flat tax

noun
Updated on: 18 May 2018

Definition of flat tax

Recent Examples of flat tax from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'flat tax.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of flat tax

1952

in the meaning defined above

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Financial Definition of FLAT TAX

flat tax

What It Is

A flat tax is a system under which all taxpayers pay taxes at the same percentage rate of their total income.

How It Works

Let's assume that you had $100,000 of taxable income last year. Under a progressive tax system, you might be taxed 0% on the first $25,000, 10% on the next $50,000, and 30% on the remaing $25,000, for a total tax bill of (0 x $25,000) + (0.10 x $50,000) + (0.30 x $25,000) = $12,500. Under a flat-tax system, you might instead simply owe, say, 15% of your taxable income, or $15,000.

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Why It Matters

The concept of a flat tax is controversial, and many economists and politicians have introduced many different twists and forms of the idea. In many proposals, the flat tax would not apply at all to incomes below a certain amount.

Supporters say flat taxes incent people to work harder, earn more, and engage in wealth-creating activities because the current progressive system penalizes people who make more money (by putting them in higher tax brackets and thus taxing that incremental income at a higher rate). In this vein, supporters say a progressive tax system does not encourage entrepreneurship. Supporters also say the current tax system is too complicated, and that the system of credits, deductions, exemptions, etc. offers too many loopholes with which to take advantage of the system.

The notion of whether the flat tax is "more fair" is perhaps the most controversial aspect of the idea. Under the system, a person with 100 times more income would pay 100 times more in taxes, but that person would be paying the same percentage of his income in taxes as a low-income person would pay.

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