Flat tax

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Linear dependence of the tax amount on income above the basic tax allowance (general example)
Constant marginal tax rate above the basic tax allowance (general example)
Rising average tax rate above the basic tax allowance (general example)

With Flat Tax (short for flat-rate tax ), or unit control one is single-stage income tax rate referred. The marginal tax rate is constant, which means that the entry and top tax rates are identical. Without a basic tax credit, there is no tax progression . A flat tax with a basic tax-free allowance leads to an indirect progression : While the marginal tax rate remains the same, the average tax rate rises with increasing income and approaches the marginal tax rate.

The concept of the flat-rate tax with a basic allowance amounting to a minimum income as a proportion of the per capita income was proposed by Dennis Milner in 1920 . In our time Robert E. Hall and Alvin Rabushka have proposed a flat tax again . The flat tax is usually conceptually linked to the extensive elimination of subsidies and tax breaks in order to generate sufficient tax income even with a low tax rate .

Redistributive effect

There is no redistributive effect with the pure flat tax without a basic allowance. All income is taxed at the same average tax rate, which is identical to the marginal tax rate . In the case of a flat tax model with a basic tax allowance , however, the average tax rate is progressive , which can be interpreted as a redistribution of income. Whether this is higher or lower than a reference redistribution compared with it can only be determined by measuring in specific cases: For the income distributions to be compared, unequal distribution measures are calculated before and after taxation . Not necessarily from the type of progression, but only from the comparison of the measures of inequality does the degree of mitigation of the income differences emerge.

Compared to other tax scales, the flat tax can lead to a lower, but also to a higher adjustment of income differences. That depends on the marginal tax rate and the basic allowance of the flat tax and on the tax rates compared with it. If both the basic tax allowance and the top tax rate are identical to the flat tax in a progressive tax rate to be compared, then the redistributive effect of the flat tax is definitely lower. If, on the other hand, the basic allowance of the flat tax is significantly higher than the reference tariff, the redistributive effect can be higher with the same top tax rate. The differences take place in the transition area between the zero zone and the top income corner value of the comparative tariff. If the top tax rate is lower than the comparable tariff, then the subsidies abolished in return have to be included in the analysis, so that a general statement is hardly possible here.

Without limiting the average tax rate to positive values, the basic tax allowance acts as a negative income tax for incomes below this tax allowance , as suggested, for example, by Milton Friedman in his book Capitalism and Freedom . This type of flat tax as negative income tax, in which part of the tax exemption is paid out in advance as a subsidy and then offset against the tax liability, is one of the models for an unconditional basic income . There are therefore two types of flat tax with a basic tax allowance: The flat tax with a negative tax has a higher leveling effect than a flat tax with a limitation of the average tax rate to the positive range, given the same high tax credit.

Countries with flat tax

Flat tax in the world
  • Flat tax
  • No income tax
    • Flat tax in Europe
  • Already established
  • Introduction planned
  • abolished again
    • Countries with flat tax (as of 2007; where no other source is given)
    country Income tax Basic allowance Corporation tax
    Albania 10%
    Bulgaria 10% - 10%
    Estonia 20% 000000000002040.0000000000€ 2,040 0% (20% for profit distribution)
    Georgia 25% 20%
    Hong Kong 16% 17.5%
    Iceland 36% 18%
    Kyrgyzstan 10% 10%
    Latvia 23% 000000000001200.0000000000€ 1,200 15%
    Lithuania 15% 000000000002400.0000000000€ 2,400 15%
    Macedonia 10% 10%
    Mongolia 10% 25%
    Romania 16% approx. 000000000000067.000000000067 € (? RON) 16%
    Russia 13% 24%
    Serbia 12%, 24% 10%
    Slovakia (Introduced in 2004, abolished in 2012)
    Czech Republic 15% 919 € 19%
    Ukraine 15% 25%
    Hungary 15% - 19%

    Example Slovakia

    In 2004, under the then Finance Minister Ivan Mikloš , Slovakia introduced a flat tax with a tax rate of 19%. This relates to income tax , corporation tax and VAT . Tax privileges and practically all legal exceptions have been abolished, the reduced VAT rate of 14% has been abolished. The result was that basic food, medicines, electricity, coal etc. were also taxed at the normal tax rate of 19%. In addition, various fees, excise taxes and social security contributions were increased.

    Thanks to the single tax, almost all Slovak taxpayers were relieved of income tax: those on lower incomes received increased tax allowances, and higher incomes via the reduced tax rates. In relative terms, middle-income earners received the least relief in the first year. In certain middle income brackets, the reform has increased the burden.

    The tax burden increased as the reduced tax rate of 14% was abolished, so that the uniform tax rate of 19% applies to all goods and services. Since the reduced tax rate applied to food, books and medicines, among other things, its abolition increased the cost of living significantly. Consumption has declined for many items related to the VAT hike.

