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Progressive Tax Vs Flat Tax Essay

1269 words - 6 pages

Our present progressive income tax system requires a complete overhaul into a flat tax structure. Efficiency throughout all related markets would increase, reducing distortions, and creating greater than ever incentives to work and create capitalist opportunities. It also presents the potential of solving our country’s budget deficit issues. Our current system stymies innovation and the desire to persevere by forcing a higher tax bracket on those who earn more, causing more individuals to pursue avenues of evading taxation, either through legal or illegal means. Even though the flat tax appears as too burdensome to the poor – or as a contributing factor towards the establishment of a ...view middle of the document...

Adopting a flat tax would also eradicate the existing tax distortion “favoring non-corporate over corporate investment.” The flat tax eliminates the distortions in the code favoring debt over equity financing by businesses through eliminating the double tax on dividends. Family businesses would also be more stable under the flat tax through the elimination of the estate and gift tax. A flat tax would not eliminate the possibility of economic distortions, but with the flat tax, there would be a greater sense of efficiency, which allows for the maximization of social welfare.
Under a plan called the Hall-Rabushka flat tax, the United States would amplify the total annual production of goods and services created by six percent. This is from a composite of 3 percent from enhanced incentives to work and 3 percent from improved incentives for investment and capitalistic action. This would also be the outcome of spending time on the development of productivity rather than being preoccupied with exploiting tax-advantaged opportunities.
The best solutions to tax evasion are not punitive, but rather preventive. A flat tax would diminish incentives for officially authorized tax avoidance and unlawful tax evasion, thereby capably growing tax yields to the public coffers. Russia adopted a flat tax in 2001, which helped their economy prosper, pouring revenues into the government treasury by eliminating the profitability of tax evasion and avoidance. A flat tax would increase the number of taxpayers through the elimination of the Earned Income Tax Credit.
One fallacy of a progressive tax system is the difficult installation and maintenance of such a policy. Looking outside of the United States, more countries – such as Russia, Estonia, Slovakia, and Poland – have found economic stability through a flat tax program. In developing countries around the world, using a progressive tax system has proven difficult to accomplish. “The targeting of expenditures by individual or family unit income levels in these countries – as well as the level of the average tax rate – is more important for the post-transfer income distribution. ” This causes a high-yield proportional (or “flat”) tax system to have a larger equalizing impact than a low-yield progressive tax system.
The progressive rate arrangement prompts inescapable political demands by interest groups for special deductions, special exemptions, and special credit for preferential actions. This is true for taxpayers on either side of the income spectrum. Both low and high wage earners look for some type of incentive to lower their tax responsibility through the amount of salary either category makes. Both use different vehicles to arrive at that conclusion: lower income earners look towards earned income tax credit for relief, while higher income earners look towards “loopholes” to reduce their taxes (which include paying money to a tax professional to find...

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