Net income provides a more accurate account of the financial status. Here’s why.
What is a proportional tax?
A proportional tax, also referred to as a flat tax, is a tax in which the percentage of tax taken from a person’s income remains the same, regardless of how much money he or she earns.
In a proportional tax system, everybody is required to pay the same percentage of their income in taxes. For instance, if a tax rate is set at 10 percent, an individual who makes $200,000 a year would pay $20,000 a year in taxes, thereby leaving him $180,000 of income.
In contrast, a taxpayer who makes $10,000 a year pays $1,000 in taxes, which leaves the person with $9,000 a year to meet all his or her bills. The tax rate of 10 percent is paid equally no matter how much money a taxpayer makes.
Supporters of proportional tax argue that an equal tax rate across board is the fairest system. There are no exemptions, the rules are easily understood and there should not be any questions about the rate because it is the same for every taxpayer.
Another argument for a proportional tax system is that it motivates people to make more money. The hope is that by encouraging people to earn a higher income, the country and the people’s quality of life will improve.
Opponents of proportional tax argue that such a tax places an undue burden on the lower and middle class by eliminating deductions and increasing the tax base to include every level of income.
They claim that adopting such a tax shifts the tax burden from wealthy individuals to the poor — those who are most affected by taxation and who are less capable of paying.
Proportional tax example
One example of a proportional tax today is the sales tax. Although sales tax may vary from one region to another, every buyer pays the same sales tax. For example, If the sales tax is 10 percent, every buyer of a laptop that is worth $1,000 would pay $100 in sales tax, regardless of personal income.
In countries such as Russia, working citizens pay a proportional tax to fund government operations. Russia’s flat tax of 13 percent was put in place in 2001 by President Vladimir Putin.
However in the U.S., the government does not impose a proportional tax on income, but rather imposes a progressive tax in which high-income people are taxed at a higher rate compared to those low-income individuals.