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Flat Tax (Proportional Tax)

Last updated 25th Apr 2022
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Definition

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.

Explanation

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.

Related Terms

progressive tax, expatriate tax, excise tax, tax treaty, Gas Guzzler Tax, FUTA, franchise tax

Moneyzine Editor

Moneyzine Editor