What is a Proportional Tax?

A proportional tax is a type of income tax mechanism where the taxing authority levies all taxpayers the same percentage regardless of what their income is. In other words, the proportional tax applies to all types of income earners (high, low, and middle).

How Does a Proportional Tax Work?

Generally, proportional tax is a type of income tax where the federal government taxes all income earners a similar percentage rate regardless of how low or high their income is. With proportional tax, everyone is equal and, therefore, foes through a similar tax rate. A proportional tax contrasts with the progressive tax system where levying of tax rates is as per the income. On the other hand, there is a flat rate where the rates are usually constant for both individual taxpayers as well as businesses. The idea behind the proportional tax is that everyone is equal and, therefore, charges for tax should be the same regardless of whether their salary is high, middle, or low. The argument is that it is unfair to charge less for low-income earners at the expense of high-income earners. Note that the Internal Revenue Service (IRS) tries to ensure that the entire taxation structure remains a proportional tax system. However, with the income tax brackets that make up the United States federal income tax, it becomes impossible for the IRS to achieve this. For example, there is a progressive income tax, which increases with an increase in income and vise Versa. If you relate an income to a consumption tax, then the income not spent should be considered a tax-deferred. The savings will be spent in future time, meaning that tax levying will take place at this time, in order to create a proportional tax rate that is based on income. If you relate an income to a consumption tax, then the income not spent should be considered a tax-deferred. The savings will be spent in future time, meaning that tax levying will take place at this time, in order to create a proportional tax rate that is based on income. However, it is possible to exempt consumption taxes such as sales tax from taxation, to ensure social justice. For instance, some states in the U.S., exempt basic items such as clothing, non-processed food, or prescription drugs from sales tax. They do this to ensure that they alleviate the tax burden on those with meager income or the poor. 

Examples of Proportional Tax

Sales tax in the United States is a good example of a proportional tax. The government charges everyone a similar tax rate without factoring in what each one of them earns. The rate is usually somewhere between 2.9 and 7.25 percent of the products price. Exemption of such tax only applies in those states that don't levy tax related to sales. Also, there are states in the U.S that levy a proportional tax for all their residents. The states are Massachusetts, Utah, Pennsylvania, Illinois, Colorado, Michigan, and Indiana. Lets take Massachusetts as an example. Tax charges in these states are at a rate of 5.1%, and it applies to all income. 

Pros and Cons of Proportional Tax 

The proportional tax has its own pros and cons. 

Pros - Supporters of the proportional tax argue that this taxation system ensures fairness. The reason behind this argument is that the tax rule does not exempt anyone, but instead, it cuts across all income earners. There is also a belief that a proportional tax system is a way of motivating people to increase their earnings. For instance, taxpayers may want to increase their earnings so that after taxation, they remain with a reasonable amount that will enable them to afford a decent life. 

Cons - The proportional tax is seen to place a tax burden on low-income earners, a move that seems unfair. That the wealthy engage the working class by making them work and make money for them. However, when it comes to tax, they pay the same rate. The move seems unfair as it is the wealthy who benefit in all this while the working-class left to carry the tax burden. In other words, those who have less capacity to pay the tax are the ones that carry the taxation burden.

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