Analysis on the Flat Tax

Please follow the link below to an article from Project Syndicate on the flat tax. It seems as if every Republican nominee is pushing their own version of a flat tax this election cycle which makes understanding the advantages/disadvantages of the structure worthwhile. Personally, I am opposed to such a tax system. My reasoning for this is that if the tax is to be revenue neutral (and some would argue it would have to be revenue positive due to the current budget deficit), and if it thus lowers the top tax rate, it will undoubtedly cause people with lower incomes to pay more in taxes. Not only does this seem like bad policy in light of the trends in income inequality over the past 30 years, it also would most likely reduce aggregate demand in the economy due to the fact that poor people spend almost all of their money on consumption (creating market demand) while wealthy people often save/invest their excess income. 

Here are a couple of useful excerpts from the article:
But, if a flat tax is such a bad idea, why have so many countries embraced it?......A careful study of these countries – mainly post-communist countries in Eastern Europe and a smattering of tiny micro-states worldwide – suggests that there are three main reasons. First, some countries are so relatively poor and lacking in domestic capital that they opt to drop rates in order to attract foreign investors. Other countries are so small and ineffective at collecting revenue that they cannot afford a progressive tax system. Finally, some countries are so corrupt that they have to offer the wealthy a huge rate cut to get them to pay any taxes at all.

For developed countries that already have capital and a track record of inward investment, “the appeal of the flat tax is consequently less,” as a report by the International Monetary Fund concludes. Thus, the flat tax has not been adopted in any developed countries, or in China.

A country’s tax system reflects its institutional capacity, economic circumstances, and distribution of political power. If the US were to become the first developed country to experiment with a flat tax, that shift would tend to confirm what many suspect but hope is not true: that America is broke, desperate for inward investment, incompetently governed, and increasingly ruled by a self-regarding oligarchic elite.


http://www.project-syndicate.org/commentary/orenstein4/English