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Let's say that the national income tax is 5% for everyone with no loopholes (i.e. no tax reduction). In theory the rich would contribute more to total tax revenue.
What are the arguments for and against this assuming the government uses revenue wisely?
Flat taxes are extremely popular to fiscal conservatives and libertarians for their simplicity and seeming 'fairness'. This is an extremely naive view of the issue, however, and very few countries adopt this policy.
This is for a wide number of reasons. However, I'll focus on five for simplicity's sake:
It's generally acknowledged that in a capitalist society, the price of goods should not fluctuate widely, but should settle in a spot that balances supply and demand at a point that only increases prices as labor increases. Likewise, most modern capitalist societies believe in the division of labor, allowing for goods beyond that which can be produced on a farm. The end result of this practice is that there is an absolute minimum amount of money required for each person to survive. For our example, let's say that it costs $100 to provide bare minimum food, clothing and shelter. If one person earns $100 and one earns $1000, the first person has no disposable income. If I take 5% of his money, he may die. The second person has $900 of disposable income. If I take 5% of his money, he will be inconvenienced, but he won't die.
Along a similar bent, capitalism is driven by poor people spending money. If I save a poor person $5, they're going to spend that $5 immediately, thus providing jobs and making the economy healthier. If I save a rich person $5, they might spend it, but they also might save it, which benefits them but not society as a whole.
The government provides help to its citizens in a variety of ways: by providing communal infrastructure to allow for movement of goods and services, a military to protect stability, a government-guaranteed stock market, government-guaranteed banks, and other vital services. George makes $100, and while he uses the roads when he takes the bus to and from work, he doesn't see nearly as much monetary benefit from the government's services as Jill with $1000 does. Jill owns a business and sends semi trucks down those roads every single day to deliver goods to market. She puts lots of money in banks to protect her money against calamity. She invests her money in the stock market to turn that $900 into way more. George might get $3 of benefit, while Jill gets $300 of benefit, so Jill should probably pay more for that benefit.
It's expensive to be poor. Jill can afford to get preventative maintenance on her car so it doesn't break down and cost her more. She can afford to get a security system so that all her expensive stuff doesn't get stolen. She can afford to go to the doctor and catch that cancer while it's small and manageable instead of waiting until it's so bad she can't work, pay an arm and a leg for treatment, and still die, leaving her heirs with six-figure bills. George doesn't have any of those benefits, and thus can't afford to prevent calamity. He ends up paying more overall because of this issue.
Taxes are only for those who can't afford to buy a legislator. Jill has enough disposable income to make sure her voice is heard in government, making it both work better for her interests and make sure she pays less taxes via loopholes and creative accounting. So even though it looks like she's paying her flat 5% on paper, she has routed quite a bit of wealth through Panama, Switzerland and Ireland so that she's paying somewhere closer to 3%. This kind of stuff isn't even on George's radar.
This would be a flat tax, which is a fair way to tax people from the perspective that each person is paying the same proportion of their income. There are also many people that believe that such a tax is not fair because the results of the tax are far more punishing to those with low incomes. This is a largely ideological belief based on whether you view equality of opportunity or outcomes as more important.
The biggest argument against a flat tax is that it is crippling to people that earn the least, taking 5% from someone just above the poverty line will force them into poverty and that isn't a desirable outcome, that will likely require some form of assistance from private charities or the government. A more progressive tax system would tax the bottom less and offset that loss by taxing the top slightly more. Depending on the difference in incomes between the top and bottom it can take an extremely small additional percentage of tax to replace that income. Since money has a marginal value its possible that the more money paid by the rich has less value to them than if it was paid by the poor. This is a double edged sword though, because by taxing the rich more it's possible to create a disincentive to increase income for high income earners since each extra dollar is both worse less to them and they receive less of each new dollar they earn. Progressive systems also run the risk of collapsing because they rely too much on a handful of people paying all the taxes, if even a small number of them leave then it becomes a massive blow to income.
(As others have said, the disadvantages of flat tax have been amply described both for this and other questions. I'm therefore adding only 2 advantages and 2 possibilities to mitigate a particular disadvantage.)
In addition to lots of good points that have already been brought up.
Where I am, one part of the income tax is handled by a flat tax: captial gains tax.
Flat taxes work quite as expected in situations where you have "chain taxes" (or, total tax is split between two consecutive tax payers).
E.g. a public company that has a profit at the end of the year has to pay "income" tax. If then a dividend is paid (i.e. net profit payed out to shareholders), that is subject to that shareholder's income tax.
With flat taxes on dividends and company profit the total tax burden is exactly the same whether the profit is reinvested or drawn, and it doesn't matter whether the profit is kept for future investments and then e.g. payed out together with the next year's profit. This means that the decision how to best use the profit can be made purely with regard to what is economically good and sensible for company and owners and is not artificially influenced by tax considerations as the taxes will be the same.
In particular, progressive taxes on the dividend may encourage to always pay out profits even if keeping more money in the company would be economically better and make it more resilient against more difficult economic situations in the future.
Flat taxes can be calculated without any information on other/total income which is needed in case of a progressive tariff. This means that a flat tax can easily be collected directly directly at the source: when dividends are payed out, the capital gains tax due directly goes to the tax office. The shareholder gets net payment + a document saying that taxes were paid.
For:
Flat taxes feel fair because everyone is taxed at the same rate
Flat taxes would save billions of dollars that are spent on compliance with complex tax laws, also much of the money that is spent on enforcing compliance with those laws
By removing tax breaks from the tax system you remove a source of corruption as lawmakers are no longer able to give tax breaks or penalties to targeted corporations
Against:
The tax is harder for the poor to pay because they have less disposable income. Compare for extreme example how a 50% tax rate would affect Bill Gates versus someone barely feeding his family. To make this less of a problem many flat tax proposals have a certain amount of income that is exempt from taxes
The tax code can’t be used to encourage good things such as by putting extra taxes on industries that pollute and lowering taxes on companies researching solar power
To make a flat tax that is capable of raising enough money, the rate may need to be so high that there is greater motivation to hide income, thus increasing both criminality and enforcement costs
The introduction of a flat tax rate, as opposed to progressive tax bands, would be required to meet two simple criteria to be viable.
Number 1 is a no brainer. The Government still needs all the income it currently receives. Even if flat tax collection was cheaper than the current situation, a dubious assumption, the cost of tax collection is minor against the amount of tax collected.
Number 2 is where any real problems lie, to be seen as any way a legitimate change the impact of a flat rate cannot be simply seen as a give-away to any section of society. The only practical way to achieve this is to modify everyone's current income (at least pay rather than investment income) based on the changes in tax. After all, everyone's pay is currently based on the idea that they'll lose a certain amount to taxation, if tax changes dramatically it is only logical that pay would change dramatically too. The work required to do this and the compliance cost to ensure it is done fairly is significant to say the least.
