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Flat tax

A flat tax, also called a proportional tax is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. The term "flat tax" is most often discussed in the context of income taxes.

(Poll taxes, in contrast, are not flat taxes, because they usually refer to a fixed amount per individual, which is a decreasing percentage of income for higher-income individuals.)

Advocates say that a flat tax system may arguably have most of the benefits of a progressive tax, depending on whether the flat rate is combined with a significant threshold. Usually the flat tax is proposed to kick in at a certain income level, or to exempt income below that level, so that the lowest-income members of society pay no income tax. Technically, this is a two stage progressive tax rather than a flat tax.

Advocates of a flat tax claim that it will end unfair discrimination. They also argue that flat taxes are easier (and cheaper) to administer and comply with than complex, graduated taxes. Most political parties that advocate the introduction of a flat tax are on the right of the political spectrum.

Those who oppose a flat tax claim that it will benefit the rich at the expense of the poor. One argument is that, since most other taxes (sales taxes etc.) tend to be regressive in practice, making the income tax flat will actually make the overall tax structure regressive (i.e. lower-income people will pay a higher proportion of their income in total taxes compared with the affluent). Another argument can be made by looking upon the value of money to various groups and not simply the rate of taxation. While the monetary value of a dollar (or other unit of currency) is the same for everyone, it is clearly "worth" a lot more to someone who is struggling to afford food than to a millionaire. Taxing everyone at the same rate ignores the fact that richer people can give up more of their income without ill effects. Morever, it is debatable whether a flat tax would substantially simplify the tax system (most of the complication of which arguably resides in the accounting of one's taxable income and in the possibilities for deductions)

The amount of income the government receives from a flat tax depends entirely on the level of the tax. Usually flat taxes are advocated by parties that also believe in a tax cutting agenda, but a flat tax can also be used to increase government revenue by simply raising the tax rate.

An example of a flat tax proposal is that advocated by Canada's right wing Canadian Alliance party. The party's policy calls for the elimination of Canada's three separate tax brackets for low, medium, and high incomes with a single 17% income tax on everyone. (This was not in fact a pure flat tax as the very poor were in a separate bracket where they had to pay no taxes.) This new tax structure would have greatly reduced average tax burden of Canadians and also shrunk government revenues considerably. The proposed flat tax turned out to be unpopular among Canadians, however, and the party dropped it at the beginning of the 2000 general election.

There are other tax system changes that are often proposed along with a flat tax. A common one is to eliminate most deductions, credits, and other means of avoiding the tax. This purports to avoid having millionaires with good accountants pay little or no income tax; however, it also reduces the deliberate use of tax deductions by governments to promote other desired ends.