I am a strong supporter of the flat tax since I dislike unnecessary bureaucracy. The tax code is too complex and bureaucratic. After a long time I finally succeeded in publishing an article on the flat tax in the journal of Financial Management (UK) in January 2006. I still salute Robert Hall and Alvin Rabushka for their excellent book Low Tax, Simple Tax, Flat Tax. I join other supporters of the flat tax and my strong point of view is that a simple flat tax on earnings without deductions (with the exception of personal allowances) is the right and justified tax to have.
The 80/20 rule or 90/10 rule holds true in most countries of the world, where 80-90 percent of the population own only 10-20 percent of wealth. Assuming the other 80-90 percent of people have no money to save, they will spend one-hundred percent of more of their income and pay sales tax and VAT on it. When these poor people pay a sales tax, the number of dependents, earnings or other tax exemptions is irrelevant. Simply put, a poor man who makes 1,000 units of currency a year and pays a 10% effective income tax-rate would be spending 100 currency units as tax. Now, this poor individual would take his/her 900 units of after-tax-income and spend it paying an 8% sales tax amounting to 72 units. In total this individual has paid 172 units of currency in taxes of which 7.2% (the sales tax equivalent) was not subject to any preferential treatment. If 42% (sales tax) of total taxes paid by this individual was a flat tax, then why could not the same simple flat tax apply to the other 58% (income tax)? The loopholes and exceptions create opportunities for people to cheat on taxes or legally evade paying taxing by seeking loopholes. It is blatant that people can advertise openly that they can show you how to pay less in taxes the legal way.
The Wall Street Journal reported on April 13, 2006 (H&R Blocked) that the IRS code has 66,000 pages of special interest rules, regulations, loopholes, credits and carve outs. More than half of Americans now have to hire a professional to prepare a tax return. In addition, the tax code is so complicated that even the tax preparation expert H&R Block had under-reported its own tax liability by $32 million. Preparing complex taxes does not add any value to the country’s Gross National Product (GDP). Just imagine the government bureaucracy that is required to write, revise, and administer a complex tax code. Then think of the thousands upon thousands of hours that the population must spend to complete a complex tax code. With a simple flat-tax, those equivalent hours spent on a complex tax code can instead use for scientific discovery, building infrastructure, and a host of other activities that will benefit the GDP.
Many East European countries have adopted a flat tax including Russia. Hong Kong has been a flat tax pioneer. I hope that China will adopt a flat tax and surprise the rest of the world as they have done with economic expansion. Alvin Rabushka visited China as a guest of the Chinese government and his book is now available in Chinese.
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