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Proportional Tax: Definition & Examples

Proportional Tax: Definition & Examples
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  • 0:03 What Is Proportional Tax?
  • 1:23 The Proportional Tax Debate
  • 2:12 Examples
  • 3:05 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Have you ever heard someone talking about a flat, or proportional, tax and weren't sure what the person was referring to? Find out what a proportional tax is and learn about some of the benefits it might offer.

What Is Proportional Tax?

Have you ever heard someone complaining about the amount he or she pays in taxes? If so, did the person have any thoughts on how to change things? One simple idea that's often proposed is changing our current tax system to a proportional, or flat, tax. Some argue that a proportional tax is much less complex than our current system and a fair solution for people of all incomes.

Proportional tax is a tax strategy in which the taxing authority charges the same rate of tax from each taxpayer, regardless of how much money the taxpayer makes. This means that lower-income, middle-income, or upper-income people pay the same tax percentage. Since the tax is charged at a flat rate for everyone, a proportional tax is often referred to as a flat tax. For example, under a proportional tax, everyone might pay a 10% federal tax on their income earned, whether they made a million dollars or ten thousand dollars.

The basis of this proposal is rooted in the thought that since everybody is equal, taxes should be charged in an equal manner. The rationale is that it's unfair to charge more from anybody having a higher income.

It's important to note that most societies have a progressive income tax, where lower-income individuals pay a lower fraction of their income in taxes than do higher-income individuals. This is currently how the United States taxes individuals.

The Proportional Tax Debate

The idea of a proportional tax has been brought forward for debate in the United States on several occasions over the past few decades. The proportional tax debate is a complex one, with the obvious advantage being that no one receives special treatment; all people are taxed in exactly the same way. It's also easy to reason that this system would be much simpler and thus would result in considerable savings to all parties.

For example, the time and energy businesses and individuals spend annually in preparing tax forms would be greatly reduced. The Internal Revenue Service would also save huge amounts of money if tax returns were as simple as a postcard with the amount owed and paid. You can probably appreciate this argument if you have ever opened up the paper instructions for filing a federal income tax return or gone through hundreds of questions to file your tax return online.

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