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.

Related Terms

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