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What Is a Proportional Tax?

A proportional tax, also known as a flat tax, is a type of tax system that levies the same tax rate on everyone, no matter their income level. This system is in contrast to the progressive or marginal tax system that exists in the U.S., which is one in which the higher your income is, the more you’re taxed. Proportional tax systems aren’t very common, though some supporters believe it can encourage people to work more.

Managing your taxes should be a major part of your long-term financial plan. Talk to a local financial advisor about your plans today.

What Is a Proportional Tax?

A proportional or flat tax is a system in which taxpayers all pay the same percentage of their income in taxes. This applies regardless of what their income level is and whether they fall into the upper, middle or lower class.

A proportional tax system can make filing easier, as you don’t have to figure out your tax bracket. In turn, everyone is simply paying the same percentage of their taxable income. On the other hand, a progressive tax system taxes high-earners more and low-earners less. The purpose of this arrangement is to balance out the tax burden in an effort to level the financial playing field.

Examples of a Proportional Tax

Overall, a proportional tax system places a larger financial burden on lower earners. Although technically everyone is paying the same percentage of their taxable income, that rate will have a larger effect on those who are starting with less.

For instance, imagine a system in which the proportional tax rate is 10%. Someone earning $5 million per year will have $4.5 million in post-tax income, whereas another person struggling to get by with an income of $30,000 per year will have just $27,000 in after-tax income.

A sales tax too can be thought of as a proportional tax, as it’s the same rate for everyone. Other capped taxes, like certain payroll deductions, are also proportional, as they’re limited and can’t be raised for higher earners. Russia is the largest country in the world to currently use a proportional tax system, as all taxpayers are taxed at a rate of 13%.

Bottom Line

What Is a Proportional Tax?

A proportional tax is one example of a tax system societies can use to collect from its taxpayers. There are very legitimate criticisms of proportional tax systems, namely that they are a form of a regressive tax. This is because individuals and businesses with a lower income will end up with a heavier financial burden than their high-earning counterparts. While some argue that proportional taxes encourage more work as they carry no additional tax burden, the criticism still continues.

Tips for Managing Your Taxes

  • Working with a financial advisor can help you get your taxes in line with your overall financial plan. This can be especially helpful if you have multiple taxable accounts or income streams. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area in five minutes. Get started now.
  • If you’re nearing retirement or are wondering how your taxes will look when you retire, try using SmartAsset’s retirement tax calculator. Simply click on the state you plan to retire in and read about how its taxes can affect your Social Security, IRA or 401(k) benefits.

Photo credit: ©iStock.com/Moon Safari, ©iStock.com/Creativeye99

Sam Lipscomb, CEPF® Sam Lipscomb is a writer for SmartAsset. His work spans a wide variety of personal finance topics with expertise including retirement, investing and savings. He is particularly well versed in credit cards. Sam has been featured in The Economist and on The Points Guy. He is a Certified Educator in Personal Finance (CEPF®). Sam graduated from Kenyon College with a degree in Economics and enjoys being a go-to resource for family and friends when it comes to personal finance. Originally from Washington, DC, Sam loves all things aviation and is a Cleveland sports fan. He currently lives in New York.
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