A uniform tax system applies the same tax rate to each taxpayer, regardless of income bracket. Typically, a flat tax applies the same tax rate to all taxpayers, without allowable deductions or exemptions, but some politicians such as Ted Cruz and Rand Paul have proposed flat tax systems that keep certain deductions in place.
Most flat tax systems or proposals do not tax income from dividends, distributions, capital gains and other investments.
Break down the flat tax
Proponents of a flat tax system suggest that it encourages taxpayers to earn more because they are not penalized by a higher tax bracket. In addition, uniform taxation systems facilitate filing. Critics of flat taxes argue that the system places an unfair burden on low wages in exchange for lower tax rates on the wealthy. Critics believe that a progressive tax system is fairer than a uniform tax system.
Examples of a flat tax
Russia is the largest country in the world to use a flat tax. Russia imposes a flat tax of 13% on profits. The nation has considered moving to a graduated tax to increase tax revenues. The other countries that use a flat tax system are Estonia, Latvia and Lithuania. These countries have experienced economic growth since the adoption of flat rate policies.
In the United States, payroll tax is a type of flat tax. As of 2020, the IRS levies a 12.4% payroll tax. Employees pay 6.2%, while their employers also pay 6.2% of the tax. The self-employed submit the total amount themselves. This tax is considered flat because it imposes the same percentage on all employees. However, only earnings below the $ 128,400 threshold are subject to payroll tax. As a result, this tax is effectively regressive, although it uses only one rate.
Flat rates vs regressive and progressive taxes
While a flat tax imposes the same tax percentage on all individuals, regardless of income, many view it as a regressive tax. A regressive tax is one on which high-income earners tax a lower percentage of their income and low-income earners at a higher rate of their income. The tax is perceived as regressive due to the fact that a larger part of the total funds available for low income goes to tax expenditures. Although the top income payer still pays the same percentage, he has enough income to offset this tax burden.
A sales tax is an example of a regressive tax, although at first glance it may appear to be a flat tax. For example, imagine that two people each buy $ 100 worth of T-shirts and pay 7% sales tax. Although the tax rate is the same, the individual with the lowest income spends more of their salary on tax than the person with the highest income, which makes sales tax regressive.
Progressive tax rates, on the other hand, constitute a larger percentage of high-wage earners and a lower percentage of low-wage earners. Income tax in the United States is progressive. To illustrate, starting in 2020, people earning up to $ 9,525 in taxable income pay 10% tax, while those receiving more than $ 500,000 pay up to 37% on their earnings.