What is Flat Tax? - Lemeton

If you want to better understand how the systems in various State works, engage this post on “What is Flat Tax?”. We bring to you the Benefits, its downside as well as peculiar comparisons.

The only guarantees in life are Death and Taxes. However, out of those two, one is definitely more complex than the other. In a Progressive Tax system, when a person’s income increases, so does his share of income taxes. It is also important to note that this tax system is actually discussed in the context of an income tax. In this light, taxes on consumption, property or transfers will be affected as a result of progressivity.

Definition

A Flat Tax, which is short for Flat-Rate Tax is a tax system that applies a single tax rate to all levels of income. This means that everybody’s pays the same percentage of their income. Sometimes is usually referred to as an Income Tax when exactly the same tax rate is applicable to all taxable income.

Over time, a lot of people have been of the opinion that this type of Tax will make payment easier as well as the enforcement of payment. However, what nobody realizes is that a Flat Tax rate automatically reduces the burden from high income earners and places it on the low income earners.

Note: It is important to understand that while the U.S Tax system is progressive there are other advanced State that have Flat Taxes on income.

Why settle for Flat-Rate Tax?

The Flat Rate Tax seem fair to a lot of people as it usually treats all taxable income neutrally. Also Flat Taxes are less likely to discourage additional work, investment or anything that contributes to economic growth.

A perfectly Flat income tax is over that doesn’t distinguish between incomes, does nothing to alter the effective tax rate. However, it is unfortunate that no state has a perfectly Flat income.

States with this Tax

Most States actually practice the Income Tax systems which is very similar to Federal Income Tax, however, there are 9 States that decided it’s citizens all pay the same tax rate. These States are;

  • Colorado
  • Illinois
  • Indiana
  • Kentucky
  • Massachusetts
  • Michigan
  • North Carolina
  • Pennsylvania
  • Utah

Out of these 9 States, 4 States moved from Income Tax rate to Flat Income Tax rate. They are;

  • Colorado
  • Utah
  • North Carolina
  • Kentucky

In 2022, 4 other States applied for permission and was given clearance to shift to Proportional Tax Rates. They are;

  • Arizona
  • Georgia
  • Iowa
  • Mississippi

Types of Flat Tax

True Flat-Rate income Tax

In this system, tax rate is applicable to all personal income will no deduction or exceptions.

Marginal

This is similar to True Flat-Rate income Tax except that the Marginal Tax excludes some kinds of income from being defined as Taxable income.

Hall-Rabushka

This tax system was designed by Economists at the Hoover Institution. Hall-Rabushka is basically a proportional Tax on consumption while excluding investment.

Negative Income Tax

The idea of this kind of tax is basically same as Marginal Flat Tax. The only difference is the fact that when deductions exceed income, the taxable income can be negative instead of being set to zero.

Capped

In this Tax system, all incomes are taxed at a flat rate until a specific cap amount is reached.

Advantages

Motivation: The Proportional tax system can Serve as a form of motivation for the individual to earn more so as to have a better standard of living.

Discrimination: This System of Tax Rate eliminates every chance or possibility of discrimination between taxpayers since they all pay at the same rate.

Bribery and Corruption: The Flat Tax system frowns at Bribery and corruption which in this case can be practicing Tax evasion. The system discourages misuse of taxation laws.

Revenue: Practicing same Tax Rate system has brought about an increase in revenue. Money from thus can be invested in social welfare schemes.

Simple: The biggest benefits of all is that this system of taxation is Simple and effortless.

Disadvantages

Despite the many advantages of Proportional Tax, there are also some downsides to the system. Some of them are;

Struggle: This Tax system puts a lot of burden on Low income earners. They have to work twice as much if they’re going to keep up with a decent disposable income.

Low Revenue: If peradventure flat rates become applicable, revenue generation will reduce drastically. This is because in this system the government will not be able to get revenue from high income class as everybody pays the same rate.

Low esteem: Sometimes instead of being motivated, low income earners get depressed as they feel deprived of all the benefits they deserve.

Flat Tax VS Progressive Tax

In the proportional Tax system, the people have the same Tax Rate while in the Progressive Tax system the government provides a tax slab with different tax rates according to individual income.

While there are usually no exemptions or deductions in a Flat Tax system, the Progressive Tax offers various exemptions and deductions.

Low income earners are at the receiving end of the Proportional Tax as they earn just enough to meet their everyday need. However, in the Progressive Tax system, the high income earners take the heat

Flat Tax VS Regressive Tax

A Flat tax can lead to Regressive Tax because unlike Progressive that charges Tax rate according to income, these other two do quite the opposite.

Regressive Tax system is a system where the higher your income, the lower your tax rate and vice versa. Just like Flat Tax, the burden is on the Low income earners.

Flat Tax VS Proportional Tax

A Proportional Tax is exactly what you would call a Flat Tax. They can be used interchangeably as they basically mean the same thing.

Frequently Asked Questions

What is the best Tax system?

This question is difficult because it doesn’t’ have a definite answer. Various countries have exactly what works for them. The level of development and job opportunities in other countries matters and is usually put into consideration.

Who benefits from a Flat Rate?

Mostly the high income earners. There is more burden on the Low income earners. There’s the pressure to do more, earn more, save more.

Is there any state where taxes are not paid?

Yes! As a matter of fact, they are seven. They include; Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington as well as Wyoming.

Who originally proposed the Proportional Tax?

Milton Friedman, 1962.

How do I calculate ?

This is simple! Just divide the Flat Tax amount paid by Gross Income. Usually tax rates are maximum of 10% (so says God)

See also: https://www.brookings.edu

If you want to better understand how Tax systems in various State works, engage this post on “What is Flat Tax?”. We bring to you the Benefits of Flat Tax, its downside as well as peculiar comparisons.

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