Last November, E-Draft.am, the Armenian government’s official draft-legislation portal, published a proposed legal amendment which would greatly simplify Armenia’s tax code. The draft law is intended to address a number of issues with the country’s current personal and corporate tax code. It also contains provisions to simplify the tax burden on startup companies, family-owned businesses and single proprietorships. The proposal calls for the creation of a new category for private entities: the “micro-business,” which would be totally tax-exempt.

Article 17 of the draft proposal has caused some controversy among social justice advocates. This amendment would transform Armenia’s personal income tax code from progressive taxation to a flat tax scheme. A Yerevan-based journalist published an open letter on his Medium page voicing his opposition to this new proposal. The usual medley of social justice activists, human rights advocates and other NGO-types, concerned by the unequal distribution of the country’s wealth, have added their names to the letter.

The current Armenian personal income tax code provides for three tax brackets:

Those earning 150,000 AMD (300 USD) per month or less are taxed at a rate of 23 percent.

Those earning between 150,000 and 2 million AMD ( 4000 USD) per month are taxed at a rate of 28 percent.

Those making above 2 million AMD per month are taxed at a rate of 36 percent.

Taxpayers are also required to contribute a monthly sum equivalent to an additional 2.5 percent of their salary to social security.

The new tax proposal would do away with the existing tiers, replacing them with a single 23 percent tax. This figure is expected to be lowered to 20 percent for all taxpayers, regardless of income. Notably, this amendment does not include any changes to the capital gains or dividend tax rates.

The letter cited three main concerns with the adoption of a flat tax:

It would shift the burden of taxation from the wealthy minority to the impoverished majority.

It would encourage income inequality.

It would polarize Armenian society even further.

Though these apprehensions are undoubtedly genuine, they draw upon flawed economic and moral reasoning. The current tax scheme is not transparent, doesn’t effectively curtail wealth inequality, while harming economic growth and social mobility. A flat tax could actually alleviate some of these issues. For example, one of Armenia’s primary obstacles to prosperity is the perpetual lack of government resources. For proponents of progressive taxation, the budgetary arithmetic would take this form:

Higher taxes on the rich → More government revenue → Effective infrastructure investment

Supporters of a progressive tax scheme argue that financing issues would be resolved if the rich paid “their fair share” of the tax burden, thus allowing the State state to then allocate the extra revenue to the construction of new schools, hospitals and so on. This may seem like a convincing argument. After all, who doesn’t want to invest in our children’s future or the health of our nation?

However, the statist view of government expenditure relies on faulty reasoning, by presupposing a cause-and-effect relationship between taxes, government revenue and infrastructure investment; factors which are not necessarily related. Neither one of these steps leads into the other. A more accurate formula could look like this:

Simple tax code → Increased economic activity & investment → Higher wages & spending power → More tax revenue

A flat tax could stimulate economic activity, which, even if taxed at a lower rate, could translate into larger budgetary income. These extra funds could then be used on the social projects, new schools, hospital and so on, that we desperately need.

The notion that higher taxation increases State revenue deserves particular scrutiny. Since this is an American newspaper, it seems fitting to take the United States as an example.

In the 1950s, the marginal income tax rate on the highest income earners (the so-called 1 percent) was a whopping 90 percent. In the same period, roughly 17 percent of the nation’s total generated productivity (GDP) entered state coffers. By the 1960s, the tax rate on the highest income earners had drastically decreased to the (still high) rate of 50 percent. The share of government revenue however, remained virtually unchanged at 18 percent. In fact, from the 1950s to this day, the share of United States government revenue has remained at a constant 18 to 20 percent of GDP, no matter how the tax brackets were set up. Similar results have been reproduced throughout the world.

This phenomenon can be rationalized in two ways. The first is that higher tax rates reduce productivity, without significantly boosting revenue flow to state coffers. The second reason may sound counterintuitive. Progressive tax systems almost always include provisions for deductions from taxable income. Charitable contributions, mortgage interest, business expenses, deductions related to children, different taxation rates on capital gains or dividends and many other items all serve to reduce taxable income. Thus, ironically, the rich tend to benefit from—and therefore, encourage—complicated progressive taxation systems.

Unlike the United States, Armenia’s budgetary troubles stem from improper tax collection, not tax revenue. In the years since independence from the USSR, the Armenian authorities tolerated the creation of a parallel patronage system. The Revenue Service deliberately drafted complicated tax codes designed to shake down smaller entrepreneurs. Government-connected oligarchs engaged in blatant tax evasion while enjoying total impunity. The State’s inability to enforce tax collection, particularly among the ‘oligarch class’ served to perpetuate this vicious cycle.

