Flat Tax Definition

What Is a Flat Tax?

A flat tax system applies the identical tax charge to each taxpayer no matter revenue bracket. Sometimes, a flat tax applies the identical tax charge to all taxpayers with no deductions or exemptions allowed, however some politicians have proposed flat tax techniques that maintain sure deductions in place.

Most flat tax techniques or proposals don’t tax revenue from dividends, distributions, capital good points, or different investments.

Understanding a Flat Tax

Supporters of a flat tax system suggest that it offers taxpayers an incentive to earn extra as a result of they aren’t penalized with the next tax bracket. Additionally, flat tax techniques make submitting simpler. Critics of flat taxes argue that the system locations an unfair burden on low-wage earners in alternate for decreasing tax charges on the rich. Critics consider a progressive tax system is fairer than a flat tax system.

Flat Taxes vs. Regressive and Progressive Taxes

Whereas a flat tax imposes the identical tax proportion on all people no matter revenue, many see it as a regressive tax. A regressive tax is one wherein the federal government taxes high-income earners at a decrease proportion of their revenue and low-wage earners at the next proportion of their revenue.

The tax is seen as regressive attributable to a extra significant slice of the full funds accessible to the low-income earner going to the tax expenditure. Whereas the upper-income payer nonetheless pays the identical proportion, they’ve sufficient revenue to offset this tax load.

A gross sales tax is an instance of a regressive tax, though at first look it might look like a flat tax. For instance, think about two individuals every purchase $100 value of T-shirts and pay a 7% gross sales tax. Though the tax charge is identical, the person with the lower-income spends extra of their wages towards the tax than the particular person with the upper revenue, making gross sales tax regressive.

Progressive tax charges, in distinction, represent a extra important proportion of high-wage earners’ incomes and a decrease proportion of low-wage earners’ incomes. In america, revenue tax is progressive.

As an instance, as of 2020, people incomes as much as $9,875 in taxable revenue pay 10% in tax, whereas these receiving over $518,400 pay as much as 37% on their earnings. For 2021, will probably be $9,950 and $523,600, respectively.

Actual-World Examples of Flat Tax

Russia was the most important nation on the earth to make use of a flat tax with a 13% flat tax on private revenue. In 2021, the nation moved to a progressive tax to spice up tax income. Different nations which have used a flat tax system embody Estonia, Latvia, and Lithuania, however each Latvia and Lithuania have now modified to a progressive tax system.

Greenland makes use of a flat tax system that may be adjusted yearly. For people, the present charge is 36%, 42%, or 44%, relying on the municipality.

In america, the payroll tax is a kind of flat tax. The IRS levies a payroll tax, particularly the Federal Insurance coverage Contributions Act (FICA) tax of 15.3% on all wage-earning taxpayers. Proceeds go to take care of the Social Safety and Medicare applications. Workers and employers cut up the tax: employees pay 7.65% in the direction of the FICA tax, whereas their firms pay 7.65% of the tax. Self-employed people pay the total quantity on their very own.

This tax is taken into account flat as a result of it imposes the identical proportion on all wage-earners, no matter their revenue tax bracket. Nevertheless, solely earnings beneath $142,800 are topic to the Social Safety portion of the FICA tax in 2021; that determine rises to $147,000 in 2022.