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A flat tax, also called a proportional tax is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. The term flat tax is most often discussed in the context of income taxes. The flat tax is currently little-used in the developed world on national level and stands in contrast to the more widely used progressive income tax, in which citizens and corporations with higher incomes pay tax at a higher rate than those of lower income.

Flat tax plans currently being advanced in the United States also seek to redefine sources of income; current progressive taxes count savings and capital gains as income, for example, while the flat tax plan advanced by Steve Forbes narrow the definition of income to apply only to employer wages.

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Advocates of a flat tax claim that it will tax every citizen fairly, and end unfair discrimination. They believe flat taxes require each citizen to pay their "fair share" of the tax burden, based on their income. For example, a taxpayer making ten times the income of their neighbor will pay ten times as much tax as their neighbor.

Opponents of a flat tax claim that although each taxpayer will pay the same percentage of their income in tax, the money is more valuable to poor and middle-class taxpayers. They believe these taxpayers should have less tax burden than those with greater incomes. For example, a taxpayer making one tenth the income of their neighbor may pay one thirtieth as much tax as their neighbor.

Both sides agree that the poor should not be taxed. Proponents of a flat tax advocate raising the the "no tax" level to working-class levels as a way to gain the benefits of a progressive tax for those who would see their tax rate increase under a straight flat tax.

Opponents note that by limiting the tax to paid wages, wealthier people who earn proportionally more money from investments and savings are not taxed for this at all; similarly, the loss of deductions means that some tax reliefs for the middle class will disappear. The wealthy would actually be paying less, as a percentage of their monetary gains, than the less wealthy. Therefore opponents point out that the flat tax is deceptively advertised as fair, when in fact it shifts the tax burden off the upper class onto the middle class--the real issues are deductions and what money counts as "income", not where the tax brackets are set.

Under progressive taxes, higher earners pay higher tax rates. In addition, proponents suggest that flat taxes result in higher revenues for the government, because the rich must pay their fair share, and the cost of tax enforcement is significantly reduced. They also argue that flat taxes are easier (and cheaper) to administer and comply with than complex, graduated taxes. Opponents point out that the complex part of the current tax code has to do with exemptions and deductions and other special rules determining income; these could be simplified without flattening the tax brackets, and even under a flat tax deductions are likely to be added later with time and legislation.

Advocates say that a flat tax system may arguably have most of the benefits of a progressive tax, depending on whether the flat rate is combined with a significant threshold. Usually the flat tax is proposed to kick in at a certain income level, or to exempt income below that level, so that the lowest-income members of society pay no income tax. (Some argue that this is technically a two-bracket progressive tax rather than a flat tax, but others maintain that the lowest "bracket" has a zero tax rate, making it an exemption, rather than a bracket.)

Additionally, proposed flat taxes usually allow little or no exemption of earned income besides the bottom-level exemption, which they claim makes the system more fair because exemptions favor the wealthy who can afford to hire accountants to find all the exemptions that they are eligible for. Opponents of the flat tax point out that plans also propose to eliminate taxes on sources of income that apply only to the wealthy.

Advocates of a flat tax claim that it will make every taxpayer pay their fair share. They also argue that flat taxes are easier (and cheaper) to administer and comply with than complex, graduated taxes. Those who advocate flat tax say that government expenditure will be reduced because of fewer audits and less litigation over spurious tax deductions.

Those who oppose a flat tax claim that it will benefit the rich at the expense of the poor. They also argue that in combination with other taxes, a flat tax will force lower-income people to pay a greater percentage of their income in taxes. Opponents also claim that calculating taxes is uniformly simple and easy with computers, and therefore a flat tax offers no savings of time or money over a progressive tax.

The amount of income the government receives from a flat tax depends entirely on the level of the tax. Usually flat taxes are advocated by parties that also believe in a tax cutting agenda, but a flat tax can also be used to increase government revenue by simply raising the tax rate.

There are other tax system changes that are often proposed along with a flat tax. A common one is to eliminate most deductions, credits, and other means of avoiding the tax. This purports to avoid having millionaires with good accountants pay little or no income tax; however, it also reduces the deliberate use of tax deductions by governments to promote other desired ends.

Uses of the flat tax

An example of a flat tax proposal was that advocated by Canada's Canadian Alliance party. The party's policy called for the elimination of Canada's three separate tax brackets for low, medium, and high incomes with a single 17% income tax on everyone beyond the 'zero bracket amount' (the very poor had to pay no taxes). This new tax structure would have greatly reduced average tax burden of Canadians and also shrunk government revenues considerably. The proposed flat tax turned out to be unpopular among Canadians, however, and the party dropped it at the beginning of the 2000 general election.

The Baltic country of Estonia has a flat tax of 26% with a tax exempt amount. On January 1, 2001, a 13 percent flat tax on personal income took effect in Russia and it is producing far more revenue than the former system, which included a large number of loopholes and suffered due to tax evasion.

In the United States, although the national income tax is a progressive tax, the flat tax is sometimes found in income taxes for smaller juridictions such as municipal income taxes (usually such rates are very low). Proposals for a flat tax for the federal government have emerged repeatedly in recent decades in the national political debate. Jerry Brown, former Democratic Governor of California, made the adoption of a flat tax part of his platform when running for President of the United States in 1992. At the time, rival candidate Paul Tsongas criticized the notion as a "flat earth" idea. Four years later Republican candidate Steve Forbes proposed a similar idea as part of his core platform. Although neither captured their party's nomination, in both cases their proposals prompted widespread debate about the fairness of the U.S. income tax system.

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