Saturday, December 3, 2016 0 comments ++[ CLICK TO COMMENT ]++

Opinion: You Can't Build a Society with Flat Taxes

Libertarians, classic conservatives and many on the right* love flat taxes and always seem to be in favour of flat taxes but I have never seen it ever last. I thought I would comment on it after reading that Estonia has started to abandon its flat tax. Apparently the first country to introduce flat tax in Europe, Estonia is starting to back off the flat tax.

In my opinion, you just can't build a society with flat taxes. If anything, history seems to indicate that as societies advance, their taxes become more progressive.

The flat tax helped a lot of ex-Communist states after they gained independence when no one was paying taxes and the system was completely dysfunctional, but it is hard to build a society with such a system. Wealth grows exponentially and hence accrues to the top few disproportionately--most investors probably know that 80% of the American stock market is owned by around 10% of the population--and it's hard to do anything at the societal level if most of the wealth in society only pays a small amount of it in tax.

Having said that, what Estonia is doing to implement a progressive tax system is the wrong way to do it: it appears to be simply introducing credits. This just complicates the taxes and creates inefficient tax collection authority. Simplest is to have practically no credits (except possibly to those that society determines shouldn't be burdened (those with serious health issues, etc)) and just have an escalating rate based on income or something. Introducing credits is the dumb way to build a bullet-proof system. It is that way because lawyers are the ones who run politics but if it were up to a more rational person (ie. scientific-thinking), you wouldn't have so many credits and special clauses, with so many potential line items on a tax form.

I think the only time flat taxes make sense for a large society--it may be ok for small islands, city-states, etc--is if it is undeveloped/developing or the government is dysfunctional. It made sense for the ex-Communist states after the collapse of their societies, as Estonia was in the 90's. Similarly, I think it makes sense in most of Africa and South Asia. It will probably work better than what they have right now in countries like South Africa, Congo, India, Pakistan, and so forth. Countries with high tax avoidance and a general distrust of government, such as Greece, might be better off with a more flat tax as well.

To sum up, natural state of human affairs is probably towards more progressive tax as societies advance. Of course, I can't prove it and you can't disprove it, so humans will probably argue about the ideal taxation system for another hundread years.

(* Some on the right support flat taxes but not because they want a simple one-tax system or want to improve the efficiency of the tax system, but rather because they want to shrink the government. They will argue the opposite but the reality is that flat taxes result in less government tax income and consequently less government services. This will result in a smaller government in the long run. [I'm a typical liberal in that I support progressive taxes and "high taxes" but I do think governments are too big and should be shrunk. Governments should not be engaged in some activities they are presently involved in and spend a lot of money overseeing.])

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