In scenario 2, a business owner that pays himself a salary equivalent to the personal allowance would owe no personal income tax, but would owe 17 percent on all remaining profits. Under either scenario, the business owner would pay the same in taxes. By embracing the single 17 percent rate and the common sense to tax all income a single time, the flat tax would dramatically reduce the compliance cost imposed by the federal income tax. The flat tax would treat everyone equally. The Armey-Shelby flat tax, however, allows individuals to deduct the standard personal allowances based on family size from their income.
Individuals only owe taxes on the income above the standard allowance.
Notice that as income rises, so does the average, or effective, tax rate. Under this system, individuals with higher incomes pay a higher percentage of their income in taxes than those with lower incomes, even though everyone faces the same tax rate on income above the personal allowance. The flat tax would increase economic growth. Broadly speaking, the flat tax would create two major economic effects that would boost economic growth. First, it would create a greater incentive to work by lowering all marginal tax rates to a flat 17 percent.