8/28/2023 0 Comments Pros and cons of flat tax rate![]() Therefore, people are taxed on what they take out of the economy, not on what they put into it. The flat tax is based on a consumption tax principle. In 1983 Hall and Rabushka proposed 19% flat income tax for companies and individuals in the United States, including personal allowance, while other income exemptions were not allowed (Rosen, 1999). Its simplicity reduces administrative costs of taxation (Kesner-Škreb, 2005). The flat tax decreases the tax burden and the possibility of tax evasion. Deductions and exemptions are not allowed, which means that it is applicable to a broad tax base. Hall-Rabushka flat tax proposal holds its progressivity through the amount of basic personal allowance and low marginal income tax rate. In Western Europe, only Iceland has the flat tax, while there are discussions related to that topic in many other countries. Although the flat tax proposals originally come from the United States, countries that have enacted this model are mainly Eastern European transition countries, as well as other non-European countries, such as Hong Kong. The flat tax idea has been one of main features of liberalism, as a part of comprehensive tax reform model which would create open investment environment for economic growth. In 1962 Friedman proposed a 23.5% federal income tax for USA and maximum 20% in 1980 (Socol and Marius, 2009). The flat-tax idea was put on the policy agenda after the World War II, with prominent thinkers of liberalism such as August von Hayek and Milton Friedman. This brings a new perspective on the idea of social justice and equality. Therefore, the flat tax idea has been based upon the principle that the tax system needs to be just, which could be achieved only if all personal income shall be treated with equal marginal tax rate and without exceptions. In fact, as this term cannot have a precise meaning, social justice could also be defined in other ways. Therefore, the flat tax has not been a new fiscal policy instrument, while progressive personal income taxation was proposed by Karl Marx (Basham and Mitchell, 2008), as one of socialist policy proposals for the income redistribution, in order to achieve “social justice”. In the 19 th century most countries had the flat tax, while in the 20 th century many countries converged towards progressive taxation (Baturo and Gray, 2007). Emes and Clemens (2001) argue that flat tax means the single rate, including personal allowance, and excludes any tax deductions and exemptions. In fact, the single rate system is not necessarily the flat tax in its pure form. The flat has mostly been related to personal income taxation, which replaces progressive marginal tax rates with the proportional, equally treating all incomes through the single rate. Therefore, a proper term would rather be “flat taxes”. It means a constant marginal tax rate for all personal and/or corporate incomes, and/or VAT (Kesner-Škreb, 2005). The flat tax has also been called „proportional tax“. The flat tax means a single tax rate on personal and/or corporate income and/or VAT, without any exemption or deduction, except personal allowance. However, rapid economic growth rate in these two countries needs to be seen from much broader perspective, as consequences of various structural liberalisation reforms, including the flat tax reform.įlat tax policies have already been implemented in the vast majority of Eastern European countries, with the aim of more simplicity, fairness and neutrality in the tax system, with savings and investment incentives. It can be emphasized the flat tax reforms in Estonia and Slovakia had positive effects on tax revenues and GDP growth. The article examines main features of the flat tax policy and brings a research overview of flat tax reforms in Estonia and Slovakia. The political will is neccessary in order to stimulate growth. Flat tax reforms in Estonia and Slovakia can be the models for Croatian tax reform.
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