# Proportional Tax: What It Is and How It Works

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## What Is a Proportional Tax?

A proportional tax is sometimes referred to as a [flat tax](https://www.investopedia.com/terms/f/flattax.asp). It is an income tax system that levies the same percentage tax to everyone regardless of income. A proportional tax is the same for low, middle, and high-income taxpayers. 

In contrast, a [progressive](https://www.investopedia.com/terms/p/progressivetax.asp) or [marginal tax](https://www.investopedia.com/terms/m/marginaltaxrate.asp) system adjusts tax rates progressively by income. Low-income earners are taxed at a lower rate than high-income earners.

### Key Takeaways

*   A proportional tax, or flat tax, assesses the same tax rate on everyone regardless of income or wealth. 
*   Proportional taxation is intended to create greater equality between marginal tax rates and average tax rates. 
*   Proponents of proportional taxes argue they encourage people to spend more and work more because there is no tax penalty for higher earnings.

## Understanding Proportional Taxation

A proportional tax allows people to be taxed at the same percentage of their annual income. Supporters of a proportional tax propose that it gives taxpayers an incentive to earn more because they are not penalized with a higher [tax bracket](https://www.investopedia.com/terms/t/taxbracket.asp). Flat tax systems make filing easier. Critics of flat taxes argue the system places an unfair burden on low-wage earners in exchange for lowering tax rates on the wealthy.

A [sales tax](https://www.investopedia.com/terms/s/salestax.asp) can be considered a type of proportional tax since all consumers, regardless of earnings, must pay the same fixed rate. The sales tax rate applies to goods and services, and the income of the purchaser is not a part of the equation. Other examples include poll taxes and the capped portion of the [Federal Insurance Contributions Act](https://www.investopedia.com/terms/f/fica.asp) (FICA) payroll deductions.

> **Fast Fact**
>
> Greenland imposes a 45% flat tax, one of the world’s highest rates.

## Example of Proportional Taxes

The United States imposes a progressive or marginal income tax system on its taxpayers. Income is taxed on a graduated scale at rates that range from 10% to 37%.

Countries such as Mongolia and Kazakhstan impose flat taxes of 10%, while Bolivia has a 13% flat tax rate. A citizen in Bolivia subject to a 13% flat tax rate who earns the equivalent of $50,000 per year would pay $6,500 in taxes. A person who earns the equivalent of $1 million would pay $130,000.

Russian had a flat 13% tax rate for years, but passed a law in 2024 increasing the tax rate specifically for high income earners.

> **Important**
>
> Although the federal government and most states in the U.S. impose a progressive tax system, 12 states levy a flat tax on wage and salary income as of 2024.

## Pros and Cons of Proportional Taxes

A proportional tax is not progressive, but neither is it a [regressive tax](https://www.investopedia.com/terms/r/regressivetax.asp), which takes a larger percentage of income from low-income groups than high-income groups. Proportional tax rates fall in between these two systems, giving it advantages of disadvantages of both.

Proponents of proportional tax rates claim that they simplify the tax code, making it easier for everyone to file their taxes. This can reduce the administrative burden of collecting taxes, saving the government money that it can spend on other services. Proportional taxes may reduce the desire for people to avoid taxes, and encourage people to work harder, as there is no disincentive to earn higher income as is present in a progressive tax system.

Opponents of the proportional tax argue that higher-income earners should pay a higher percentage than taxpayers with lower incomes. They claim that a flat tax system places a more significant burden on middle-income earners to carry a large portion of government spending. While the percentage is the same, the after-tax effect on low-income earners is more burdensome than for high-income earners.

However, If a system has generous deductions, then low-income earners may be exempt from tax, thus eliminating, at least in part, the regressive aspects of the tax. Variations of the proportional tax include allowing mortgage deductions and setting lower income levels.

## Why Do Countries Impose a Marginal Tax Rate Over a Proportional Tax Rate?

Developed countries tend to use a graduated or marginal tax system where those with lower incomes pay a smaller percentage of their income in taxes. The common argument for a marginal tax system is that those who have low incomes need most to all of their income to provide for basic needs such as food and shelter.

## Is Sales Tax Considered a Proportional Tax?

Sales tax is considered proportional because all consumers, regardless of their income, pay the same fixed rate.

## What Is the Difference Between a Progressive Tax and a Regressive Tax?

A regressive tax system is where the tax rate decreases as the taxpayer's income increases. A progressive tax system—also known as [ability to pay taxation](https://www.investopedia.com/terms/a/ability-to-pay-taxation.asp)—is one in which the tax rate increases as the taxpayer's income increases.

## The Bottom Line

A proportional tax is commonly called a flat tax, which assesses the same tax rate on everyone regardless of income. Proponents of proportional taxes argue they encourage consumers to spend more because there is no tax penalty for higher earnings. Critics argue the system places an unfair burden on low-wage earners.

_**Correction—Oct. 4, 2024**: This article has been corrected to state that a proportional tax is not the same as a regressive tax._  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Understanding Taxes: Theme 3 Lesson 5](https://apps.irs.gov/app/understandingTaxes/whys/thm03/les05/media/ws_ans_thm03_les05.pdf),” Pages 1 and 5.
>     
> 2.  World Population Review. "[Countries With Flat Tax 2024](https://worldpopulationreview.com/country-rankings/countries-with-flat-tax)."
>     
> 3.  Internal Revenue Service. "[IRS Provides Tax Inflation Adjustments for Tax Year 2025](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025)."
>     
> 4.  Associated Press. "[Putin Signs Bill Increasing Income Taxes for the Wealthy in Russia](https://apnews.com/article/russia-putin-income-tax-law-progressive-488eb751c96787b07a73dc9ee2e8ec66)."
>     
> 5.  Tax Foundation. "[State Individual Income Tax Rates and Brackets, 2024](https://taxfoundation.org/data/all/state/state-income-tax-rates-2024/)."