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The Web Cliffology

Tax Rates: Flat Taxation Versus Redistributive Taxation

by C. Moult, Publisher,
How tax rates should be structured continues to be an ongoing debate in the political atmosphere. There are experts who believe that we should have a flat tax structure while others believe in a redistributive tax structure.

This article will focus on the flat and redistributive tax systems and determine which is most effective in growing an economy.

To determine the effectiveness of each tax structure, we must draw a clear contrast between these two types of taxation:

Flat Tax:

Under a true flat tax structure, all tax payers pay the same tax rate on their respective income and the rates do not vary upon income level or brackets.  Many experts find this tax structure to be simple and less complicated as it eliminates deductions and exemptions and make the taxing process fairer and evenly distributed. But while this is a simpler process, it comes with disadvantages as well.

The main disadvantages are that everyone is expected to pay flat taxes at either a high rate, low rate or medium rate on their income.  In any of these cases, this would not necessarily bode well for the economy because excessive taxation hurts the economy and inversely, too little taxation going into the treasury or federal government hurts the economy as well. The question now becomes—how do you find a reasonable rate of taxes being with held among all income levels.

When people and business are charged too much in taxes, it gets in the way of productivity (ability to buy, sell, spend, hire).  Economies are built around the transfer of goods and services by manufacturers and providers to consumers in the form of buying and selling. Therefore, when taxation is severely high, consumer spending drops because they are taxed more and the production of goods and services drops due to higher operational costs.

Like high taxation, low taxation has the ability to impact an economy in a negative way as well. When taxes are too low, the government has fewer resources to invest in things that are pivotal for economic success. This means fewer resources going into the military, fewer resources for our roads and bridges, fewer resources in urban development, fewer resources in education, science and research.  All these things are necessary for a balanced; robust economy and many of which are most effectively accomplished through the public sector.

Redistributive or Progressive Tax:

A redistributive or progressive tax structure is a structure in which your income level determines the tax rate that you pay. For example, people who make significantly less income and often those at the poverty-line pay little or no income tax. In contrast, people who make significantly more in income will pay taxes at a higher rate.

Redistributive taxation can have a very stimulative effect on economic growth. To best understand this system of taxation, you should look at it from the stand point of wealth versus the not so wealthy.

When big businesses and people with very high income spend, it quickly reaches a point of plateau because they are no longer in need. For example, big businesses will start to hire little or no workers and wealthy people spend less because they already accomplished many of the things that they need and therefore triggering them to save more and spend less.  As a result, this does very little to spur economic growth.

Because of this plateau effect where wealthy people and big businesses as a share of the economy have less effect on economic growth due to a lack of participation in spending and hiring as they get wealthier, economic experts find it savvy to tax the wealthy more and redistribute the taxed income to other areas where economic growth is needed. This is often a clever method as long as over taxation does not occur and such that their rate is not too high or too low.

Economies tend to grow faster when high earners and big businesses are taxed at a medium-high rate while the middle class and small businesses are taxed at a medium-low rate.

The reason why economic growth is so pronounced when middle income earners and small businesses pay taxes at a lower rate relative to big businesses is because middle class people and small businesses spend more money as a share of the economy. Ordinary people have no choice but to continuously spend money on basic needs and necessities. For example, food, clothes, shoes, home (shelter) or if a refrigerator or stove is broken they will buy another one or get it repaired. Similarly, small businesses spend and hire more workers as a share of the economy than big businesses because of their growing need to expand and keep up with rapid demands from their customers.

Because these economic demographics play such a vital role in hiring, buying, and selling, it is important that their taxes are kept low to avoid productivity impediments and spur large scale growth. Members of the big business and high income community do not have to fret when paying slightly higher taxes at the expense of investment in small business and the middle class because they too will always benefit when small businesses and the middle class thrive. This is so because there will be more demand in the market place for goods and services due to consumers having more money to spend.


The United States and other democratic countries have long utilized the redistributive/progressive taxation method. What this type of taxation does is create an equal playing field such that lower income people and small businesses can be put on course to help propel the economy forward.  Though this type of taxation can be politically controversial, it can play a role in balancing out an economy and create broader success ratios among people and businesses. When more people in an economy do well, the economy as a whole tends to benefit a great deal. The progressive or redistributive taxation system should not be seen as a waste, but an investment. Countries that invest more tend to be rewarded with robust economies and countries that invest less tend to experience stagnation.  While the flat tax method is simple, the redistributive tax method when structured properly, will amount to better, balanced and more well-round economic growth.