Many developed countries use a graduated tax system, meaning that people who have lower incomes pay a smaller percentage of their income in taxes. People who have higher incomes pay a higher rate. The reasoning is generally that those who have low incomes need most to all of their income to provide for their most basic needs – particularly food and housing – while those who have a higher income can live off of a smaller portion of their income.
A flat tax is a tax system in which everybody, no matter what his or her income may be, pays the same percentage in taxes. For example, if the flat fee is set at 15%, someone who earned a billion dollars would pay 15% in taxes - $150 million – while someone who earned $10,000 would pay 15%, equal to $1500. Critics of the flat tax argue that it places an unsustainable burden on the poor, and they also look at countries that have flat charges and are unable to provide social services for the poor.
Greenland, for example, has a flat tax, and at 45%, it is one of the world’s highest taxes. Nevertheless, Greenland has few of the social services that many developed countries have. Similarly, Mongolia and Kazakhstan have flat taxes of 10%, and Bolivia and Russia have flat taxes of 13%, yet these countries do not have well-developed social sectors. Hungary and Romania have flat taxes of 16%, and Lithuania and Georgia have flat charges of 20%. Many of the countries with flat fees have lower standards of living than the nations that surround them.
However, there are arguments in favor of a flat tax, one being that not taxing the rich at high rates incentivizes them to remain in the country and spend their money there. Imposing high taxes on the rich can cause them to set up offshore accounts in tax havens, as happened with The Beetles when the UK government taxed them at 95% of their income.
Many in the United States favor imposing a flat tax, at least in part, to encourage the rich to spend their money domestically rather than to keep it in tax havens. Others believe that not taxing the rich at rates higher than the poor will leave critical social institutions, such as schools and roads, underfunded.