Proportional Tax

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DEFINITION of 'Proportional Tax'

A tax system that requires the same percentage of income from all taxpayers, regardless of their earnings. A proportional tax applies the same tax rate across low-, middle- and high-income taxpayers. The proportional tax is in contrast to a progressive tax, where taxpayers with higher incomes pay higher tax rates than taxpayers with lower incomes.


A proportional tax is also called a flat tax.

INVESTOPEDIA EXPLAINS 'Proportional Tax'

For example, in a proportional tax system, all taxpayers may be required to pay 10% of income in taxes. A sales tax can be considered a type of proportional tax since all consumers, regardless of earnings, are required to pay the same fixed rate.


Supporters claim that proportional tax systems are fair and that they may encourage people to earn more money because they would not have to pay higher tax rates. Opponents believe that proportional taxes are similar to regressive tax (where the tax rate drops as the amount subject to taxation rises), placing a greater tax burden on low-income individuals. For a $1,000 purchase, for instance, consumers might pay $80 in sales tax (assuming an 8% sales tax rate). This $80 tax burden would be a higher percentage of income for low-income earners than it would be for high-income earners.

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RELATED FAQS
  1. What's the difference between regressive and progressive taxes?

    The U.S. federal tax system and local and state tax systems are complex in that they combine progressive, regressive and ... Read Full Answer >>
  2. What are the differences between regressive, proportional and progressive taxes?

    Tax systems fall into three main categories within the tax code: regressive, proportional and progressive taxes. Regressive ... Read Full Answer >>
  3. Does location matter for taxes when calculating gross sales?

    Tax policies regarding gross sales differ by state and region. Some city jurisdictions, counties and states require a percentage ... Read Full Answer >>
  4. Are progressive taxes ever more unfair that flat taxes?

    Progressive taxes assign a different tax rate to different taxpayers. Affluent taxpayers pay the highest income tax rates ... Read Full Answer >>
  5. Is a progressive tax more fair than a flat tax?

    Progressive taxation versus flat taxation inspires ongoing debate, and both have proponents and critics. In the United States, ... Read Full Answer >>
  6. Who developed the theory of economic externality?

    British economist Arthur C. Pigou advanced the theory of economic externalities, which he most notably expressed in his book, ... Read Full Answer >>
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