A proportional tax is an income tax system where the same percentage of tax is levied on all taxpayers, regardless of their income. A proportional tax applies the same tax rate across low, middle, and high-income taxpayers. 

In contrast, the progressive tax system adjusts tax rates by incomes. A marginal rate taxing system, such as the flat tax, has a constant rate for both businesses and individual taxpayers.

Breaking down Proportional Tax

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. The sales tax rate applies to goods and services, and the income of the purchaser is not a part of the equation. Other examples include poll taxes and the capped portion of the Federal Insurance Contributions Act (FICA) payroll deductions.

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 $200,000.

Pros and Cons 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 higher financial burden on low-income individuals. A tax is said to be regressive if it has an inverse association where the average tax carries less impact on higher-income individuals or businesses.

Opponents of the proportional tax have claimed that higher-income earners should pay a higher percentage than poorer taxpayers. They see the system as placing a more significant burden on middle-income earners to carry a large portion of government spending. 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.

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. Variations of the proportional tax include allowing mortgage deductions and setting lower income levels.