UK Accounting Glossary
A flat tax system has a fixed tax rate regardless of level of income. The primary advantage of a flat tax is simplicity. Not only are flat tax computations and payments very straightforward, but in theory, the economy also benefits from a minimum of distorted incentives driven by tax deductions in a flat tax regime. Usually, the flat tax is understood to apply only to earned income. Many conservatives favour this flat tax formulation because it eliminates capital gains taxes. Opponents describe such a flat tax system as regressive, meaning that the poor share a disproportionate burden. In contrast, the current US tax system is progressive because high-income earners pay a higher rate than low-income earners. The name flat tax comes from the flat line that results when the tax rate is plotted against income. In 1994, Estonia became the first country to implement a flat tax, and when its economy subsequently thrived other countries followed suit.
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This glossary post was last updated: 9th February 2020.