Legal Definitions - flat tax

A flat tax is a taxation system where a single, uniform tax rate is applied to all taxable income or transactions, regardless of the amount. This means that everyone subject to the tax pays the same percentage, rather than a rate that increases or decreases based on income level or other factors.

Here are some examples to illustrate how a flat tax works:

• Example 1: National Income Tax

  Imagine a country decides to implement a 15% flat income tax. Under this system, an individual earning $40,000 per year would pay 15% of that income in taxes ($6,000), and another individual earning $400,000 per year would also pay 15% of their income in taxes ($60,000). The actual dollar amount paid differs, but the percentage rate applied to their taxable income remains constant for everyone.

  This illustrates a flat tax because the same 15% rate is applied uniformly across all income levels, without any progressive brackets where higher earners pay a higher percentage.

• Example 2: State Corporate Tax

  Consider a state that simplifies its business taxation by introducing a 5% flat tax on all corporate profits. This means that a small startup company with $100,000 in annual profits would pay $5,000 in state taxes, while a large corporation with $10 million in annual profits would pay $500,000. In both cases, the tax is calculated as 5% of their respective profits.

  This demonstrates a flat tax because the 5% tax rate is applied uniformly to all businesses within the state, regardless of their size or the total amount of profit they generate.