    Contrary to many forecasts, income tax revenue fell only slightly. However, Slovakia showed strong growth even before the tax reform, which increased tax revenue regardless of the tax reform. One of the success of the reform is that since 2004 there has been a marked increase in foreign investors' interest in Slovakia. However, this is also due to EU accession in the same year and the relatively low wage level.

    The 2006 elections were won by the opposition with a promise to reverse the reforms, which was only partially implemented. In 2012, the flat tax was abolished and replaced by a progressive income tax.

    Example Czech Republic

    In the Czech Republic, the introduction of a flat tax has resulted in the social and health insurance contributions of both the employee and the employer being taxed by the employee (super gross income). The tax base for employees is therefore 135% (instead of 87.5% previously) of the gross wage. As a consequence, income is not taxed at the nominal rate (which was 15% in 2008), but much higher in real terms (according to expert estimates in 2008 with 23.1%).

    Flat tax under discussion

    Arguments for the flat tax

    • The flat tax allows income to be taxed to a greater extent than before at the source ( withholding tax, withholding tax ). Wages, investment income and pensions could be fully and definitively taxed by withholding tax; an income tax return and assessment would no longer be required in the case of pure withholding tax without tax exemptions (= flat rate withholding tax ).
    • The incentive to move income between individuals or tax brackets is reduced. It no longer matters which year or which person an income is allocated to, because the tax rate is always the same.
    • The income splitting does not matter if no personal allowances are taken into account because, if each spouse, the tax rate is the same. If basic allowances are taken into account for each spouse, the problem in this regard also arises with the flat tax. Since the effect of the spouse splitting can then be desirable again, this could also be seen as an argument against the flat tax.
    • The division into wage tax classes is unnecessary and with it the criticism of the supposedly discriminatory effect of tax class V (in Germany).
    • The flat tax could solve the problem of linking income tax and corporation tax to form a legally neutral taxation of corporate profits. If the assessment base for corporation tax and income tax is also standardized, then in the case of a single tax rate all corporate profits are taxed equally.
    • A flat tax could simplify income tax law and thus lead to a simpler tax return. However, a simplification has less to do with the rate structure than with the legal structure of the assessment base. While the introduction of a flat tax in Slovakia has simplified tax returns, the introduction in Russia has not resulted in any simplification.
    • The hidden tax increase caused by the " cold progression " can be avoided by introducing a flat tax.
    • The government's ability to channel capital to focus investments (e.g. in renewable energies, shipbuilding or closed real estate funds) through tax incentives is made more difficult. In the opinion of some economists, such state control effects almost always have negative effects, so this is an advantage.

    Arguments against the flat tax

    • If a flat tax is supposed to lead to the same income tax revenue as under applicable law and the basic tax-free amount is not increased, the flat tax rate is significantly above the previous entry tax rate and below the previous top tax rate. Compared to a direct progressive income tax rate , in which the average tax burden rises almost linearly up to the top tax rate and only then begins to level off, this means a higher burden lower and a lower burden on higher incomes. With the flat tax, the average tax rate initially rises steeply and then flattens out early. Without additional allowances, middle-income recipients would have to bear a higher tax burden.
    Comparison of two variants of the flat tax (10% and 40%) with different progressive systems with the same basic tax allowance
    • The concept of the uniform tax is difficult to convey politically because the media, the public and part of the political spectrum usually associate the concept of progression with rising marginal tax rates and, in this respect, assume that the principle of income tax progression will be abandoned with a uniform marginal tax rate.
    • A flat tax is not necessarily linked to a broadening of the tax base. In order to make their introduction more popular, however, a relatively low tax rate is often required, with the resultant shortfall in income being offset by an expansion of the tax base. However, the abolition of exceptional circumstances can - despite the low marginal tax rate - lead to individual tax increases, depending on the tax rate and the tax exemption.
    • The smaller difference between marginal tax rates and average tax rates could increase wage pressure in collective bargaining and thus cost jobs.
    • Ideally, the tax rate is based on the utility functions of the taxpayer and also contains a redistribution component. With a flat tax, the legislature sets a certain progression curve, which cannot be mathematically derived from utility functions plus redistribution specifications. In other words: Concrete assumptions about the utility functions as well as precisely defined specifications about the redistribution aimed at with the tax tariff can make progression courses necessary, which cannot be achieved with a uniform marginal tax rate.
    • In Germany, despite the (largely) income-independent consideration, the contributions to statutory health and long-term care insurance up to the assessment ceiling are proportionally based on (work) income. Above the assessment ceiling, the contributions remain constant, i. H. the marginal burden of social security contributions is zero for higher incomes. Rising marginal income tax rates represent a certain amount of compensation that would not apply in the case of a flat tax.

