:::: MENU ::::

Flat Tax Revolution

This was the title page of last weeks Economist dated April 16-22 2005

A Flat-Tax system is an over-simplified taxation model, it attempts to bypass all the intricacies of a complicated taxation slab which is commonly prone to tax loop holes. The Flat Tax system enforces a unified one-rate tax for everything across the board. This taxation model started from Estonia in 1994 who were the pioneers to take the bold step and enforced a 26% Flat-Tax, this concept slowly spread to the neighbouring Baltic nations and was finally also implemented in Russia in 2001 with a 13% tax on personal reserves. We are all aware that Russia, like Pakistan is a bribe-infested economy but they have used this concept with great success and have an increase in its taxation returns by 30% surely not a small increase.

The thing that drives this concept is the notion that lower taxes convinces the people to declare and payup then to suffer later. A unified taxation also avoids loop holes for people to sneak through hence in a way forcing people to come clean

Fewer tax brackets are simpler to administer, but one bracket is simplest of all. Under a pure flat tax, the taxman takes the same cut from the last dollar you earn that he took from the first. The appeal to high earners is obvious. But the administrative elegance of such a system is not so immediately apparent. Because every dollar is taxed at the same rate, it does not matter to the tax collector how many dollars are going to whom. Thus, in principle, the taxman could simply withhold 20% of a company’s payroll, without needing to know who was paid what. Add a second rate of tax, however, or a personal exemption, and the tax collector must find out how much money is going into each pay packet before he can be sure of collecting the right amount from the right person. In America, for example, the tax collector needs to tax the wage packets of 130m or more employees, rather than simply taxing the payrolls of 8m or so enterprises.

………I ask from those Business guru’s out here, is such a system possible in Pakistan?
Read in detail at The Economist editorial

One Comment