Question - What are the disadvantages to having a 'flat tax' where the government took a fixed percentage of money any time it changed hands (no tax write offs for charitable contributions, no progressive tax brackets, no luxury/sin taxes, etc.). Congress would have a fixed budget and have a direct incentive to better their respective economies. People would know exactly how much they would owe and no one company could get the upper hand by hidden tax breaks tucked away in obscure bills. - At least this is what the Utopian point of view is. Are there any good examples of economies that have tried this? How have they dealt with national emergencies, paid for a military, unplanned expenses, etc.?
Response - Your questions possess many subjective qualifications. Obviously, there is no objective concept of 'disadvantage' or 'advantage.' What appears to be an advantage to one person may also appear to be a disadvantage to another. For example, the progressive income tax currently in place is viewed by some as 'good' and others as 'bad' for precisely the same reason: that those who earn more pay higher rates than those who earn less. Progressivity is 'advantageous' or 'disadvantageous' depending entirely upon whom one questions - and their views of what the 'best' outcome is.
One cannot even really ask which tax system is most efficient, because it depends upon the goal of that tax system and the structure of the bureaucracy implementing that tax system.
In other words, the starting point matters. So does the ultimate result desired. Each helps define the road taken from the former to the latter.
I could write an essay about the different goals of taxation. Should we care most about overall per capita standard of living? Maximizing overall tax revenues? Only generating as much tax revenue as is 'needed' (requiring the determination of some formal definition of 'necessary')? Who should possess the power to determine how these monies are spent - the bureaucrats, or the people? If the people should possess the power, how should this power be demonstrated and acted upon?
I don't think any of that, however interesting it may be, is necessary to tackle the various characteristics of a 'flat tax.'
So, let us assume we have a flat tax. All income, regardless of label (profit, capital gain, dividend, wage, rent, interest, etc.) is taxed at a fixed rate. There are no loopholes, no tricks, no gimmicks.
Now, this system can exist independent of a balanced budget. So, I'm not going to address budgetary issues.
The first wrinkle that must be addressed is: how do we determine income? Which costs are permitted to be counted against revenues to determine taxable income? We have the same issues, it seems, with a flat tax as we do with progressive taxation. Someone is going to have to determine what is permissible and what isn't when we subtract costs from revenues.
So, what would have to happen is the authors of the legislation to implement a flat tax would have to specify deductions that would apply to married versus single and parents versus childless.
It is possible that, over time, a tendency will arise for a gradual increase in complexity within the tax system. Remember, our current labyrinthine income tax system didn't come about overnight.
The authors would also have to deal with the problem of 'double taxation.' If corporate profits are taxed, and the money left over generates capital gains - and those are also taxed, then spending will be incentivized over investment. There would still have to be a lot of caveats within the legislation to cover as many of these issues as possible in order to avoid as many unintended consequences as possible.
Of course, it's perfectly reasonable to simultaneously have both a progressive and a flat tax. The taxpayer could then select how he wished to calculate his tax liabilities and pay his taxes.
Remember in class, how we talked about the fact that everyone's income is someone else's spending? The reason I'm bringing this up to you is because the main antagonists among those seeking to replace progressive taxation are those advocates for the flat income tax and those advocates for a national consumption (or sales tax). In either scenario transactions are still being taxed, it's just the tax is being funded from the buyer's hand in one situation and the seller's hand in the other. Same money. Different angle.
It's interesting to think about.
As far as nations using a flat tax are concerned, there are actually quite a few. Russia, Estonia, Latvia, Lithuania, Ukraine, Serbia, Romania, Slovakia, Georgia, The Channel Islands (Jersey and Guernsey), and Hong Kong (Hong Kong actually has a dual tax system - where you can choose either progressive or flat).
Economic growth in many of these nations is pretty significant.
Personally, I think simpler is always going to be less costly than complicated. But, there's an entire industry built around the complications of the current tax system that will be extremely resistant to any change (tax accountants and tax attorneys, for example).
Also, remember, income taxation is only one way a government can raise revenues. Import tariffs and bond sales are others. Unplanned for (emergency) expenditures shouldn't prove to be a problem.
This is a subject that can get incredibly complicated and we could probably have an ongoing conversation that could last an entire semester, but I hope this short 'mini-essay' at the very least points you in the right direction cognitively and helps you better understand the topic.
Of course, let me know if you need anything else.