The definition of proportional tax is that all taxpayers make a contribution to the state budget according to the same percentage rate, irrespective of their income. For instance, people might pay 20% of their income, regardless of whether they have earned $20,000 or $5,000 a year.
A tax is an inevitable phenomenon in the modern world. Governments impose various tariffs to collect money that is then used to pay salaries to public sector employees, fund libraries and parks, build safe roads, and provide many other services. It is hard to overestimate the significance of taxation for both individuals and a nations as a whole.
Various systems exist that stipulate the size of a contribution that a citizen should give to the state, and a proportional tax is among them. Even though this system is said to be the fairest option, there are proportional tax pros and cons, and it is necessary to understand them to evaluate this phenomenon adequately.
In a proportional tax system, individuals identify the required proportion of their income and pay it as a tax. The sizes of these contributions will be significantly different, but they will represent the same percentage. That is why the proportional tax system is known as flat taxation, meaning that it does not imply any variations for people with various income levels.
One should also consider other taxation methods, like regressive and progressive taxes, to understand how a proportional tax system works. On the one hand, a progressive approach stipulates that individuals with higher incomes should pay higher contributions. On the other hand, in a regressive system, someone with an increased income will pay less taxes.
Thus, by comparing proportional tax vs. regressive tax, we see that the latter is less advantageous for people with small and medium incomes because they pay more while wealthier individuals witness a lower financial burden. Finally, the graph below illustrates the differences between progressive, regressive, and proportional tax systems.
The information above highlights the main advantages of the proportional tax, showing that it is fair for every member of society. With this option, irrespective of their income rate, individuals bear the same financial burden, with no deductions offered for citizens with either low or high income. In this way, the proportional tax is better for society.
However, that aspect is also considered the principal disadvantage of this system. In other words, the equal proportional tax rate represents different financial burdens for various people. For example, a high-income individual might feel it financially easier to pay equivalent contributions in comparison with a low-income person.
Modern society cannot exist without taxes because they contribute to its financial stability. Different governments use various approaches that determine how much money individuals should pay to a taxation system.
Proportional taxation is one of the existing options, and it has both pros and cons. Its main advantage is that the taxation percentage rate remains the same irrespective of income size. At the same time, its principal disadvantage is that low-income individuals are not given any deductions.
In conclusion, regressive, progressive, and proportional taxations systems have been analyzed and compared, demonstrating that each of them has both positive and negative aspects for individual taxpayers.