"Flat" Taxes are actually Progressive

I'm struck by the frequency at which I see people reveal their misunderstanding of what a progressive tax is and how that applies to a tax rate or change of rates.

A "progressive tax" is deceptively simple. It simply means that the amount of tax owed rises as the base rises. For example, a tax on income would be progressive if a higher income earner had a higher tax liability. It has nothing to do with percentages or proportions.

As an extreme example, let's say someone has a $10,000 income and owes $100 in tax. Let's say another person has $100,000 of income but only owes $101 in tax. Did the higher earning person pay more in tax? Yes, even though it was just $1 more. In this case, this is a progressive tax, even though the higher tax paid by the higher income earner was a smaller proportion of his income. It is very slightly progressive, but it is still a progressive tax.

Progressivity has nothing to do with rates and everything to do with amounts. Taxes are paid in money, not in percentage points. A "flat tax" then is not a flat rate tax, but a flat amount tax. A fee, for example, is a true "flat tax." Something costs $100 and each of 50 people contribute $2; this is a true flat tax.

A flat tax rate is just one kind of progressivity. A progressive tax can also occur if the rates rise with income. But as illustrated above, even a falling rate can still be a progressive tax.

 

For most public expenditures, a flat fee is the fair allocation of cost. If a bridge is built in a town, each person in the town benefits the same from having it, and thus the costs would be evenly divided among the people. The same is true of a fire department or a library or public school. Each person in the town benefits from having the public good. So each person would pay an even share of the costs.

 

 


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