A flat tax means the rich pay a lower tax rate than they would if the tax system included tiered rates. With much higher income, an individual will feel less of a burden with paying taxes. In contrast, a flat tax on people with lower and middle incomes would be more of a strain their finances.
The largest tax burden for households in the bottom income quintile (the bottom fifth) comes from the payroll tax, followed by excise taxes and a small amount of corporate tax.
The cons are that a progressive tax discriminates against people making more money, can lead to class warfare, penalizes those that work harder, and can lead to individuals hiding income or assets.
A flat tax (short for flat-rate tax) is a tax with a single rate on the taxable amount, after accounting for any deductions or exemptions from the tax base. It is not necessarily a fully proportional tax. Implementations are often progressive due to exemptions, or regressive in case of a maximum taxable amount.
The opponents of the flat tax say that the tax system is unfair and that it places an excessive burden on low-income earners. Even though the system imposes a uniform tax rate for all income categories, it leaves low-income earners with less money to live comfortably and maintain their standards of living.
While a flat tax imposes the same tax percentage on all individuals regardless of income, many see it as a regressive tax. A regressive tax imposes a larger tax burden on those with lower incomes than those with higher incomes because a larger portion of a lower-income individual's total funds goes to the tax.
The flat tax is biased against workers because only those earning wages pay the tax. Those that earn income from capital gains (such as those with personal wealth) can avoid paying their fair share of taxes. This makes it less palatable to the American public.
Key Takeaways. Advocates for progressive taxes argue it promotes economic equality by taxing higher incomes at a higher rate, funding essential public services. Flat tax supporters claim taxing all income at the same rate is fairer, simplifies the system, and encourages economic growth.
Progressive taxes take more from those able to pay more. Because this method is based on the ability to pay, it is considered the fairest means of taxation. People with higher incomes pay larger amounts of tax because their taxable income is larger.
Most of the government's federal income tax revenue comes from the nation's top income earners. In 2021, the top 5% of earners — people with incomes $252,840 and above — collectively paid over $1.4 trillion in income taxes, or about 66% of the national total.
In 1980 Ronald Reagan was elected and promised to cut the top marginal tax rate. This he did, and the top marginal tax rate was lowered over his 8 years in office from 73% to 28% on incomes over just $29,750 - the lowest this rate had been since 1925.
Multiple studies show that corporate tax increases are directly passed on to consumers in the form of higher prices. A higher rate will also make American exports more expensive and companies less competitive in the global market. The result will be slower economic growth, fewer jobs, and less innovation.
Eight U.S. states currently have no state income tax whatsoever: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. New Hampshire, the ninth state on our list, only taxes interest and dividend income.
12 states have a flat income tax: Arizona, Colorado, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, New Hampshire, North Carolina, Pennsylvania, Utah, and Washington (but Washington does tax capital gains on high-income earners).
Flat Rate Income Taxes Come with Significant Downsides. Flat taxes consign states to regressive and inequitable taxation that falls far short of the “flat tax” ideal proponents claim to value, and do not advance the economic, budgetary, or simplicity goals commonly used to advocate for their enactment.
Regressive taxes benefit higher-income individuals since taxes decrease as income increases. With progressive taxes, however, taxes are based on an individual's specific amount of taxable income, and the tax rates increase as income increases.
While the United States may not have a federal flat income tax, several states have implemented flat-rate individual income taxes, including Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah.
Con: You'll Likely Spend More on Sales and Property Taxes
States without income taxes sometimes have higher sales and property taxes, for example. Tennessee, Washington, Nevada, and Texas are all in the top 20 states with the highest combined state and local sales tax.
Hungary and Romania have flat taxes of 16%, and Lithuania and Georgia have flat charges of 20%. Many of the countries with flat fees have lower standards of living than the nations that surround them.
In contrast to the personal income tax, the sales and use tax is regressive. This is because people with lower incomes need to spend larger shares of their income to cover basic needs, so sales taxes take up larger shares of low-income households' budgets.
The minimum income amount depends on your filing status and age. In 2023, for example, the minimum for Single filing status if under age 65 is $13,850. If your income is below that threshold, you generally do not need to file a federal tax return.
In Florida, home to the nation's most regressive tax system, low-income families pay almost five times as much as the wealthy. After Florida, the next most regressive tax codes can be found in Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas, and Louisiana.