Journal Article

How would a flat tax affect small businesses?

Abstract: The U.S. Congress is considering several strategies to reform the federal income tax system. The most widely discussed strategy, a flat tax, would tax income received by businesses and individuals at the same low, flat rate. Flat tax proposals would eliminate most tax deductions and tax credits but would increase the personal exemption for individual taxpayers. While the debate continues over whether a flat tax would be fair to individual taxpayers, assessing the effect of a flat tax on economic growth and business activity is also important.> Most economists who analyze tax incentives conclude that a flat tax would encourage economic growth, which would have a positive effect on businesses in general. The effects on businesses would not be uniform, however, and many small businesses would be affected differently than large businesses. Small businesses are an important component in the U.S. economy, producing about half of private sector output and employing over half of the work force, so tax reformers need to understand how a flat tax would affect the small business sector of the economy.> Golob examines the effects of a flat tax on businesses in general and on small businesses in particular. He concludes that businesses in general are likely to benefit from a flat tax and that small businesses are likely to benefit more than large businesses. Most businesses would benefit from higher economic activity associated with a flat tax. Small businesses would benefit even more than large businesses, due in part to reduced compliance costs. In addition, a flat tax would eliminate tax deductions and tax credits less widely available to small businesses, thereby leveling the playing field between large and small businesses. Moreover, lower interest rates under a flat tax would offset more of the loss of interest deductibility for small businesses than for large businesses.

Keywords: Flat-rate income tax; Small business;

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Economic Review

Publication Date: 1996

Volume: 81

Issue: Q III

Pages: 5-19