Flat Tax (Proportional Tax)
The term flat tax refers to a system that takes the same percentage of tax, regardless of the level of income earned. A true flat income tax does not allow for adjustments to income such as deductions. Within a flat tax system, taxpayers earning $25,000 per year pay the same percentage of income as those earning $250,000.
Unlike a progressive tax, which increases the burden as income increases, a flat tax has one rate which applies regardless of the taxpayer’s income. The federal income tax system in the United States is a progressive tax, while some states claim to have a flat income tax. A true flat tax does not provide for deductions, which allows certain taxpayers to avoid paying taxes on a significant portion of their income.
There are a number of variations of the flat tax. A modified flat tax allows for certain deductions such as home mortgage payments, while a capped flat tax applies until a certain income limit is reached. For example, the Social Security portion of FICA is a capped flat tax.
Proponents of a flat tax believe it spurs economic growth by removing the progressive tax’s disincentive to earn more income. Others argue a flat tax is simpler to implement and avoids the confusion associated with progressive tax codes. Critics of the approach believe a flat tax unfairly shifts a burden to those of the middle class and benefits higher income individuals.