The Most Comprehensive Financial Dictionary with over 1000 Financial Terms Explained - Clear and Concise Article Style Description with Practical Examples

What are Proportional Taxes?

2016-12-31T14:24:34+00:00

The term 'Proportional Taxes' is included in the Economics edition of the Financial Dictionary. Get yours now on mazon in ebook or paperback format. Read more here...

Proportional Taxes are a type of income tax system. In this taxation system, the identical percentage of taxes is applied to all taxpayers in an economy. It does not matter how much or how little they earn. This type of tax simply levies the same rate on all high income, middle income, and low income workers as well as businesses.

This stands in direct contrast to a more widely utilized progressive tax system. In this competing type of tax plan, those taxpayers who enjoy greater income levels pay at higher income tax rates than the unfortunate bottom income earning citizens. Proportional taxes are also often known as the flat tax since it is a one tax plan fits all sizes means of collecting revenues for a government.

Besides proportional taxes and progressive taxes, there are also regressive taxes. A regressive tax takes a larger share of income from the lower classes than they can afford. Sometimes flat taxes are considered to be regressive in nature. The difference between these three types of tax structures comes down to the way the tax addresses the tax base (of a business income or household income) as the income level is significantly different.

In these proportional taxes systems, every tax payer, regardless of income level or job, will pay the identical percentage of their earnings in taxes. If this given proportional rate is set up at 20 percent, then the earner at $10,000 gives $2,000 of income to the taxing authorities, while the worker making $50,000 will pay in $10,000. At the same time, the higher earner with $1 million in annual income will pay the same rate for a grand total of tax payment amounting to $200,000. This system is so much simpler and eliminates the needs for large, wasteful, and bureaucratic taxing agencies.

Sales taxes are another example of proportional taxes. This is the case because every consumer, regardless of the amount of money which he or she makes, will pay the sales tax at the identical fixed sales tax rate. It is almost a given that sales taxes will be proportional. Since all goods and services are affected by them, a government can not simply alter the rate based on a person’s actual income. Buying a good does not factor in the income of the buyer in the transaction, and so far there is no known way to change this to a more progressive form of tax.

Many economists and analysts consider these proportional taxes to be a form of regressive tax by accident. Since the rate never goes up regardless of how high the income of the person in question goes, the higher burden remains on the lower income earners. They can least afford to pay the flat rate tax, while a high income earner has the ability to pay his or her elevated but still same percentage share. With the same example from above, the earner who garners $10,000 only has $8,000 left on which to live after paying his or her share of taxes. The worker bringing down $50,000 gets to keep fully $40,000 after taxes. The million dollar stunner holds on to $800,000 after paying his or her share. The percentage of the tax is the same in every scenario.

Many people call this the epitome of truly fair. The problem is that the low income earner suffers from a severe after-tax hangover effect because the burden makes it impossible for him or her to live on what remains. This is how the critics of such a flat tax are able to insist that higher income people should be forced to pony up a larger percentage in income taxes than the poorer workers who outnumber them so vastly anymore.

Those in favor of proportional taxes insist that they are more fair since they encourage workers to go for greater earnings without punishing their results with higher income tax brackets and rates, as a progressive tax system inherently would. They argue that when everyone receives the same treatment, this is the ideal definition of the concept of fair. Proportional tax systems have the additional advantage of being simple for everyone to grasp and to practice. This is because there is no room for debate on the tax rate in question for any business, individual, or family.

The term 'Proportional Taxes' is included in the Economics edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.