A flat tax is a tax system that applies a single tax rate to all personal or corporate incomes. It seeks to simplify taxation by eliminating tax brackets.
How It Works:
- A flat tax sets one uniform rate for individuals and corporations to pay on their total taxable income.
- Exemptions are often offered up to a certain income threshold to avoid taxing the very poor.
- Deductions and loopholes are generally prohibited to make compliance and collection easier.
Example Application:
Estonia successfully implemented a flat tax in the 1990s, spurring investment and higher tax revenues as citizens realized they could keep more of what they earned by growing businesses and incomes.
Debates on Merits:
Proponents argue a flat tax boosts transparency and fairness. Critics claim it disproportionately benefits the wealthy and risks reducing progressivity in income distribution.
Key Considerations:
A flat tax promises simplification but must balance revenue needs, incentives to work, and varying capacities to contribute tax amid incomes.