“In the eyes of many fiscal conservatives, the flat-tax is the Holy Grail of public policy: One low income tax rate paid by all but the poorest wage-earners, who are exempt. No loopholes for the rich to exploit. No graduated rates that take a higher percentage of income from people who work hard to earn more. No need for a huge bureaucracy to police fiendishly complex tax laws.
Source, Allston Mitchell, January 2005
A ‘flat tax’ means that everyone is taxed at just one rate. I.e. everyone pays the same percentage (%) tax on any income earned above the tax threshold (the tax-free allowance. A similar system is often used for corporate taxes – taxes on company profits and also on indirect taxes such as VAT.
The size of the tax free allowance is an important issue – it needs to be large enough to persuade people to prefer paying taxes rather than avoiding them. But if it is set too high, then the government may not get enough tax revenue to pay for government spending. Some theorists in favour of flat taxes have suggested the countries should introduce a large personal allowance, with the most detailed research by the Adam Smith Institute hinted at a £12,000 personal allowance up from the current rate of £4895.
Examples of countries that have moved towards flat rate tax systems include Estonia, Latvia, Poland, Lithuania, Russia, Slovakia and most recently, Hungary. From being a theoretical curiosity in the lecture halls for university economics courses, flat taxes are now being applied in different countries and there is an active debate about their merits and demerits.
