FLAT TAX

Regressive Taxation, Progressive Taxation, Proportional Taxation

Flat tax or flat rate tax is a constant rate tax system. Flat tax refers to income being taxed at one marginal rate, in contrast with Progressive Tax.

Flat tax structure has gained significant public support in North America. Flat tax structure in which all citizens would pay the same flat percentage of taxation on their income.

Flat tax would simplify tax law and the completion of a tax return but would make income tax regressive.

Flat tax has been criticised: "The millionaire to pay exactly the same tax rate as the young nurse, the home help, the worker on the minimum wage". - Gordon Brown's speech to the Labour party conference September 26, 2005.

Regressive Taxation

Regressive Taxation structure which requires the more well-off to pay a lower percentage of their income (or wealth) in tax than a less well-off citizen. Sales tax and the federal goods and services tax (GST) are of this type as these taxes remain constant regardless of one's income.

Progressive taxation

Progressive taxation structure progressively increases the percentage of a citizen's income (or wealth) which is paid in tax as income (or wealth) increases. The consequence should be that the more well off are taxed at a higher rate than are the less well off.

The Bush 35 Percent Flat Tax on Distributions from Public Corporations
Calvin H. Johnson, University of Texas at Austin School of Law
Abstract: Corporate dividends now bear tax at both the corporate and the shareholder levels, Professor Johnson argues, yielding rates as high as 61 percent. The Bush administration has proposed to exclude dividends from shareholder tax, but only to the extent that the corporation has paid the 35 percent corporate tax. The 35 percent corporate tax would be paid whether shareholders would pay more or less than 35 percent tax, but private corporations, not publicly traded, would be able to elect a passthrough regime instead.
Professor Johnson begins by describing the policy judgments underlying the proposals. He then recommends that any tax on distributions be computed by and collected from the corporation itself and not from a million, amateur-bookkeeper shareholders. Corporate earnings and profits accounting is too easily gutted by tax shelters, Professor Johnson also argues, so that all distributions will need to be considered distributions of harvest subject to the 35 percent corporate tax, except for the rare distribution that in fact drops the corporations' market capitalization to below its contributed capital.

Flat Taxes, Dual Taxes, Smart Taxes: Making the Best Choices
Jonathan R. Kesselman, "Policy Matters," November 2000
ABSTRACT: Tax cuts have risen to the top of the policy and political agendas in Canada, led initially by proposals of the Canadian Alliance Party and followed by others. This study assesses the Allianceís tax proposals in detail and uses them as a springboard for wider analysis of the requisites for improved Canadian tax policies. A surprising degree of commonality is found among the principal elements of the tax proposals of the Alliance, Conservatives, and governing Liberalsóalthough the relative emphases and speed of implementation vary. The most distinctive part of the original Alliance scheme was its proposed single tax rate for all income levels. This flat tax plan was later shifted, transitionally, to a dual rate tax which brought the Alliance tax package even closer to the mainstream of Canadian tax policy discourse. The tax changes in the Fall 2000 mini-budget (assessed in an addendum) also address some of the more important needs for improved tax policy. All of these developments are evaluated using the key tax policy criteria of equity, simplicity, and efficiency/growth, and a model tax plan is derived and compared with the other proposals and changes to date.
The equity and distributional aspects of tax policies have been a central focus in recent public discourse. Many assertions have been made about the shortcomings of the Canadian personal tax system vis-à-vis that of the US. These assertions are subjected to critical scrutiny by an analysis of the tax systems in the two countries, with a focus on personal marginal tax rates. Several common assertions are rejected, and much of our analysis turns on distinctions between tax rates at the federal versus the state or provincial levels. The progressivity of the Allianceís flat and dual tax plans is examined using numerical and micro-simulation analyses. The flat tax is found to carry significant shifts in the tax burden away from those at the lowest and particularly those at the highest incomes, with large tax savings at very high incomes. The dual tax considerably moderates the shifts in tax burdens that would arise with a flat tax. Still, any plan to sharply reduce the total personal tax burden will reduce the progressivity of the overall Canadian tax system. Another major dimension of equityóone which motivated the Allianceís original flat taxóis the treatment of one- versus two-earner families. The study examines the assumptions that must be made to reach various views about equity on this issue. It finds that even if one accepts the view that one- and two-earner families with the same total incomes should pay the same tax, this can equally well be achieved by introducing income-splitting or joint filing as by adopting a flat rate tax. The alternative approach would maintain tax progressivity, unlike the flat tax. Most of the related claims for simplicity made by proponents of the flat tax are found to be overstated, and the dual tax would further reduce any such benefits.
 

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