What is a Flat Tax?

//What is a Flat Tax?
What is a Flat Tax? 2017-10-04T21:11:44+00:00

Definition: A flat tax, also called a proportional tax, is an income tax that enacts a constant proportional rate to all taxpayers regardless of income. In other words, all taxpayers would pay the same percentage of their income to the government irrespective of their total earnings.

What Does Flat Tax Mean?

What is the definition of flat tax? The concept of a flat tax rate has been discussed as an option for the US tax code for many years It’s an appealing and intriguing concept because it does away with the unfair and disproportionate progressive tax system that we have today. Under a flat system each taxpayer would pay the rate of tax on all of their income. There wouldn’t be an incremental income bracket system. It simplifies all of the current brackets down to one.

Many leading economists, financiers, and political figures view this system as a fairer taxing policy than the current one. Many also believe that a flat taxing system would be easier to comply with and more equitable for taxpayers.

The main argument against this system is that it disproportionately burdens the poor because they have less disposable income to pay the same rate at the rich.

Let’s look at an example.

Example

Mark, John, and Jessica are all working at the same technology firm, but in a variety of roles. Mark works as a technician, and earns $90,000 per year. John works as a Vice President, and earns $120,000 per year. Lastly, Jessica works as the Chief Technology Officer, and earns $200,000. There are multiple ways they could be taxed, but in the first year, the government decides on a flat rate of 40%. This means that each person, no matter their income, will be taxed at 40%.

Thus, Mark will pay ($90,000 x 0.4) = $36,000 in taxes, leaving him with $54,000.

In contrast, John will pay ($120,000 x 0.4) = $48,000 in taxes, leaving him with $72,000.

Lastly, Jessica will pay ($200,000 x 0.4) = $80,000 in taxes, leaving her with $120,000.

In this system, the government collects ($36,000 + $48,000 + $80,000) = $164,000 in taxes, while the individuals will keep $246,000 of their income. However, as you can see, the government only takes 40% overall ($164,000 / $410,000 = 40%), versus a progressive tax system or otherwise which would be different. It may result in a less efficient or equitable taxation scheme, but possibly more revenue for the government.

Summary Definition

Define Flat Tax Rate: Flat tax means every taxpayer pays the same percentage of his income to the government regardless of income level or class standing.