If someone earns $500, for instance, he or she must decide between spending that money immediately or, either saving or investing that income. Let’s dive into an example to see how this might play out in real life. What do we mean by double taxation? It’s a tax principle that refers to income taxes paid twice on the same source of earnings. And one main reason why some states have moved to a flat tax is to avoid what’s referred to as “ double taxation.” In general, many economists believe the benefits of flat taxes outweigh the drawbacks because they tend to raise revenue without negatively impacting the economy. Has it made a difference? With the aforementioned Eastern European countries and Russia as case studies, these countries have all historically enjoyed economic growth since moving to this type of tax system. Russia is the biggest economy in the world that uses a flat tax which comes out to 13% for all earnings. The main philosophy behind a flat tax rate is that it helps boost the economy because it both simplifies taxes and encourages people to save rather than spend their earnings. What is the purpose of a flat tax system? There also a few eastern European countries like Latvia, Lithuania, and Russia that use flat tax rates, as well. If someone made $50,000 in a year, they would be obligated to pay $5,000 in taxes.Ĭurrently, there are eight states that have a flat tax income system which will be explored in detail below. So, if the flat tax rate was 10%, those who made $100,000 would pay $10,000 in taxes. What are the drawbacks of a flat tax system? What is a flat tax?Ī flat tax rate simply means that everyone pays the same tax rate regardless of their tax bracket. What are the benefits of a flat tax system? What is the purpose of a flat tax system?Īre there states with a flat tax income system?Īre there federal taxes that are flat-rates? Keep reading for a comprehensive explanation of flat tax rates and how they affect your taxes already and may impact them in the future. There are both benefits and drawbacks of a flat tax rate, especially for those in the extreme poles of tax brackets-the highest wage earners and the lowest. Some politicians, financial analysts, and economists have suggested implementing a flat tax rate system in place of the current progressive tax system already in place in most states. If you’ve ever filed taxes, you know what a headache it can be when you’re forced to navigate through intricate tax codes.

Flat tax example