A tax is any monetary charge or any sort of civil levy imposed upon a taxpayer by an agency of the government so as to finance various public expenses and government spending. A person charged with tax evasion or refusal to pay is liable to criminal action. The amount of tax will be calculated upon the taxable income and the assets of the taxpayer. Failure to pay and evasion of or refusal to comply with the terms and conditions of the tax scheme are punishable by law.
In a VAT based economy, it would be impossible to have a flat rate tax. In such a system, the tax is proportional to income. A VAT based system, where everyone has identical flat rate income taxes and everyone pays the same percentage of income tax on his taxable income, would not work out very well. On the other hand, a regressive tax system, in which the lower earners pay a higher percentage of income tax than the higher earners, would work out quite well.
A VAT based economy is characterized by a progressive tax system with taxation levels becoming progressively more progressive the more one increases in level of income. As tax rates increase, income taxes become higher as well. The opposite would be the case if income tax rates were cut down while the base price for VAT remained the same or even decreased. It is this VAT system that has brought about its famous nickname, “rate me!” A VAT based economy is characterized by widespread avoidance of income taxation and a rampant graft bazaar where the prices of goods go up dramatically yet people pay far less tax than they actually earn.
The current situation in Ireland is such that we have now reached the end of the line where a flat tax rate of 50% is incompatible with a functioning market and state. A high-income earned entrepreneur in this state cannot survive within such a high-rate regime for long. He will either have to move abroad or find ways to earn a substantial portion of his income at an internationally recognized business rate. In such a scenario, there is no incentive whatsoever for the high-income earners to avail themselves of the services of a competent international tax consultant. What is the use of paying taxes when you can get the same service at a much lower cost?
A VAT based economy on the other hand is completely opposite to the above described situation. VAT or Value-added Tax is charged at a rate which is proportional to income and not proportional to one’s economic standing. The bottom line is that a firm earning a six figure salary will not be required to pay a single cent in the form of Value-added Tax. On the other hand, a person earning a meager five thousand dollar salary needs to shell out a good sum in order to pay the tax due to the regressive nature of the Income Tax system.
A flat tax system can be described as a regressive taxation system where the basic rate of taxation is deducted from the amount of income before paying the corporate tax. Under such a system the rate of taxation is completely dependent upon the income level and standard of living of an individual or family. The concept of VAT or a proportional tax is completely dead! Let us now hope that none of us actually take the advice given in the previous paragraph!