What is a flat tax and how it is different from the current tax? This is a very common question asked by a large number of taxpayers in the US. In this informative post, we have covered everything that taxpayers need to know about flat tax system vs the current tax system. We will cover the definitions of these systems and why people like them.
What is a Current tax system?
In the current tax system, tax rates increase progressively as income increases. In the US, people who earn more fall into higher tax brackets that are taxed at a higher rate. The United States of America is far from the only country that uses this tax system. There are many other countries that have a progressive income tax system like the UK, China and Germany.
Why people like current tax system in US
The prime reason behind why people like this system is that it increases more revenue without putting a higher burden on lower income earners. Additionally, people advocate for the current tax system as it acts as somewhat for a tax break for those people who earn less. This is because those people who earn more can afford to pay more. On the other hand, higher tax rates on poorer people can be very burdensome and those who advocate for this tax system say that through it is not equal it is fair.
What is a flat tax system?
It is an income tax system that applies the same low tax rate across the board. This means every individual pays the same tax rate no matter what is the income. But, its success depends on the tax rate proposed as it should take in enough revenue to fund the government. In addition to this, most flat tax systems let exemptions for those people who are living below the poverty line. Thus each Proposal fir this tax system should be evaluated very carefully in order to assess it’s true revenue producing potential.
Let’s take a look at states with a flat tax system in the US. These states include Illinois, Colorado, Utah, North Carolina, Indiana, Michigan, Kentucky, Pennsylvania and Massachusetts.
Why people like flat tax system in the US
US citizens living abroad expat taxes like this tax system because it feels more fair as every individual pays the same percentage (%) of tax across the board. It is more simple and must mean that there would be less call for tax paying individuals to pay to have return prepared. It would completely eliminate the need for the IRS ( Internal Revenue System). Also, flat taxes are supported in the investment and business communities as dividends, capital gain and many other incomes not tied to wages are often exempt from tax and this must spur both investment and savings.
These are some strong arguments for both the tax systems. Though this informative post, we hope that it helped taxpayers understand where they may stand in the flat tax vs the current tax system debate.