The coming Tax Reform - "Flat Tax"
By: R. García De Paredes
The flat tax proposed by our president Ricardo Martinelli implies reducing the ISR rate for companies from the current 30% to 10% or 15%; limit the deductions and eliminating a number of subsidies and tax exemptions, including those for banks.
Everybody knows that the Flat Tax would eliminate all exclusions, subsidies, exemptions and credits and would set a uniform fixed tax on the income.
In example, eliminating the CAIR and implementing the flat tax would mean a significant decrease in the income from taxes for the State. How will they replace the current tax incomes that have been used to finance an important part of public investment?
The system of a flat tax is a fair scheme because individuals and companies receive the same treatment, with no privileges, where simplicity encourages to produce wealth, stimulates the economy and employment and puts an end to the negative slant to savings and investment. One of the great advantages of this outline is that the incentives to pay taxes as company or as individual disappear, which depended on which was more convenient, and it strongly discourages tax evasion and avoidance because there would not be privileges for sectors or legal concepts, solving to a great extent the sub statement of profits of the companies as well as other juridical maneuvers.
All problems result from causes, and to eradicate problems we should first take care of the causes that produce them. Although the causes of a decreased economical growth are as complex as the economic process itself, we hay identify several structural factors that definitely inhibit obtaining the capital that is necessary for the economic expansion. Among them it is how the tax system is designed, because the taxes affect, whether directly or indirectly, in the information transmitted by the price, which distorts the decisions of the economy agents to consume, save and invest.
Specifically, the main advantages of such a system are the following:
It is simple: The international experience is that the main virtue of a flat system is its simplicity. It is easier to manage and for the people to comply with it. Paying these taxes is so simple that persons need less than 10 minutes to prepare their statements. Its simplicity heartens more people to pay their taxes. It is equitable: Persons like companies, regardless of their income, are subject to the same tax rate, then people with alike incomes pay alike taxes. There being no special treatments, there are no incentives to have profit from other tax payers. It is progressive: In order for poor people to pay less or to pay nothing at all, different tax rates are not required. It is enough to apply a sole rate taxing in excess of a generous personal exemption, the same for all, which allows for the necessary progressiveness. The effective rate is higher as the incomes are higher. It is efficient: the economists agree in that the most desirable taxes are on consumption, because are the ones less distorting decisions of the economic agents and most stimulating for the production of wealth. Also, this type of tax is one of the most efficacious manners to increase tax incomes, because it broadens the taxable basis.
Reduces Costs. Tax losses decrease due to differentials in taxes and the multiplicity of regimes and privileges. Incentives to evade and avoid are reduced and also decreases the costs incurred by the citizens and government, ones to pay taxes and the later to recover them (collection and control).
Eliminates the dual taxes. The income is taxed only once and the closest possible to the source.
