
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.
Summary:
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.
A flat tax would be the way to go because it is so simple and when doing your taxes, no need to worry about deductions and exemptions.
ReplyDeleteIt's been a while since the U.S has been using the progressive tax system. Maybe we should try the flat tax system for a change.
ReplyDeleteA lot of people seem to like the idea of a flat tax, but lots of studies seem to show that the progressive tax system is more effective.
ReplyDeleteJessy, that's probably the reason why the U.S has stayed with the progressive taxation system for so long.
DeleteI don't have a problem with progressive taxation, but I think they should get rid of the deductions and exemptions and slightly lower the tax rate for everyone.
ReplyDeleteOur politicians need to do something about this complicated tax code.
DeleteGetting our taxes done would be a breeze if we had a flat tax structure as it would eliminate some of the processes such as deductions and the like.
ReplyDeleteSorry, but don't think the wealthy should pay more.
ReplyDeleteGet your point, but to be clear, this is not solely a democratic issue. Republicans have also supported the idea of progressive taxation for some time now.
DeleteDon't have a problem with the progressive tax, but like many others have said, getting rid of deductions and exemptions would be a plus.
ReplyDeleteI believe the reason why the U.S has a progressive taxation system for so long is because the government feels that it balances the wealth. It's been this way for years. No matter what the make up of congress is and who is in power.
ReplyDelete