Flat Tax - Explained
What is a Flat Tax?
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What is a Flat Tax?
An income tax system in which all individuals (taxpayers) pay the same tax amount without giving regard to the divergence of their income is a flat tax system. A flat tax system maintains equal tax rate on all taxpayers regardless of their income. Tax deductions and tax exemptions are not allowed in a flat tax system. An ideal flat tax system maintains a proportional and constant tax rate regardless of changes in the income of taxpayers. Generally, income generated from dividends, capital gains, distributions and others are not tax under the flat tax system.
How Does a Flat Tax Work?
A flat tax system enhance more earning by taxpayers, especially those who have higher income because they are taxed equally as other taxpayers. An ideal flat tax system gives no tax deductions or exemptions to taxpayers. However, some flat tax systems have been politically influenced to cater for tax exemptions and deductions, an example is the flat tax system proposed by Ted Cruz and Rand Paul. There are some criticisms against flat tax systems, the major criticism is that it is not fair to individuals who earn low-income. While the wealthy enjoy low tax rates, low income earners aso pay the same tax as the wealthy mounting a burden on them. According to the critics of flat tax systems, a progressive tax system is a better option.
Examples of a Flat Tax
Not all countries of the world adopt the flat tax system, many nations opted for a progressive tax system as a better alternative for a flat tax system. However, Russia is the leading country with a flat tax system, it has a flat tax rate of 13% on all taxpayers, regardless of their income. Aside from Russia, Lithuania, Estonia, and Latvia are examples of countries that use the flat tax system. Although, the United States does not operate a full flat atx system, its payroll tax system is regarded as a type of flat tax. In the U.S, the Internal Revenue Service levies tax on employees and employers using the payroll system.
Flat Taxes vs. Regressive and Progressive Taxes
Flat tax is otherwise called a regressive tax system. Unlike its counterpart, the progressive tax system, flat tax system levies an equal tax percentage or tax rate of all taxpayers. A progressive tax system, on the other hand, have a higher tax percentage for high-income earners and a lower percentage for individuals with low income. In a regressive tax system, high income earners have lower tax rate on their income while low-income earners have higher tax rate. Hence, high-income earners make more money while low-income earners are eft to grapple with little wealth. Critics of the flat rate system see this as unfair and advocate for a progressive tax system.