# Flat Tax: What It Is and How It Works

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## What Is a Flat Tax?

A flat tax is a single percentage income tax rate applied to all taxpayers regardless of income.

A flat tax rate eliminates all deductions and exemptions. Most flat tax systems do not tax income from capital gains, dividends, distributions, or other investments.

The opposite of a flax tax is a [progressive tax](https://www.investopedia.com/terms/p/progressivetax.asp), in which the rate of taxation rises with a taxpayer's income. The United States has a progressive income tax system.

### Key Takeaways

*   A flat tax applies the same rate to every taxpayer regardless of income and allows no deductions or exemptions.
*   The opposite of a flat tax is a progressive tax, in which tax rates rise with a taxpayer's income.
*   U.S. payroll taxes and sales taxes are a type of flat tax. All pay the same percentage regardless of income.

## Understanding a Flat Tax

Supporters of a flat tax system suggest that it incentivizes taxpayers to earn more because they will not be penalized by higher rates and higher [tax brackets](https://www.investopedia.com/terms/t/taxbracket.asp) based on their income level. They also argue that a flat tax system makes filing tax returns easier.

Critics of flat taxes argue that such a system burdens low-wage earners disproportionately while lowering tax rates on the wealthy.

> **Important**
>
> The IRS in the United States levies a payroll tax, specifically the Federal Insurance Contributions Act (FICA) tax of 7.65%, on wage-earning taxpayers to support Social Security and Medicare programs. This is an example of a flat tax.

## Flat Tax vs. Regressive and Progressive Taxes

### Regressive Tax

While a flat tax imposes the same tax percentage on all individuals regardless of income, many see it as a [regressive tax](https://www.investopedia.com/terms/r/regressivetax.asp).

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. While higher-income taxpayers pay the same percentage, their greater incomes make the financial burden easier to bear.

A sales tax is an example of a flat tax that is considered regressive. If two individuals each buy $100 worth of T-shirts and pay a 7% sales tax, the individual with less money to spend gives up a larger share of income than the person with more money.

### Progressive Tax

Progressive tax rates charge high-wage earners a larger percentage of their incomes than low-wage earners. In the United States, the income tax system is a progressive one. There are seven income tax brackets with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

## What Nations Have a Flat Tax System?

Russia had a flat tax on personal income until 2021, when the nation moved to a progressive tax to boost revenue. Hungary, Romania, and Bolivia also use a flat tax rate.

Nations with a flat tax system tend to have poorly developed social sectors. An exception in Greenland, which has a relatively high flat tax.

## How Does a Flat Tax Work?

A flat tax imposes the same tax rate on all individuals, regardless of their income levels. A sales tax is considered a flat tax because everyone pays the same percentage.

## Does the U.S. Have a Flat Tax Income Tax System?

The U.S. has a [progressive income tax system](https://www.investopedia.com/ask/answers/042815/progressive-tax-more-fair-flat-tax.asp) in which income brackets determine the percentage of tax levied from low to high. The taxpayer pays the rates applicable to the income that falls within each bracket.

## What Is the Debate Concerning a Flat Tax?

Proponents of a flat tax argue that is fairer and more transparent. It eliminates the deductions and tax shelters that wealthy taxpayers use to minimize their taxes. It is easy to understand, and correspondingly difficult to raise without starting a political firestorm. By treating all income neutrally, the flat tax system encourages work and investment.

## The Bottom Line

A flat tax is a tax that applies the same rate to all income levels. For income tax, the U.S. imposes a progressive tax system which places a lower tax burden on low- and middle-income taxpayers. Higher-income individuals and families pay a larger share of taxes.

> **Article Sources**
>
> 1.  Institute on Taxation and Economic Policy. "[The Pitfalls of Flat Income Taxes](https://itep.org/the-pitfalls-of-flat-income-taxes/)."
>     
> 2.  Social Security Administration. "[Fact Sheet: 2023 Social Security Changes](https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf)."
>     
> 3.  Internal Revenue Service. "[Administrative, Procedural, and Miscellaneous](https://www.irs.gov/pub/irs-drop/rp-24-40.pdf)."
>     
> 4.  Tax Foundation. "[Flat Tax](https://taxfoundation.org/taxedu/glossary/flat-tax/#:~:text=Because%20all%20income%20taxpayers%20are,against%20unnecessary%20tax%20rate%20increases.)."