What is a 'Proportional Tax'

A proportional tax is an income tax system where the same percentage of tax is levied from all taxpayers, regardless of their income. 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 frequently called a flat tax.

BREAKING DOWN 'Proportional Tax'

In a proportional tax system, all taxpayers are required to pay the same percentage of their income in taxes. For example, if the rate is set at 20%, a taxpayer earning $10,000 pays $2,000 and a taxpayer earning $50,000 pays $10,000. Similarly, a person earning $1 million would pay the exact same rate, or $200,000.

In some instances, a sales tax can also be considered a type of proportional tax since all consumers, regardless of earnings, are required to pay the same fixed rate. However, because sales tax applies to particular goods and services, it is nearly impossible to vary the rate; the income of the purchaser is not a part of the equation.

Regressive Nature of Proportional Taxes

Proportional taxes are a type of regressive tax because the tax rate does not increase as the amount of income subject to taxation rises, placing a greater financial burden on low-income individuals. Using the same example as before, the taxpayer earning $10,000 has $8,000 left after taxes while the taxpayer earning $50,000 keeps $40,000 and the million-dollar earner keeps $800,000. While the percentage of tax is the same, which can be regarded as fair, the after-tax effect on low-income earners is more burdensome than for high-income earners. Opponents of the flat tax usually claim that higher income earners should pay a higher percentage than poorer taxpayers.

Proponents of proportional taxes argue that they are beneficial because they encourage individuals to seek higher earnings without penalizing high-income earners with higher tax rates, as would be the case in a progressive tax system. They claim that treating everyone exactly the same is the very definition of fairness. Additionally, a proportional tax system is easy to understand and apply in practice, since there is no issue as to the rate of tax.

To understand a proportional tax system, it is important to also look at how it defines income. If a system has generous deductions, then low-income earners may be exempt from tax, thus eliminating (at least in part) the regressive aspects of the tax.

RELATED TERMS
  1. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  2. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  3. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  4. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  5. IRS Publication 1

    A document published by the Internal Revenue Service that identifies ...
  6. Total Tax

    The composite total of all taxes that is owed by a taxpayer for ...
Related Articles
  1. Taxes

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  2. Taxes

    How The Wealthy Slash Their Income Tax Bills

    Many of these tax-minimization strategies can be used by anyone. Find out how you can pay taxes like a millionaire.
  3. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  4. Taxes

    Who Does The Current Tax Code Benefit?

    Are the non-workers benefiting from the current tax code in any way or is it the wealthy who are still getting the big breaks?
  5. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  6. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  7. Insights

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  8. Taxes

    Start Over With The IRS

    If you're struggling to pay back taxes, try a fresh start with the IRS. They really can help.
  9. Taxes

    Countries with the Highest Income Taxes

    Before you move to one of these countries with the highest income taxes, think through the overall tax situation - and what you get for your money.
RELATED FAQS
  1. What are the differences between regressive, proportional, and progressive taxes?

    Learn about the three basic types of tax systems, all of which are used in the U.S., and how they affect different income ... Read Answer >>
  2. What is the difference between a regressive tax and proportional tax?

    Learn about the differences between regressive, progressive and proportional taxes and how they each affect everyday finances ... Read Answer >>
  3. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center