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Flat tax

In a flat-tax system, everyone pays the same rate. Bankrate explains.

What is a flat tax?

A flat-tax system is one in which everyone pays the same rate, regardless of income. Although proponents suggest that flat taxes would simplify the tax system and make both payment and enforcement easier, flat taxes generally reduce the proportional tax burden of high-income earners while increasing it on low-income earners. While the U.S. federal tax system is progressive, meaning that a worker’s income is taxed according to her level of income, some states have flat taxes on income as well.

Deeper definition

Under a progressive tax system, a person’s share of income taxes increases with the amount she earns. That takes the burden off lower-income people and helps reduce income inequality.

In a flat-tax system, everyone pays the same percentage of their income, and most proposals have no or limited deductions. Virtually all proposals feature a low tax rate, usually far lower than the upper marginal tax rates; because taxes will fall across the board, this seems to add a degree fairness to the tax system. Proponents suggest that, with a flat tax, the Internal Revenue Service (IRS) tax code could be reduced from thousands of pages to just a few, freeing up IRS workers and accountants to focus their energies elsewhere and making the stressful experience of filing a tax return a mere afterthought.

However, the overall net effect of a flat-tax system is simply to deprive the federal government of tax revenue. That’s because the benefits largely accrue to higher-income earners, who will pay far less, while disadvantaging lower-income earners, who may notice only token decreases in their tax burden or may even see an increase. While flat-tax proponents believe that lower taxes across the board could lead to prosperity and job growth, periods of marginal tax rates as high as 92 percent have also been associated with a stronger economy, and the verdict remains unsettled.

Some states already tax personal income at flat rates, although none of these rates is higher than 6 percent. FICA taxes, which pay for Social Security and Medicare, are also flat taxes, assessed by the federal government at 6.2 percent and 1.45 percent per employee, respectively.

Many flat-tax proposals have exceptions for investment income, so the interest you earn in a money market account won’t get taxed.

Flat tax example

One of the most prominent supporters of the flat tax is the publishing executive Steve Forbes, the editor-in-chief of Forbes magazine. Forbes has run for office on several occasions, and he frequently makes the flat tax one of his policy proposals while championing it in his magazine. Forbes’ plan calls for a 17 percent flat tax assessed just once on individual and business incomes, with exemptions for people and families earning below a certain amount. Forbes, who is worth nearly half a billion dollars, would see his tax burden more than cut in half, saving him millions of dollars a year. Meanwhile, those on the lower end of the income spectrum would see a more modest drop in taxes, if they see any difference at all.


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