What’s a flat tax?

A flat tax applies one rate to all taxpayers, regardless of income. Flat taxes usually have no exemptions or deductions. Some politicians advocate unsavory tax regimes with deductions.

Most flat tax regimes or plans do not tax dividends, distributions, capital gains, or investments.

Understanding Flat Tax

Supporters argue that a flat tax system encourages increased income with no penalty for higher rates, unlike a progressive system that progressively raises tax bands. They also say a balanced tax system simplifies tax returns.

Critics of this tax say it unfairly burdens low-wage earners by lowering tax rates on the rich. Critics argue that a progressive tax system is more equitable than a balanced one.

This tax is opposed to progressive and regressive taxes

Regressive Tax

Flat taxes, which apply the same amount to everyone regardless of income, are sometimes considered regressive. Regressive taxes penalize low-income people more than high-income people.

The tax is regressive since it takes a significant share of lower-income individuals’ cash. Higher-income taxpayers pay the same proportion, but their higher income and funds make the financial burden lighter. They earn enough to cover taxes better than lower-income people.

Regressive fixed taxes include sales taxes. Say two people pay 7% sales tax on $100 worth of T-shirts. Despite the same tax rate, the poor spend more on taxes than the rich.

Progressive Tax

Progressive tax rates harm high-wage workers more than low-wage ones. The U.S. income tax system is advanced and contains seven bands with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

For example, in 2022, anyone earning $10,275 or less will pay a 10% tax. Over $539,900 earners pay up to 37% on a part of their income (the top rate as taxes are applied gradually to income in all six groups).

The 2023 tax year amounts are $11,000 and $578,125.The IRS alters income tax brackets annually to reflect inflation.

Real-World Flat Tax Examples

Russia has the world’s highest flat tax, 13% on personal income. To increase income, the government adopted a progressive tax in 2021. Other nations with flat tax systems include Estonia, Latvia, and Lithuania. However, Latvia and Lithuania currently have advanced tax systems.

The tax in Greenland can be changed annually. Individual rates vary by municipality: 36%, 42%, or 44%.

The payroll tax in the U.S. is flat. Individuals receiving wages are subject to a 15.3% Federal Insurance Contributions Act (FICA) payroll tax by the IRS. Funds support Social Security and Medicare. Employers and employees share tax equally. Both employers and employees pay 7.65% of FICA taxes. Self-employed people pay 15.30% in total.

This tax is flat since it applies the same rate to all wage-earners, regardless of their income tax category. Social Security tax income is capped. Only incomes under $147,000 were subject to Social Security tax in 2022. That maximum climbs to $160,200 in 2023.

How does flat tax work?

A flat tax taxes everyone at the same rate, regardless of income. For instance, sales taxes are flat taxes.

Are flat taxes good or bad for low-income people?

Critics say a straight tax unfairly compares low- and high-income people. Because the same tax rate applies to both, people with less money pay a higher percentage of their total income.

Does the U.S. have a flat income tax?

No, the U.S. has a progressive income tax system. A person’s income is divided into low to high-income tax bands, each with a distinct tax rate. That person pays those bracket rates for their income. For instance, a $45,000 earner in 2023 will pay $5180 in taxes: 10% on the first $11,000 ($1,100) and 12% on the remaining $34,000 ($4080). That amounts to 11.51% of the effective tax.

The first two of the seven tax rates are 10% and 12%. Single filers with higher earnings would also pay the rates in each bracket, starting with 10% and up to 37% for income exceeding $578,125.

Bottom Line

Flat taxes are the same for all income levels. One example is the flat sales tax. Critics say it harms low-income households.

The U.S. has a progressive income tax system. It reduces low- and middle-income taxes. High-income households pay more taxes.

Conclusion

• A flat tax has no deductions or exemptions and applies to all taxpayers, regardless of income.
• An alternative to a flat tax is a progressive tax that increases with income.
• Fans of the tax say it simplifies filing and encourages individuals to earn more since they won’t be taxed more.
• Tax detractors say it penalizes low-income people by increasing their tax burden.
• U.S. payroll taxes are flat.