See Also:
Marginal Tax Rate
Prepaid Income Tax
Tax Brackets
Deferred Income Tax
Cash Flow After Tax

Flat Tax Rates Definition

Flat tax rates refers to a single tax rate that is applied to all levels of income. In a flat tax rate system individuals with lower levels of income are taxed at the same rate as individuals with higher levels of income.
A flat tax rate system is in contrast to a progressive tax rate system, in which individuals with different levels of income are taxed at different tax rates. There are arguments for the benefits of a flat tax rate system and arguments that emphasize the problems with a flat tax rate system.

Flat Tax Example

Here is a flat tax example. Let’s look at three individuals with three different incomes. The first person earns annual taxable income of $20,000 dollars. The second earns annual taxable income of $50,000 dollars. The third person earns annual taxable income of $150,000 dollars. The flat tax rate for this example is 20%.
The first individual, the person with a salary of $20,000, pays taxes of $4,000. The second individual, the person earning $50,000 dollars, ends up paying taxes of $10,000. While the third individual, the one making $150,000 dollars, ends up paying $30,000 dollars. So the amount of taxes paid, but the percentage of income that must be paid in taxes is the same for all income levels.

Flat Tax Benefits

There a several benefits to using a flat tax rate system. Those who argue for the benefits of a flat tax rate claim that it is simple and fair. In addition, they claim it motivates individuals to work harder in order to earn a higher salary.
The simplicity of the flat tax rate system comes from the fact that everyone pays taxes at the same rate. This is simpler than a progressive tax rate system in which individuals at different income levels pay different tax rates. The proponents of the flat tax rate system also claim that it is fair – more fair than a progressive system because of the equality in taxation. Everyone is taxed at the same rate, so it is a fair system.
And finally, because those earning higher salaries would not be taxed at higher rates, proponents of the flat tax rate system claim that it motivates individuals to work harder so as to earn more. The idea being that with a higher salary and a flat tax rate, individuals get to keep more of their income then they would with a progressive tax system.

Flat Tax Problems

Those who argue against flat tax rates claim that it is unfair and it punishes those individuals who earn lower incomes. For individuals with lower incomes it is more of a burden to pay taxes. Even though the tax rates are the same, individuals with lower income have less income to live comfortably and find it harder to pay taxes at the same rate as the individuals with higher incomes and more breathing room in terms of affording a comfortable standard of living.