There is a growing debate on the usefulness of a flat tax regime, a taxation system that ensures fairness by taxing all individuals at the same percentage rate regardless of income level.
Dr. Mahamudu Bawumia, the New Patriotic Party presidential candidate, occasioned this debate by making it his flagship proposal.
This article evaluates the concept of a flat tax and concludes that it is a positive innovation with good prospects of success towards economic independence.
A flat income tax is a taxation system that ensures fairness. All individuals are taxed at the same percentage rate regardless of income level.
Unlike progressive tax systems, where tax rates increase as income rises, a flat tax applies a single rate to all taxable income.
This means that everyone, from low-income to high-income earners, pays the same proportion of their income in taxes.
Flat taxes often contrast with progressive tax systems, which apply higher tax rates to higher income brackets.
Key Features of a Flat Income Tax:
- Single Tax Rate: All income is taxed uniformly, simplifying the tax structure.
- Elimination or Reduction of Deductions: Many flat tax systems reduce or eliminate tax deductions, exemptions, and credits, further simplifying the tax filing process.
- Simplicity: The primary advantage of flat taxes is their straightforwardness. They make tax compliance a breeze for taxpayers and tax authorities by significantly reducing the complexity of calculations and paperwork, relieving the usual tax-related stress. This simplicity instils confidence in the system and reassures taxpayers of its fairness.
Key Benefits of a Flat Income Tax:
- Increased revenue: The simplicity of administering and enforcing a flat tax and its wider tax net are expected to improve compliance and revenue.
- Economic growth: A flat tax system can stimulate demand because it typically implies lower tax rates and increased disposable income. The simplicity and predictability of flat taxes can attract foreign direct investment, improving economic growth. Furthermore, flat taxes can positively impact entrepreneurial effort, investment, growth, and sustainable development by removing the disincentive to take on more risk to earn a higher income.
Opponents of flat taxes argue that their record of increasing revenue is not clear.
Flat taxes are often introduced as part of a raft of reforms designed to improve revenue mobilisation; therefore, it is not easy to establish the impact of the flat tax itself.
They argue that where flat taxes have been successful, it’s been mainly because of superior enforcement, collection mechanisms and economic expansion, not the flat tax per se.
What is clear, however, is that in most countries that have implemented a flat tax, economic growth has improved significantly.
However, it’s important to note that flat taxes are not without their critics.
Some argue that flat taxes are regressive and favour the rich by reducing the marginal income tax rate.
They contend that flat taxes violate the ‘ability to pay’ principle, which states that those with a greater ability to pay taxes should contribute more.
This principle is based on the idea that the more income a person has, the more they can afford to contribute to the common good.
They argue that flat taxes disproportionately burden lower-income individuals who spend a higher percentage of their income on essentials, leaving less disposable income than the higher earners.
Critics of flat taxes also argue that this can lead to widening income disparities, which they view as socially undesirable.
These concerns highlight the potential challenges and risks of implementing a flat tax, and it’s important to consider these factors when evaluating the concept.
| Country | Flat Tax Introduced | Economic Growth Before (%) | Economic Growth After (%) |
| Russia | 2001 | 6.3 (1999-2000) | 7.3 (2001-2007) |
| Slovakia | 2004 | 4.6 (2000-2003) | 6.0 (2004-2008) |
| Estonia | 1994 | -0.6 (1991-1993) | 7.0 (1994-2000) |
| Latvia | 1995 | 0.5 (1992-1994) | 5.6 (1995-2000) |
| Lithuania | 1994 | -2.2 (1991-1993) | 5.8 (1994-2000) |
| Georgia | 2005 | 5.9 (2000-2004) | 9.3 (2005-2007) |
| Romania | 2005 | 5.4 (2000-2004) | 6.2 (2005-2008) |
| Bulgaria | 2008 | 5.6 (2004-2007) | 6.2 (2008-2010) |
| Hungary | 2011 | 1.2 (2008-2010) | 3.0 (2012-2015) |
Hong Kong was the first ‘territory’ to implement a flat tax in 1940, although currently, most countries implementing a flat tax are in Eastern Europe.
Estonia adopted a flat tax system in 1994, which has been a critical factor in its economic success.
Russia, the largest country ever to adopt it, shifted from the flat tax after twenty years in 2021 due to geopolitical, economic, and social factors.
Under pressure from sanctions and increased social spending, Russia introduced another tier of 15% on salaries over 5 million roubles a year, approximately $55,000, in addition to the 13% original flat tax rate.
The critical success factors in implementing a flat tax are the tax rate and compliance/enforcement.
The rate ensures revenue increase, and compliance is necessary to widen the tax net.
It’s important to note that none of the countries implementing the flat tax system had anything near the level of digital financial integration, visibility, and enforcement mechanisms Ghana currently has when they implemented theirs.
The recent advancements in digitalization, such as the National ID card, the tax identification number (TIN), mobile money interoperability, the Ghana.gov platform, digital address system, SIM registration, etc., have made the flat tax proposal now possible and practicable.
These digital tools have significantly improved tax administration and enforcement, making it easier to identify and collect taxes from previously untaxed sources”Exploring the Potential of Flat Tax: A Path to Economic Independence”.
While success is not guaranteed, the $23 billion in annual potential revenue outside of the tax net makes the innovative flat tax worth a try.
Even if it captures only a quarter of this revenue, it would be transformational to Ghana’s public finances and provide the resources needed to finance the promised ‘upgrade’ of the economy.
The flat tax will allow the removal of nuisance taxes, the reduction of port duties, the payment of our debt, the improvement of private sector access to credit, and the increase in investment, employment, and growth, paving the way for a brighter economic future for Ghana.
All said Dr Bawumia’s proposed flat tax remains the most credible path, articulated by any of the competing presidential candidates, to the revenue increase that will allow Ghana to break out of the vicious cycle of debt it is currently in, stay out of it, and eventually achieve economic independence.
The writer, Mordecai Quarshie, is a seasoned Ghanaian politician with many years of experience in private life. You can reach him at mordecai.quarshie@gmail.com.
OTHER ARTICLES BY MORDECAI QUASHIE:
- Managing Ghana’s economy: A ‘Reset’ or an ‘Upgrade’
- Economic independence now IV: Fiscal responsibility – a new flat tax system ‘getting some more cloth’
- Economic independence now 3: ‘cutting our coat according to our cloth’
- Mordecai Quarshie writes: “Economic independence now!”
- Economic independence now II: A day in the life of economically independent Ghana