Taxes are imposed in general by governments as financial charges for taxpayers (people or legal entities) without any direct connection to a specific benefit for a taxpayer. Taxes can hereby occur e.g. as a percentage rate on incomes, as sales taxes, as wealth tax, as inheri-tance tax or as property tax.
In recent years, the flat tax gained popularity as an opposite to the established progressive tax systems, especially in many Eastern European countries (e.g. Serbia, Ukraine, Georgia, Romania, Slovakia, and Macedonia) followed the Russian step to introduce a flat tax (Gorodnichenko & Sabirianova, 2007). This new tax system did not yet reach any western country however a discussion of flat ...view middle of the document...
Under these circumstances, if we are talking about a flat tax system, we have probably to talk about a private income flat tax.
But the classic flat tax which was introduced by Hall & Rabushka in 1995 had a much broader horizon. Based on the complexity of the existing US tax code, they introduced a flat tax system that should enable calculating the tax payments on a postcard (Hall & Rabushka, 1995) without reducing the tax income of the government.
With their proposal of a flat tax, they had four goals: increase of taxpayers’ compliance, re-ducing complexity of the tax system and with that fewer bureaucracy and lesser costs, im-provement in investments of tax payers and finally reduced amount of tax favours.
For their flat tax, they had a simple structure. There would have been only one system left for business and income taxes, both with tax rates at 19 %.
The business tax base would be calculated after a simple formula; all business related in-comes minus all business related expenses would result in the final tax base.
The personal income tax would be based on a 19 % tax rate and a tax allowance, so that all income minus the basic allowance would result in the tax base. An exception hereby would be the exclusion of income produced by retirement savings. Taxes on interests, dividends and so on would be abolished (Hall & Rabushka, 1995). Taxing should happen directly at the income source (on salaries, wages,...) and tricks to avoid as share options or non-taxable fringe benefits would be no longer excluded from taxation.
Furthermore, they expected that the U.S. economy will profit from a flat tax. They see their flat tax as an incentive, work effort and total output would increase in their model. The work-force would benefit from older people who would normally retire because of their high tax payments and poor people would be disburdened by the flat tax through the allowance. Ad-ditionally, investments would increase and through that the entrepreneurial spirit.
Policy goals in the context of tax systems
In the next point, one need to know why governments exist and why they need taxation. Governments should act in situations where private markets do not provide an efficient out-come for a good that everyone uses but no one wants to pay for (e.g. national defence), they have to provide this public good. Furthermore, governments can correct market inefficiency (e.g. externalities as air pollution) by taxing them.
Besides debt, a government has no other possibilities to receive money than taxes, external-ities taxation only cannot finance all public goods.
Furthermore, governments want to improve the happiness of its country’s inhabitants (this is in the interest of a democratic politician, so he gets re-elected) but cannot directly influence the happiness based on several constraints which occur when measuring happiness.
However, research showed that two variables influenced the happiness of a country’s popu-lation, income and unemployment.