Our last article took a look at the positive benefits of the progressive tax structure that we have in the United States, and that is utilized by a majority of industrialized countries in the world. However, there are several inherent downsides to the progressive tax code that have made many people more in favor of the flat tax, which taxes a flat tax rate across all taxpayers, regardless of their income. There are several countries that have a national flat tax code, such as Iceland. Several states in the U.S. also have a flat tax rate, such as Massachusetts. Here are some of the cons of the progressive tax code…
- Taxes success
Opponents of the progressive tax code argue that it is a discriminatory tax. The reason for this is that it inherently taxes success at a higher rate. There are fears that this may have an impact on the effect of the free market, since success is always going to have more barriers in front of it, due to the tax code. However, it should also be noted that one of the biggest myths of the progressive tax is that a taxpayer’s entire income is taxed at a specific rate. This is not the case.
For example, a person who only makes $9,000 only pays 10% of that income towards taxes. However, a person who makes $10,000 is in a 15% tax bracket. However, only the money after $9,325 is taxed at 15%, while the first $9,325 is taxed at 10%. This means that a person will never make less after taxes because they moved up a bracket. However, it does mean that they will pay more taxes on each higher dollar that they make.
- Encourages wealth to be placed elsewhere
One of the biggest problems with most countries that have a progressive tax code is that it has incentivized wealthier individuals to place their wealth in tax havens in other countries. This means that there is a substantial amount of income that isn’t being taxed in the United States, at all. Because of this, mega rich taxpayers who can afford to offshore their money end up paying less than their tax rate, anyways. Until the tax structure is able to eliminate these loopholes, then the progressive tax code will never be truly working as intended.
- Far more complicated than a flat tax
The IRS is an enormous organization, because it has to be to handle our enormous tax code. One of the biggest hindrances of the progressive tax code is that it is intensely complicated, as opposed to a flat tax, which is supposed to reduce loopholes and simplify the tax process, in theory.