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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