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A flat tax system is a tax system that charges a constant tax rate to all income above the personal allowance. This system ensures that above a certain level, everyone remits an equal proportion of their total earnings in spite of how much it is. It discards the deductions theory and ensures that high income individuals are taxed accordingly. This tax system differs greatly from the conventional progressive tax system since similar rates are employed across all income categories instead of being conformed to different income classes. Although a couple of economists have argued otherwise, the flat tax system no doubt delivers some undisputed benefits both long term and short term to the economy of the country of state applying it.
Unlike the progressive tax system which imposes hefty taxes in interest incomes, capital gain and dividends, flat tax systems encourage saving over consumption since their income is taxed only once at a flat rate. This aspect promotes a savings and investments culture in the community which in turn creates an indirect effect of public expenditure to boost the country's key economic industries such asthe service industry, housing market and automobile industry. A flat tax system also motivates individuals to work hard, earn much more money, diversify and increase their wealth base since they are not being subjected to extra taxation. This trend eventually sparks an increase in economy-wide spending, job creation and small venture startups thus boosting other established industries and the general economy ultimately.
A recent study on the "Economic Effects of a flat Tax" shows that under a progressive tax system, industrial investment does not favour the most appealing and competitive industries because of grants and unequal treatment geared towards more diverse industries. The study stipulates that under flat tax systems, the investments are redistributed away from more supported industries such as farming towards more lucrative industries such as mining or manufacturing. This phenomenon triggers growth in nearly all industries.
Superficially a flat tax system may seem to lower the governments total tax revenues but due to its underlying factors such as economy wide gain in production and consumption together witth the increament of individual productivity brings forth a higher economy-wide income and consequently resulting in the growth of the tax base. Other vices such as tax avoidance and evasion are completely unnecessary under this system; thus there are a very minute percentage of people who do not pay taxes. In addition, this tax system makes the economy attractive to foreign investments due to its ease of use, free travel and reduced red-tape. This translates to an even wider tax base over years and overall increase in tax revenues.
Lastly a Flat rate tax system impacts positively with the household savings ratio thereby influencing the larger economic growth positively. More savings help protect the economy from the nemesis of huge pension deficits. It also provides funding for future investments, strengthening growth and raising the living standards. In conclusion, owing to these and other underlying reasons, there is more reason to believe that flat tax rate system is superior to other tax system since it instigates economic growth across all sectors and economic industries through both active and passive support.