Progressive tax benefits versus flat tax benefits are an ongoing debate, with both systems having proponents and critics. In the United States, the historical favorite is the progressive tax. Progressive tax systems have tiered tax rates that charge higher income individuals higher percentages of their income and offer the lowest rates to those with the lowest incomes. Flat tax plans generally assign one tax rate to all taxpayers. No one pays more or less than anyone else under a flat tax system.
Both of these systems may be considered "fair" in the sense that they are consistent and apply a rational approach to taxation. They differ, however, in their treatment of wealth, and each system may be called "unfair" according to who benefits or is treated differently.
Progressive Tax Benefits vs. Flat Tax Benefits
Progressive Tax Benefits
Tiered tax rates based on individual income
Lower earners pay a lower percentage of their income in taxes than higher earners
It reduces the tax burden on those with the least income
Gives lower earners more income to pay for housing and other essentials
Helps reduce income inequality
Flat Tax Benefits
One tax rate for all, regardless of income
Lower and higher earners pay the same percentage of their income in taxes
It doesn't put a higher tax burden on those with a higher income
Gives everyone the same percentage of their income to spend
Encourages individuals to earn more without fear of tax repercussions
Progressive Tax
Supporters of the progressive system claim that higher salaries enable affluent people to pay higher taxes and that this is the fairest system because it lessens the tax burden of the poor. Since the poor have the smallest disposable incomes and spend a higher proportion of their money on basic survival needs, such as housing, this system allows them to keep more of their money. Affluent taxpayers are better able to provide for their physical needs and therefore are charged more. A flat tax would ignore the differences between rich and poor taxpayers. Some argue that flat taxes are unfair for this reason. Progressive taxes, however, treat the rich and poor differently, which is also unfair.
Flat Tax
Flat tax has one tax rate. Everyone carries the same responsibility, and no one is unequally burdened, rich or poor. Taxes do not discourage high earners from earning more, and the low tax rate encourages the poor to strive to earn more. This reduces the potential deadweight loss of taxation and encourages good work ethics. This system does, however, risk taking too much money away from the poorest citizens.
Both tax policies have significant advantages and disadvantages that may prevent them from perfect fairness.
Advisor Insight
Ronald Mesler, JD
We Protect Doctors LLC, Boise, ID
This may be more of a social or political question than a financial question. The key issue you raise is one of "fairness." The concept of a progressive tax is fundamentally a simple one: The more you earn, the more taxes you pay, with the tax rate increasing incrementally as your income does. However, as the saying goes, "the devil is in the details"—at least in the details of the U.S. tax code, which has gotten so bloated and complicated that the system has lost its simplicity. This seems to be one of the key popularity drivers of a simple flat tax system: The progressive model may be fairer in theory, but the real fairness, or lack thereof, is how the system is implemented. Of course, there's always the concern that if a flat tax were adopted, how long would it remain simple?
FAQs
Advantages of a Progressive Tax
On the pro side, a progressive tax system reduces the tax burden on the people who can least afford to pay. That leaves more money in the pockets of low-wage earners, who are likely to spend more of it on essential goods and stimulate the economy in the process.
Is a progressive tax rate good? ›
Among the tax rate systems used to calculate the taxable liability of an individual or a corporation, the progressive tax rate is considered by many to be the best since it puts more burden on those with the highest incomes. Under this system, the average tax rate is less than the marginal tax rate.
Why is a flat tax rate better? ›
Supporters of a flat tax system suggest that it gives taxpayers an incentive to earn more because they will not be penalized by higher rates (as with a progressive system where income falls into progressively higher tax brackets). Also, they argue that a flat tax system makes filing tax returns easier.
What are the pros and cons of progressive taxes? ›
Advantages and Disadvantages of Progressive Tax
The taxes they pay have a greater impact on their standard of living than they do on high-income taxpayers, most of whom can easily afford to pay for the basics. However, critics of progressive tax systems believe they act as a disincentive to hard work and success.
Who benefits the most from progressive tax? ›
With a progressive tax, the person with the lower income would pay a lower tax rate than the person with higher income. An example would be if one person earns $12,000 in a year, and another person earns $120,000. They would be taxed differently under a progressive tax system.
Does progressive tax increase equality? ›
Because federal taxes are progressive, the distribution of after-tax income is more equal than income before taxes. High-income households have a slightly smaller share of total income after taxes than their share of income before taxes, while the reverse is true for other income groups (figure 6).
How do progressive tax rates hurt an economy? ›
In states where high income individuals are taxed more heavily, migration increases high earners' pretax real incomes and lowers pretax incomes of lower income individuals. Instead of achieving a long-run redistribution of income, a more progressive tax system distorts economic choices and reduces total real incomes.
What is one disadvantage of a progressive tax? ›
Lower Government Revenue
Depending on how progressive the tax system is, it could actually lead to lower levels of government revenue. For instance, people will be disincentivized to work hard and move into higher tax brackets.
Why is progressive tax better than proportional? ›
A proportional tax applies the same tax rate to all individuals regardless of income. A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more.
Who benefits from a flat tax? ›
A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes. No longer would the tax code penalize success and discriminate against citizens on the basis of income.
