Flat Tax system
A flat tax is a tax in which constant rate is applied on every individualdespitetheincome. In a flat tax system, the same tax rate applies to the taxpayers with no exemption or deduction. In flat tax system, there is not any tax on income from capital gain, distribution, dividends and other investments. This systemwas applied for the first time in Estonia then in Russia and other countries. Russia is now the largest nation to use a flat tax system. It imposes a 14% flat tax on earnings. (Phd, 2016)
Pros of Flat tax system
A flat tax is simple and it is considered a significant benefit of this system. For the government, one tax rate is very easy to compute. As in flat tax system, we don’t tax on other income, we only tax on one income so it is very easy to compute and report. In taxpayers’ perspective, they can save costs of accountants, lawyers or another financial cost for compliance. This system eliminates double taxationso; it is good for the public. At the individual level, it makes it redundant to dividend, interest or other business income. This tax system does not discriminate on the income levels. Everyone pays the same tax rate. It promotes economic growth, if we see in history, almost every country that has applied the flat tax system experienced economic growth.Former communist nations including Estonia and Latvia werethe first to adapt global tax reform. In 2001, Russia adopted this system and this system yielded some positive results for the economy.
Flat tax system will be more welcomed by individuals and businesses as they will be more likely to pay the fixed amount of tax and this will lead to more accurate forecasts being made by the companies.The outside environment is uncertain so the outside environment will be known or more favorable if the tax rate amount is already known and the company will know in advance about how much amount to generate in order to pay the tax and how to claim the tax amount and at what time.
Cons of Flat tax
Opponents of this system argued that this system penalizes the lower or middle-income earners. As lower-income people have to pay more tax and in remaining they don’t have enough money to pay for their necessities. This inequity proves that flat tax is unfair to the lower and middle-income people as poor people pays ahigher tax than rich people and rich get richer and poor get poorer. A flat tax system eliminates investment income, it is giving benefits to the rich people, as they can have investment without worrying about any taxes.Flat tax system eradicates a backup revenue source for the government, as agovernmenthas the chance to charge ahigher percent to high earners, and it can also charge tax on other incomesof dividend andinvestment income.
Furthermore, the flat tax system will lead to more tax on poor people leading to lower disposable income. The lower disposable income of the poor people will increase poverty in the country and they will use the governmentmedical and educationfacilities which will shift the burden on the government..........................
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