A flat tax system is one in which every taxpayer pays the same tax rate, regardless of their income. This is in contrast to a progressive tax system where each taxpayer is placed into a different income bracket depending on their income, which results in people paying different amounts.
Several countries have established a flat tax, some of the most notable being Estonia, Lithuania, and Russia.
Flat Tax Advantages and Disadvantages
There are quite a few flat tax advantages and disadvantages to consider before implementing such a system.
There have been numerous proponents of a flat tax within the United States, including Senators Ted Cruz and Rand Paul. They claim that there are several advantages to implementing a flat income tax. According to its fans, those advantages include:
- Flat tax system is fair, since everyone pays the same percentage
- Possibility for higher economic growth
- Simpler tax system and tax filing
- Can eliminate other taxes
This said, a flat tax system also comes with several downsides:
- System can negatively impact poorer taxpayers
- It can benefit richer citizens
- This system eliminates or diminishes the role of the IRS, leading to unemployment
- It can cause the national debt to increase sharply
It is also worth noting that the evidence behind the flat tax promoting economic growth is disputed.
Progressive vs. Flat Tax: What’s the Difference?
As stated above, a progressive tax system involves tax brackets based upon income, while a flat tax doesn’t. However, there are more distinctions one should consider when comparing a progressive vs. flat tax system.
A progressive tax system typically has numerous write-offs for individual taxpayers, allowing them to effectively save money. Governments under such a system are also far more able to implement wealth distribution measures and can supply tax credits to promote beneficial behavior (e.g. making one’s home more energy efficient).
All in all, both systems come with distinct advantages and disadvantages.
Need Help Understanding Taxes?
It goes without saying that the American tax system is incredibly complicated. At Tax Help MD, we do more than help you define “flat tax”—we want to serve as a guide that can supply you with information and services that will take the burden of taxes off of your shoulders.
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