Proportional TaxDefined with Examples

Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: January 7, 2022
Date Published: January 7, 2022

What is a Proportional Tax?

Proportional Tax is a taxation mechanism where income earners – low, middle, or high income earners – pay a flat rate regardless of the amount of income that they earn.

For this reason, proportional tax is also called a Flat Tax.

Proportional Tax is a type of regressive tax – a uniform way of applying tax rates.

Which means that if a tax rate is set at 20%, a person earning $20,000 will be charged 20% of tax in the same way that a person earning $500,000 is charged.

The reasoning behind the application of proportional tax rates is that since everybody is treated equally, so should their taxes.

And when taxes are charged equally, it pushes everybody to work hard and earn more because earning more does not mean paying more in taxes.

Understanding Proportional Taxation

With Proportional Taxation, it allows people of different income brackets to be charged the same way.

While those who are opposed to this type of taxation argue that those who are earning less are forced to pay more in taxes, proponents of this taxation method are encouraged to work more and strive to earn more because their taxes remain the same regardless of how much they make.

Critics of Proportional Taxation are firm in believing that a Progressive Tax system is more beneficial to society because low-income earners pay a lower percentage of tax on their income while those who earn more are taxed more.

Sales taxes for goods and services purchased are considered proportional taxes because people pay the same tax regardless of their income or wealth.

Other examples of proportional taxes are the capped portion of the FICA (Federal Insurance Contributions Act) payroll deductions and poll taxes.

what is proportional tax

Example of Proportional Taxes

A government sets the tax rate of a country at 15%.

One individual earns $1,000,000 while another earns $250,000.

With proportional taxation, the person who earns $1,000,000 will pay $150,000 and the other person earning $250,000 will pay $37,500.

For a person who earns $1,000,000 and pays $150,000 in taxes, he will be left with $850,000 to spend for all his needs and more while the other person who earns $250,000 and pays taxes of $37,500 will have a remaining amount of $212,500 to spend.

Pros and Cons of Proportional Taxes

Proportional Taxes remain constant even with the fluctuations of income making it beneficial for high income earners.

It encourages them to work harder, earn more, so that they will have more money to spend for all of their needs.

Proportional taxes are considered regressive because as people earn more, the taxes have little effect on their income.

Those who are opposed to proportional taxes argue that with this type of taxation, low income earners are left to suffer more on the consequences of this system because they end up paying more taxes than high income earners.

Instead, it should be the high income earners who should be paying higher tax percentages.

With the argument that everyone should be treated the same and should be charged with the same tax rate, while it may only be fair, the after effect of this type of taxation impacts the low income earners more.

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  1. Northeastern University "What’s in a Name? Progressive vs. Regressive Taxation" Page 1. January 7, 2022

  2. Brookings "Flat Tax Impact on Saving and the Economy" Page 1 . January 7, 2022

  3. Chapman University "The Puzzling Case for Proportionate Taxation" Page 1 . January 7, 2022