A flat-rate tax on personal and corporate incomes involves a duel-rate system of taxation wherein income under a certain threshold is exempt from taxation and a single rate tax is imposed on all income above that threshold. This system has been adopted by nine countries so far, including Hong Kong in 1948 and Estonia in 1994. Several more countries intend to implement the system. National variations on flat-rate systems are common.

Pro

The two leading arguments in favor of a flat tax in the United States is that it is fair to both high and low income earners, whereas progressive tax regimes punish those with higher incomes. It also simplifies the tax rules since taxes are deducted at one rate without discriminating based on the source, use, and level of income. Complicated methods of taxation like those found in the U.S. and Europe consume a large share of the revenue they collect. Estimates of the cost for implementing the tax system in the United States average between 10% and 20% of revenue collected. Eastern European governments that have switched to the flat tax or are planning to have argued that simplifying the tax code strengthens revenue collection and that encourages investment, both domestic and foreign. However, there is no evidence yet to suggest that tax reform in these countries have resulted in greater foreign direct investment or if investments have risen because of other reforms. The empirical evidence to date cannot conclude that flat taxes in countries that have implemented the system have led to significant investment and economic growth.

Con

The main opposing argument put forward in the U.S. states that a flat tax regime is simply unfair since people with lower incomes would pay the same percentage of their income to the government as higher wage earners. For this reason, flat taxes tend to be set at low rates. Increases in other forms of taxation, particularly excise taxes and value-added tax, often occur to make up for lost revenue. In addition, the duel-rate system has the potential to create winners and losers with the combination of tax rate and allowance and depending on the number of incentives offered for certain income brackets to avoid paying taxes. The American tax rules, for example, offer numerous opportunities, legal and illegal, to avoid taxation. In countries that do not addressed the complexities in the tax code, the rich have paid as much under a flat tax system they did under the progressive tax system. Across Eastern Europe, however, countries have reduced these incentives by eliminating exemptions.

Reform efforts in the U.S.

In 1995, Congressman Dick Armey (R-TX) introduced the Freedom and Fairness Restoration Act that would introduce a flat tax system. Since then, the idea has been proposed by President Bush in his 2004 presidential campaign and some current Republican presidential candidates.