THE KGM TAX STRUCTURE
Thanks to globalization, many nations are adopting better tax policies. Most politicians still believe in high tax rates, of course, but they feel compelled to move in the opposite direction since it is now increasingly easy for labor and capital to escape oppressive tax regimes by crossing national borders.
This is why so many nations had to lower personal income tax rates after the Thatcher and Reagan rate reductions – and why many nations have been lowering tax rates on business in response to Ireland’s incredibly successful 12.5 per cent corporate tax. They know the geese that lay the golden eggs will fly away if they impose bad tax law.
Economists like tax competition because it leads to better tax policy. Two of the most important rules of good tax law are low tax rates and less double taxation of saving and investment. Fiscal rivalry between nations leads them to adopt both.
Maximum personal income tax rates, for instance, are 23 percentage points lower today in developed nations than they were back in 1980.Corporate income tax rates have dropped by almost 20 percentage points. And many nations, including Scandinavian countries, are reducing tax rates on individual capital income and lowering taxes on wealth.
All these reforms boost economic performance by lowering the marginal tax rate on productive behavior. It is no surprise that nations that enact these policies grow faster and create more jobs.
The Bahamas Government has kept the tax rates high, by contrast, the economy now continues to suffer from stagnation and joblessness.
It is the expressed view of the KGM that instead of fighting to preserve existing tax systems that punish job creation and success, we intend to make a virtue out of necessity and adopt pro-growth tax reforms. Ideally, we will scrap the current tax codes and implement a FLAT TAX SYSTEM. About a dozen nations already have implemented this simple and fair tax code, and the list gets longer every year – thanks to tax competition.
How would a flat tax work for individual taxpayers?
Compared to traditional tax systems, a flat tax is extremely simple. Households get only one exemption -a generous allowance based on family size – and then pay a low rate on any income above that amount.
They do not need to worry about reporting dividends, interest and other forms of business/capital income. Those forms of income are taxed at the business level, thus obviating any need to tax them at the individual level since that would violate the principle of no double taxation.
How would a flat tax work for businesses? All businesses, from the largest multinational to a corner pub, would play by the same rules. Companies would add up their receipts (how much revenue came in) and then subtract their costs (salaries, cost of raw materials, and expenses for new tools and machinery).
This would give them their taxable income, which would be taxed at the low rate.
What are the advantages of a flat tax?
There are two principal arguments for a flat tax- growth and fairness. Many economists are attracted to the idea because current tax systems, with high rates and discriminatory taxation of saving and investment, reduce growth, destroy jobs and lower income. A flat tax would not eliminate the damaging impact of taxes altogether, but by dramatically lowering rates and ending the tax bias against saving and investment, it would boost an economy’s performance.
However, the most persuasive feature of a flat tax for many people is its fairness.
This radical reform appeals to citizens who not only resent the time and expense consumed by filing their own tax forms, but also suspect that the existing maze of credits, deductions and exemptions gives a special advantage to those who wield political power and can afford expert tax advisers.
When enacted, a flat tax would yield major benefits, including:
Faster economic growth. A flat tax would spur increased work, saving and investment.
By increasing incentives to engage in productive economic behavior, it would also boost the economy’s long-term growth rate.
Instant wealth creation. All income-producing assets would rise in value since the flat tax would increase the after-tax stream of income that they generate.
Simplicity. Complexity is a hidden tax that requires record-keeping, form preparation, lawyers, accountants and other resources to comply with the current system.
Fairness. A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes.
No longer would the tax code penalize success and discriminate against citizens on the basis of income.
An end to micromanaging and political favoritism. A flat tax gets rid of all deductions, loopholes, credits and exemptions.
Politicians and special interests would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy.
Increased civil liberties. A flat tax would eliminate almost all sources of conflict between taxpayers and the government.
Moreover, infringements on freedom and privacy would fall dramatically, since the government would no longer need to know the intimate details of each taxpayer’s financial assets.
Traditional income tax systems punish the economy, impose heavy compliance costs on taxpayers, reward special interests and make a nation less competitive. A flat tax would dramatically reduce these ill effects.
More importantly, it would reduce government power over the lives of taxpayers and get it out of the business of trying to micromanage the economy.
There will never be a tax that is good for the economy. But the flat tax moves the system much closer to where it should be – raising the revenues that government demands, but in the least destructive and least intrusive way possible.