What is a Flat Rate Tax?

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  • Last Modified Date: 03 September 2019
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A flat rate tax is a payment made to the local government on income earned. The rate is the same for every citizen and business, regardless of how much money is earned. Like most tax revenue, the collected money is most often used to improve the local community in various ways. A few countries have instituted the flat rate tax, including several in eastern Europe, such as the Baltic countries; other countries are considering it, since some people believe a flat rate tax is the fairest type of taxation program available. An ongoing debate among groups, individuals, and politicians exists over whether or not a flat rate is the best system as it can be difficult for the lower class to pay any amount of income tax.


Similarities to a Progressive System

The flat rate tax can be compared to a progressive tax rate. Under a progressive system, the percentage of income deducted for taxes increases as the income amount rises. A flat rate system is similar in that taxpayers with the lowest income pay very little in taxes, while those with higher incomes pay a far greater amount towards taxes. These percentages can be lessened in part by the number of deductions and tax breaks a person is able to take, lowering the amount of income that is considered to be taxable. A flat rate system is set apart from other progressive systems, however, because the tax rate is constant across the board and does not change depending on a person's income.

Pros and Cons

What tends to concern people when they argue against this system is the idea that the overall tax rate might have to significantly increase to give the government the amount of revenue needed to support the community. Proponents for the plan suggest that a constant rate wouldn’t necessarily mean tax percentages would need to be raised, since there would be a more constant rate of collection from all individuals and corporations, with fewer tax shelters and loopholes for those who make larger income amounts.

Most propositions for a flat rate tax suggest built-in deductions for people, especially in the lower income spectrum. The percentage of tax applied would only be deducted from taxable income, and would be applied to individuals and corporations alike, and this percentage would remain constant for all people. Some plans call for incomes near the poverty level or below it to be exempt from taxation.

Others suggest that taxable income for people at the poverty level would be almost non-existent because of standard deductions. There are some questions as to whether flat rate taxes would pose an undue burden on the lower middle class. Depending upon the actual amount of money earned that is considered “income,” people in the lower middle class might find themselves with much less spendable income, and have difficulty purchasing basic necessities.

Any evidence that shows economic growth in a country as a result of a flat tax rate is usually argued by proponents to be caused by some other factor, such as additional reforms or rapid market expansion. In countries where this system is in place, such as many countries in Eastern Europe, other factors may also play a part in any economic growth the country experiences. As a result, it is difficult to reach an agreement on whether or not this type of tax system is effective.

Current Systems

There are a few states within the US that have flat rate tax for state taxation. These include Indiana, Massachusetts, Maryland, and Illinois. Many countries throughout the world are considering adopting this method of taxation, or already have it in place — Russia, Mongolia, the Baltic States, and Hungary impose a flat rate system on their citizens.


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Discuss this Article

Post 5

With a flat tax, you wouldn't have to file a tax return. What comes out stays out. That would save more money overall.

Post 4

Oasis11-When you buy or consume things there is always a tax associated with it and this is a form of a flat tax that we all pay.

The people within the higher tax brackets often have their own business and tend to hire employees to support their business. If they had a more balanced tax burden then they could help the poorer people by offering an additional job opportunity that did not exist before.

I agree I think that the more successful people tend to pay just about all of the tax burden which is not fair either.

Post 3

Sunshine31-I think that a progressive vs. a regressive tax is something that will always be debated.

People think that a flat tax is a regressive tax, but it really isn’t because everyone pays the same percentage, so if you earn more you pay out more. To me it seems like the only fair way to set the same federal tax rate for everyone.

I know that the flat tax rate pros and cons really involves the fact that the poor have less available income to spare and this would impact them more, but it is only fair that if you work in the United States you should pay for the services that you receive.

It is an unfair burden for the rest of the Americans that are the most productive in society to shelter this burden. It is a fact that the top 10% of wage earners in the country pay 96% of all federal income taxes.

Post 2

Comfyshoes-The flat tax really makes things fair because everyone pays the same percentage, so if your income is higher you will pay higher dollars and if your income is lower you will pay a lower amount of your income.

This would also make filing your income taxes easier because everyone pays the same federal rate.

Post 1

A progressive income tax is what we currently have in the United States. Progressive taxation is a method of taxing wage earners additional sums based on their income.

The higher the income one has the higher the tax rate. A flat tax is a proportional tax that really taxes everyone the same percentage of income.

A flat tax of 23% for example, would be imposed on the wealthy and the poor equally. Critics say that it impacts the poor more because although they are paying less dollars the money spent on taxes would be a harder burden for them because half of the population does not pay federal income taxes currently.

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