The study looks into the advantages and disadvantages of a flat rate tax on all levels of individual income. Among the advantages of a flat tax structure, are: (a) simplicity; (b) reduced compliance costs and increased compliance rates due to the uniformity of marginal tax rates; (c) inflationary effect in income is offset since the increase in income is proportionate to the increase in taxes; (d) wider tax base; and (e) minimized tax evasion. On the other hand, the disadvantages, include: (a) violation of the principle of vertical equity; (b) subsidy of the rich by the middle and low income groups; (c) exemption of unearned or passive income from tax which are mostly investments of rich people; and (d) the differing levels of marginal utility of income are addressed by graduated progressive taxes.
The experiences of Russia and its Baltic neighbors show that the flat tax really simplifies and raises the efficiency of their tax systems. There is greater compliance among taxpayers as evidenced by the significant increase in the number of taxfilers. Administrative costs on the part of the government decreased as a result of increased taxpayers’ compliance. For the Philippines which is currently contemplating on adopting a flat tax on personal income, there is a need to consider very carefully the level of exempt income or deductions and the rate of tax to arrive at optimum levels of these two variables where there is increased revenue for the government while the tax burden is still manageable for the taxpayers.
