flat tax

Quick Reference

A tax with a single rate (as opposed to one in which the rate of tax increases with the size of the tax base) and with no reliefs or exemptions apart from a standard personal allowance. In recent years a flat rate of income tax has been introduced in Russia and a number of Eastern European economies. The advantages claimed for such a system are that it is very simple to understand and operate, thereby reducing administrative costs for both government and business, that it eliminates many forms of tax avoidance, that the abolition of the higher-rate tax bands encourages enterprise and wealth creation, and that the raising of the threshold at which people begin to pay tax benefits the lowest earners (who also gain from the elimination of poverty traps). Opponents argue that it denies governments flexibility in setting tax policy and offends against the ability-to-pay principle by shifting the burden of tax from the wealthiest to those on middle incomes. Compare progressive tax; regressive tax.

Subjects: Financial Institutions and Services — Accounting.

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