance rates in the world.

  3. No Preferential Treatment: The biggest advantage of a flat tax system is that it eliminates preferential treatment. Under a graduated tax system, there are a series of laws and rules which provide exemptions to a narrow group of people. Graduated tax systems create special interest groups. Corporations spend a lot of money on lobbying since they believe that obtaining special benefits from the government is possible. Under the pretext of strategic importance, certain sectors or even geographical locations are often given preferential treatment. However, this is incorrect since the allocation of resources should only happen on the basis of the productivity of the project and not on the basis of political patronage.

  4. No Corruption: Flat rate tax systems are politically unpopular. However, they are good for the economy. This is why it has been observed that political parties which bring about the flat-rate system are often ousted from power. However, their successors seldom repeal the system. Flat rate tax systems exclude political meddling. There is no scope for a minister or government official to represent certain industries or industrialists and ask for special breaks for them. As a result, the huge sums of money which are spent on lobbying and buying government influence are not wasted. This money can instead be used in productive economic activity, thereby generating more tax revenue.

  5. Simplification: Another benefit of the flat-rate tax system is the simplification which it provides. Graduated tax systems are complicated to understand and implement. Governments have to spend a lot of time and money trying to groom employees into tax experts. Also, the government has to spend even more money in order to create software that will help automate the tasks. Since so many rules have to be built into the software, it is complicated and often expensive. Similarly, from the corporation’s point of view, also flat tax rate brings a lot of simplification. They do not have to hire experts to ensure that they are in compliance with the law. The expenses related to filing taxes also get reduced as a result.

  6. Avoids Double Taxation: Under the current tax system, certain types of income are taxed twice, whereas others are not taxed at all. For instance, income paid out as a dividend is taxed twice, whereas some income is not taxed at all. Flat rate tax also eliminates other taxes, such as capital gains tax. Also, there are no complicated rules about income being exempt from taxation if it is invested in a certain manner. Flat rate taxation does not influence the manner in which people invest their savings. The rate of tax remains the same regardless of the manner in which the funds are deployed.

The bottom line is that flat-rate tax systems have empirically shown some advantage over graduated tax systems. However, these advantages are from an economic point of view. The political class stands to lose if flat-rate tax systems are implemented all over the world. This is the reason that they are not very eager to implement the same.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Arguments against Tax Competition

MSG Team

Arguments in Favor of Tax Competition

MSG Team

Tax the Rich Policy: A Critical Analysis

MSG Team