Flat Tax: What It Is and How It Works

A flat tax is a single percentage Know more income tax rate applied to all taxpayers regardless of income.

A flat tax rate eliminates all deductions and exemptions. Most flat tax systems do not tax income from capital gains, dividends, distributions, or other investments.

The opposite of a flax tax is a progressive tax, in which the rate of taxation rises with a taxpayer’s income. The United States has a progressive income tax system.

Understanding a Flat Tax
Supporters of a flat tax system suggest that it incentivizes taxpayers to earn more because they will not be penalized by higher rates and higher tax brackets based on their income level. They also argue that a flat tax system makes filing tax returns easier.

Critics of flat taxes argue that such a system burdens low-wage earners disproportionately while lowering tax rates on the wealthy

Flat Tax vs. Regressive and Progressive Taxes

Regressive Tax
While a flat tax imposes the same tax percentage on all individuals regardless of income, many see it as a regressive tax.

A regressive tax imposes a larger tax burden on those with lower incomes than those with higher incomes because a larger portion of a lower-income individual’s total funds goes to the tax. While higher-income taxpayers pay the same percentage, their greater incomes make the financial burden easier to bear.

A sales tax is an example of a flat tax that is considered regressive. If two individuals each buy $100 worth of T-shirts and pay a 7% sales tax, the individual with less money to spend gives up a larger share of income than the person with more money.

Progressive Tax
Progressive tax rates charge high-wage earners a larger percentage of their incomes than low-wage earners. In the United States, the income tax system is a progressive one. It currently has seven income tax brackets with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%