Every election season, you’ll hear politicians laying out their plans to make changes to the tax code. One of the most common proposals is some version of a flat tax. But what is a flat tax and how is it different from the current tax? In this post, our experts at Tax Defense Partners cover everything you need to know about flat tax systems vs. the current tax system. We’ll cover the definitions of these systems, the arguments for each system, and the arguments against each system.

Current Tax: Progressive Tax

In the United States, we have what’s called a progressive income tax. In this system, tax rates increase progressively as income increases. In the United States, people who earn more fall into higher tax brackets that are taxed at a higher rate.

The US is far from the only country that uses this tax system. Many other countries also have a progressive income tax system, including the United Kingdom, Germany, and China.

Why People Advocate for a Progressive Tax

The main reason people advocate for a progressive income tax system is that it raises more revenue without putting a higher burden on lower income earners. People advocate for this tax because it acts as somewhat of a tax break for those who earn less. The theory is that those who earn more can afford to pay more. While, on the other hand, higher tax rates on poorer citizens can be very burdensome. People who advocate for a progressive tax system say that though it is not equal, it is fair.

Why People are Against a Progressive Tax

There are two main reasons people are against a progressive tax: inequality and complexity.

First, let’s talk about why some people take issue with the inequality of a progressive tax system. By its nature, a progressive tax system taxes citizens differently. This can put a higher tax burden on higher income earners, which many find unfair. Some higher income taxpayers do actually pay less than lower income taxpayers due to various tax breaks, credits, or deductions. However, if you look at the average numbers, the top 1% of all taxpayers pay more money in taxes than the bottom 90% combined. People are against this because, though wealthier citizens can most afford to pay more taxes, many say they shouldn’t be forced to.

The other reason people are against a progressive tax is that this system can be very complicated. Any American who has ever done their taxes manually knows how complicated a progressive tax system can be. Many people are against the complexity of this type of tax system and find it needlessly confusing.

Flat Tax

In a flat tax system, everyone pays taxes at the same rate, regardless of their income. For example, Russia has a flat tax system in which all taxpayers pay a 13% income tax. Other countries that use a flat tax system include Hungary, Romania, and Estonia.

In the US, there is some prevalence of flat taxes at the state level. Colorado, Illinois, Massachusetts, and North Carolina are among the states that use a flat income tax system. Additionally, early on in American history, the entire country paid a flat income tax. Before we switched to a progressive income tax system in 1862, all Americans who earned more than $800 paid a flat 3% income tax.

Why People Advocate for a Flat Tax

People advocate for a flat tax because they find it more fair and less complex. With this system, all citizens would pay the same income tax rate. Additionally, doing taxes would be much easier with a simple flat tax. Some speculate that a flat tax would even eliminate the need for the Internal Revenue Service.

Some in the business sector also advocate for a flat tax system because these systems tend to except some things from tax. For example, many flat tax systems except capital gains, dividends, and distributions from taxation. Those in the business and investment sectors say that these exemptions would spur investment and growth.

Why People are Against a Flat Tax

Some people believe a flat tax system would be more fair than a progressive tax system. On the other hand, many believe it would be much less fair than a progressive tax system.

In a flat tax system, all taxpayers are taxed at an equal rate. Yet, those against a flat tax system say that this tax is equal but not fair. They argue that the effect of a flat tax can be wildly disproportionate.

For example, let’s look at how a flat tax could affect a very high income tax earner versus a low income tax earner. Say two individuals are taxed at an equal rate of 10%. One made $1,000,000 and the other made $10,000. After tax, the high earner would be left with $900,000 while the low income tax earner would be left with $9,000. The tax on the higher income taxpayer is not likely to severely affect their ability to afford basic necessities. While, on the other hand, it could cause considerable hardship for the lower income taxpayer. They may have trouble affording gas to get to work or food to feed their family. Additionally, if a lower income taxpayer is also elderly or disabled, the effects of losing that 10% can become even more severe.

Higher Tax Rate for the Middle Class

Another reason people are against a flat tax is that it can mean the middle class would pay a higher effective tax rate than the very wealthy. Many of those who are very wealthy earn money through things like dividends, capital gains, and distributions. Under a flat income tax system, these things are generally not taxed. Those against the flat tax say that this means those who earn traditional wages would be disproportionally taxed.

Because of these common arguments against a flat tax system, US politicians often propose modified flat tax systems. For example, a politician may propose a flat tax system that offers exemptions for very low income earners. Or, they may propose a flat tax system that allows tax deductions. These modifications to the flat tax system sometimes cause more arguments against this type of system. Some say that modifying the flat tax system essentially makes it a form of progressive tax, eliminating the very thing that makes a flat tax system appealing: its simplicity. 

Final Thoughts on Flat Tax vs. Current Tax

There are strong arguments for and against both progressive tax systems and flat tax systems. Though this post only offers an overview of these tax systems, we hope that it helped you understand where you may stand in the flat tax vs. current tax debate.