Understanding Flat Tax

The way the people of a country are taxed by its government plays a significant role in the growth of the country’s economy. Throughout the world, employees, entrepreneurs, and corporations are taxed mainly in three ways, namely progressive taxes, regressive taxes, and flat taxes.

When people are levied progressively, the rich are charged more than the poor. The rates increase as income tax brackets rise, thus impacting the high-salary earners more than the low-salary earners.

On the contrary, regressive taxes affect taxpayers with lower salaries more than the ones with higher salaries. Here, the tax-burden is not imposed directly on a person’s ability to pay, but the government charges it as a percentage of the asset that the taxpayer buys. For instance, sales charge on purchasing an item is computed as a percentage of the item bought, which is the same for all.

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Flat Tax

In flat taxation, there exists a fixed marginal rate. A marginal tax rate is the rate one has to pay for one extra unit of salary.

This is also known as Proportional Tax. It’s a proportional system since it levies all taxpayers at the same rate, regardless of their salary-levels.

However, flat taxation can behave like progressive taxation (a marginally flat taxation) also whenever applicable deductions are included. This excludes certain types of incomes from being recognized as taxable salary.

This can also become a regressive taxation method when the earnings are taxed at a flat rate until a specified cap amount is reached.

Laffer Curve Theory

The Laffer Curve theory is based on the principle that marginal tax rates will impact the motivation as income rises. This means that higher marginal rates will leave people with less motivation to earn more.

That is why, on a larger scale, taxable income decreases as a function of the marginal rate, making the net government taxation revenues decrease after a particular point. 

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