    Discussion in Germany

    The principle of uniform taxation based on performance is currently ensured in Germany by basic allowances and a linear progressive tariff . The Federal Constitutional Court has ruled that progressive taxation is a constitutional requirement of the equality rate ( Article 3, Paragraph 1 of the Basic Law ): “In contrast to this, in the area of ​​tax law, formal equal treatment of rich and poor by applying the same tax rate would contradict the equality rate. Here justice demands that, in the sense of proportional equality, the economically more efficient person has to pay a higher percentage of his income as tax than the economically weaker one (see already Art. 134 WRV ). "

    Here, however, it remains unclear whether a progressive course of the marginal tax rate is constitutionally required. The leading tax lawyer Klaus Tipke takes the view: “From the point of view of equity, the linear-progressive tariff is preferable to a tariff that contains bumps or jumps. ... And it will probably not be possible to lower the top tax rate as much as the reform drafts provide. A lower standard tax rate is especially out of the question. ”According to his legal opinion, an uneven progression violates the equality rate. Unlike Klaus Tipke, Michael Elicker takes the view that above the basic tax allowance, only a constant marginal tax rate is in line with the performance principle.

    In Germany, the single tax received increased attention in the 2005 Bundestag election campaign. The former constitutional judge Paul Kirchhof , a member of the so-called competence team of the CDU, had proposed a uniform income tax rate of 25% (see Income Tax Code ). In the course of the discussion, however, he moved away from it again for the lower income groups and proposed tax brackets with marginal tax rates of 15%, 20% and 25%.

    See also

    literature

    Web links

    Individual evidence

    1. ↑ flat-rate tax, mentioned in Dennis Milner: Higher production by a bonus on national output; a proposal for a minimum income for all varying with national productivity . London 1920, in connection with a uniform income per head (page 125) or flat-rate minimum income (p. 24) of GBP 20 per year, resulting in the average income of the population at the time of GBP 200 per year Relatives to be fed, who would have been subsidized at that time, would have been subsidized. Quote “Even the rate of taxation is fixed, so that double earnings mean double takings”. (P. 98) makes it clear that what is actually meant is a flat tax.
    2. ^ Paul Anthony Samuelson, William D. Nordhaus: Economics: the international standard work of macro and microeconomics. Edition 3. Verlag MI Wirtschaftsbuch, 2007, ISBN 978-3-636-03112-9 , p. 475.
    3. ^ Daniel Mitchell: Iceland Joins the Flat Tax Club . (PDF; 74 kB) In: Tax & Budget Bulletin , No. 43, Cato Institute , February 2007.
    4. ↑ a b gtai: "Flat tax" on the advance ( Memento from June 27, 2009 in the Internet Archive ) .
    5. ↑ a b Bulgaria: Lowest flat tax in the EU. In: The press . December 19, 2007.
    6. ↑ a b c d e f BMF (D): The most important taxes in an international comparison 2016. Edition 2017 pp. 12–15, 26–27, overviews 3 and 6 ( Memento from September 17, 2017 in the Internet Archive ) (PDF)
    7. ↑ No pure flat tax system due to exceptions and a second tax rate on high incomes; Alvin Rabushka: The Flat Tax Spreads to Serbia ( Memento of March 8, 2008 in the Internet Archive ), Hoover Institution , March 23, 2004.
    8. ^ The labor market and social policy reforms in the Slovak Republic . (PDF) Institute of the German Economy Cologne
    9. ↑ Balance after the first year of government . The press.
    10. ↑ Slovakia disenchants the flat tax ( Memento from August 2, 2012 in the Internet Archive )
    11. ^ Great tax reform in the Czech Republic . Czech Republic online
    12. ↑ Michael Keen, Yitae Kim and Ricardo Varsano: The Flat Tax (es), Principles and Evidence . (PDF; 525 kB) IMF Working Paper, September 2006, accessed on January 11, 2010 (English).
    13. ↑ Subsidies are harmful . Interview with Alfred Boss from the Kiel Institute for the World Economy. Deutschlandfunk , March 15, 2006.
    14. ^ Ewald Nowotny, Martin Zagler: The public sector . 5th edition. Springer-Verlag, Berlin / Heidelberg 2009, p. 353.
    15. ↑ Ben Lockwood, Alan Manning: Wage setting and the tax system: Theory and evidence for the United Kingdom. In: Journal of Public Economics. Vol. 52, No. 1, 1993, pp. 1-29.
    16. ↑ BVerfGE 8, 51 , Rn. 70.
    17. ↑ Klaus Tipke : An end to the income tax confusion !? - Legal reform instead of voting policy . Cologne 2006, p. 165
    18. ↑ Klaus Tipke: Moral taxation instead of fiscalism ( Memento from February 2, 2014 in the Internet Archive ) (PDF; 662 kB) In: st , 29/09, p. 3; on genossenschaftsverband.de ( memento of February 2, 2014 in the Internet Archive ) accessed on August 4, 2013
    19. ↑ Michael Elicker: https://web.archive.org/web/20131008115739/http://www.elicker.info/pdf/Pro_Bono_Steuerreform.pdf Draft of a proportional net income tax. (PDF; 2.0 MB) Habilitation thesis with Wendt, Verlag Dr. Otto Schmidt, 2004.
    20. ↑ What the Heidelberg professor wants: 25 percent tax on all income . In: The world