Note:  This article is also an addition to the BipolarNation.com Platform.

In my younger and more politically formative years, I remember hearing about the flat tax (in which everyone is taxed the same percentage of income) and turning to my older brother, saying something to the tune of, “isn’t a flat tax fair for everyone?”

He just said, “yeah.”

Well.  That makes sense.

Liberals want a “progressive” tax that more heavily taxes the rich.  But if the tax rate were the same for everyone, the rich would pay more actual money, because 20% of $1,000,000 ($200,000) is a lot more than 20% of $30,000 ($6,000).  The flat tax is as progressive as any income tax should get.

BipolarNation.com calls for a flat income tax, and the abolition of the capital gains tax, the gift tax, the property tax, and payroll taxes.

There are three principles at work here.

1. In any economically free country, there wouldn’t be regulations that say you have to make more taxes than her, or she should pay more taxes than you.  More regulations only serve to inhibit freedom and the pursuit of opportunity, which also means the creation of wealth.
2. The flat income tax plain works, as will be detailed later on, helping spur economic growth, encouraging people to actually pay their taxes, and attracting business.
3. The flat income tax is simple and reduces the need for the IRS, cutting the need for spending just on making sure people pay their taxes.

Why the Flat Tax Works

Perhaps the most important economic thinker of all time was Adam Smith.  Smith put to words what was already happening in the world:  when free trade existed, an “invisible hand” seemed to regulate economies by themselves, providing for prosperity and the free exchange of goods and services.  Or, as Smith put it:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Those who are quick to condemn the “greed” of capitalism fail to realize that in the honest pursuit of wealth, one has to actually create wealth.  Remember that wealth isn’t only money.

Consider a graphic designer who creates logos for business.  If I have need for a logo, the logo is actually wealth.  I would hire a graphic designer to create something that never existed before, and in turn, I would pay him money for it.  Although we have traded with each other, something had to be created in the first place.

Jobs, too, can be created.

Taxes only serve to inhibit this natural process of wealth creation and trade, as taking money out of the hands of free traders gives them less money with which to create more wealth.  A flat tax would drastically lower the tax rate on those with the highest ability to create wealth (the wealthy).

Consider, also, the Laffer curve.

If high tax rates worked to stimulate economic growth, a country could simply grow by raising tax rates as highly as possible.  However, consider that if 100% of your income was taxed, there would be no incentive to work.

The Laffer curve says that there is an optimal rate of taxation that would maximize revenue and economic growth.  I would argue that this rate is much lower than many people think.

Note that the graph makes it look like the ideal tax rate is around 50%.  I do not agree with this.

With a low enough tax rate, wealthy people who can afford accountants to hide their money from the government would lose incentive to do so, as paying taxes might be cheaper than avoiding the taxes in the first place.

Example of the Flat Tax Rate

The creation of wealth is evident in the economic growth of the countries that have adopted the flat tax system.  Consider, for example, Lithuania, which has adopted the flat tax system.  As it says on Wikipedia:

Lithuania, which levies a flat tax rate of 24% (previously 27%) on its citizens, has experienced amongst the fastest growth in Europe

Many other countries in Eastern Europe that have adopted the flat tax rate have seen similar types of growth.  There is argument that the flat tax rate coinciding with increased economic output doesn’t necessarily reflect casuality, but I don’t agree that this is the case.

The Flat Tax and the Poor

Many countries that integrate the flat tax simply don’t tax the poor below a certain income level, which would be acceptable.

A common criticism of the flat tax would be that it favors the rich (which, of course, would make sense economically anyway, would it not?), but lower tax rates have shown to help the poor, as well.

For example, during the Reagan years in the U.S. – a time in which a few liberals might tell you they “struggled” because of Reagan’s policies – the poor actually performed better.

In 1981, Ronald Reagan cut taxes, and this spurred economic expansion throughout the 1980’s.

First, note that the poor did better when the taxes were lowered:

Note the “trickle-down” effect that seems to occur as the income of the richest quintile increases.

Next, note that the middle class performed better, as well:

A middle class of taxpayers can be defined as those between the 50th percentile and the 95th percentile (those earning between $18,367 and $72,735 in 1988). Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

As is noted by the Cato Institute:

The only economic variable that was worse in the Reagan period than in both the pre- and post-Reagan years was the savings rate, which fell rapidly in the 1980s. The productivity rate was higher in the pre-Reagan years but much lower in the post-Reagan years.

The Reagan tax cuts did not bring us to a flat tax, but they lowered the tax burden on the people and in turn spurred economic growth.  In eastern Europe, we also see economic growth because of low, flat tax rates.