Karen Karapetyan, having been thrust into the Prime Minister’s office with the unenviable mission of saving Armenia from insolvency, recognized the tax collection issue. His hands tied by the oligarch class’ immunity to tax audits, he set off to liquidate government assets and raise taxes on the middle class to increase revenue. These efforts saw a modest 7 percent increase in tax collection.

His successor, Nikol Pashinyan, faced no such restrictions. In 2018, the Revenue Service collected 1.3 trillion drams ($2.7 billion), a 14 percent increase over the previous year. They even exceeded their expected targets by 4 percent without tweaking the tax rate.

In a Facebook Live address to the nation, the Prime Minister laid bare his displeasure with the current tax code. The complex filing process incentivises tax avoidance and income underreporting in all three brackets. Capital flight has lead to the stashing of hundreds of millions of dollars in offshore bank accounts in Switzerland or Panama.

Opponents of the new proposal would surely not be satisfied with the fiscal reasoning for such a measure. So, what of the moral argument against a flat tax? Surely no representative government would support a plan which would “exasperate, rather than soften the impact of structural inequality and injustice.”

Detractors love to focus their criticism on inequality as if it were anything more than an arbitrary metric. Why should wealth disparity matter so long as as equality of opportunity was guaranteed for the least well-off? Even the egalitarian American political philosopher John Rawls understood that inequality isn’t necessarily immoral, so long as it can benefit the least well-off. He referred to this observation as the Difference Principle. So, advocates of social justice need to ask themselves: Is it truly morally reprehensible to support policies that increase inequality while objectively raising standards for all? Is it really better for society to keep everyone equally poor?

Some might be shocked to find out that policies seemingly designed with “profit over people” in mind actually do benefit the plebs by encouraging investment, job creation and economic opportunities for all. Despite this, it seems as if some prioritize equality to such a degree that they would rather the poor be poorer so long as the rich don’t get richer. One would think that Armenians would shy away from such ideas given our recent seven-decade long experiment with state-sanctioned “equality.”

Ironically, for a system intended to reduce inequality, the progressive income tax scheme hurts the middle class the most. The wealthiest members of Armenian society benefit from multiple revenue streams, like property or dividends, offering many tax loopholes. The middle class, on the other hand, primarily depends on wages for its income, where there are far fewer exemption opportunities.

As such, the current system does nothing to rein in the wealth of top earners. On the contrary, it punishes those who graduate from low to middle-income brackets. Given that in Armenia, the financial disparity between the two is so minute, the compound loss in spending power is glaringly apparent.

The author of the previously cited open letter focuses attention on the relative decline of quality of life for low earners in a flat tax scenario. Yet curiously enough, he failed to address the considerable hurdles to upward mobility under the current scheme. A worker who earns $300 per month actually takes home $220 once the 23 percent income tax and 2.5 percent mandatory pension contribution are subtracted per the low-income tier. Assuming said worker would be rewarded by an employer with a $50 per month raise, they would now qualify under the 28 percent tax middle-income bracket. This translates to an increase of only $30—a trivial amount in a country where penny-pinching is the norm. The average gross salary in Armenia is currently around $350 per month. For reference sake, Armenias jet-set robber-baron class is defined by the tax code as those earning more than $4000 mer month. Those who purport to truly care for the poor should support a tax plan that rewards, not penalizes worker productivity.

There are different ways to implement a flat tax. One thing that the new tax overhaul proposal lacks, however, is a cut-off for the lowest earners. A negative taxation scheme could go a long way to mitigate any additional burden on the poor.

Good policies are judged on their effect, not their intent. The current tax code does not raise state revenues, nor does it minimize social inequality. It’s in dire need of an overhaul. Armenia would do better to apply policies that promote economic growth rather than linger on equality. In the words of Nobel Prize-winning economist, Milton Friedman: “A society which focuses on equality over liberty will end up with neither.”

A flat tax may be a crucial first step toward economic prosperity that will benefit all Armenians. Such a tax scheme would promote transparency and turn the “billionaire class” into producers of wealth (rather than hoarders of it). These social and economic effects alone should produce a sufficient moral and practical imperative to welcome a flat tax.

Editor’s note 04/02/19: A previous version of this article contained a passage showing the net raise as $15. This typo has been corrected