Advantages and Disadvantages
A flat tax system motivates the individual to earn more to have a better standard of living. It also eliminates the discrimination between taxpayers. However, there is no exemption or deduction for the poor class, unlike the progressive tax system.
What are the negatives of a flat tax? ›
Cons Explained
7 The rate could end up being higher than is politically acceptable if a flat-rate tax system were to replace that revenue. A flat tax could also eliminate altogether some taxes that wealthier individuals tend to pay, such as capital gains, dividends, and interest income taxes.
Who is hurt by progressive tax? ›
A progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden.
What is one argument in favor of a progressive tax? ›
The arguments in support of progression tend to fall into three main categories:7 economic efficiency, fairness, and reduction of income inequality. Economic efficiency. The argument is that progressive taxation increases worker productivity, yielding greater economic efficiency and higher aggregate incomes.
What is a con of a progressive tax system? ›
Discrimination: A progressive tax system may lead people with lesser incomes to pay a higher tax rate as a percentage of their income. This can create a situation where lower and middle-income families struggling to make ends meet and have more tax deductions on their income.
Why are people against progressive tax? ›
Those who oppose a progressive tax hierarchy are likely to be those who pay more taxes when such a policy is in place. A progressive tax policy requires individuals with higher incomes and wealth to pay taxes at a rate that is higher than those with lower incomes.
Does progressive tax reduce poverty? ›
A more progressive tax system can help to narrow the growing gap between rich and poor and boost the economy by stimulating consumer spending by middle and lower income Canadians. Higher tax rates on higher income brackets should be restored.
Does progressive tax reduce inequality? ›
The aim of a progressive tax is: To help reduce inequality – taking lower average levels of tax from low wage earners, and taking more from higher wage earners. Recognition of the diminishing marginal utility of income.
Does progressive taxation helps reduce poverty? ›
It may result in a more equitable income distribution, higher revenues, less financial and economic volatility, and faster growth.
Which country has the most progressive tax system? ›
News To Obama: The OECD Says the United States Has the Most Progressive Tax System
| Table 4.5. Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s | | |
|---|
| Sweden | 0.34 | 26.7 |
| Iceland | 0.27 | 21.6 |
| Switzerland | 0.22 | 20.9 |
| Source: Computations based on OECD income distribution questionnaire. | | |
27 more rows29 Oct 2008
Pros of Proportional Tax
Fair: The tax system is considered to be fair because everyone pays the same proportional tax rate of their income, regardless of how much they make.
Why is the proportional tax system unfair? ›
Proportional taxes are a type of regressive tax because the tax rate does not increase as the amount of income subject to taxation rises, placing a higher financial burden on low-income individuals.
Do any countries use a flat tax? ›
Similarly, Mongolia and Kazakhstan have flat taxes of 10%, and Bolivia and Russia have flat taxes of 13%, yet these countries do not have well-developed social sectors. Hungary and Romania have flat taxes of 16%, and Lithuania and Georgia have flat charges of 20%.
What is the opposite of a flat tax? ›
A progressive income tax is exactly what it sounds like: the rate of tax increases as income (however measured) increases. Technically, you can create a progressive income tax system even when stated tax rates remain flat by using personal exemptions, tax credits and tax deductions to alter the effective tax rate.
Why is a flat tax rate unfair? ›
Some drawbacks of a flat tax rate system include lack of wealth redistribution, the added burden on middle and lower-income families, and tax rate wars with neighboring countries.
What is flat tax for Dummies? ›
A true flat-rate tax is a system of taxation where one tax rate is applied to all personal income with no deductions.
What are three reasons in support of progressive taxation? ›
Why does the progressivity of taxes matter?
- Most people prefer progressive taxes. Progressive tax and transfer systems are broadly supported by the general population. ...
- Progressive taxes help reduce inequality. ...
- People are more willing to pay tax when taxes are progressive.
Progressive taxes require those with higher incomes to pay a higher percentage of their income on those particular taxes. The impact of regressive taxes is exactly the opposite: they require those with lower incomes to pay a higher percentage of their income on such taxes.
What is the major argument in favor of a progressive tax structure? ›
More Government Revenue - A progressive system allows governments to collect more money from higher income earners. This results in more money collected than if everyone paid the same percentage. As a result, the government can provide more programs and services that benefit society.
Why is regressive tax unfair? ›
Understanding Regressive Taxes
A regressive tax affects people with low incomes more severely than people with high incomes because it is applied uniformly to all situations, regardless of the taxpayer. While it may be fair in some instances to tax everyone at the same rate, it is seen as unjust in other cases.
The arguments in support of progression tend to fall into three main categories:7 economic efficiency, fairness, and reduction of income inequality. Economic efficiency. The argument is that progressive taxation increases worker productivity, yielding greater economic efficiency and higher aggregate incomes.
How do progressive taxes reduce poverty? ›
Lowering taxes on low-income individuals and raising taxes on high-income individuals should make low-income individuals relatively better off: Disposable income for low-income individuals increases, thus allowing them to increase consumption.
Why do we not have a flat tax? ›
Some drawbacks of a flat tax rate system include lack of wealth redistribution, the added burden on middle and lower-income families, and tax rate wars with neighboring countries.
Who bears the burden of progressive tax? ›
A progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden.
