With flat tax (flat-rate tax), the rate is constant and thus equal to the marginal tax rate. The flat tax is usually linked conceptually with the fullest possible coverage of income and the near elimination of subsidies and tax breaks in order to achieve an even lower tax rate.
A flat tax with an exemption will lead to indirect progression: while the marginal tax rate remains the same, the average tax rate increases with income, and approaches the marginal tax rate. With the pure flat tax, there are no deductions and no tax progression. All income is taxed at the same marginal tax rate.
Flat taxes which permit a tax exemption for household income beneath a given cutoff point do not constitute truly proportional taxes, this is due to the fact that for household incomes falling under the cutoff level, taxable income amounts to no more than the total income. The relative balance in tax distribution depends on which tax deductions are discontinued in the event that a flat tax is implemented.
The flat tax solves the problem of the link between income tax and corporation tax. Although the tax base of corporation tax and income tax is uniform, in the case of a uniform tax rate, corporate income tax is all the same. A flat tax could provide a simplification in the income tax law and thus lead to a simpler tax return.
However, simplification is less with the collective history, as the legal embodiment of the base. The hidden tax increase by cold progression can be avoided through the introduction of a flat tax. The capacity of the State to focus on tax incentives for investments (e.g, renewable energy, building or closed real estate funds) will be complicated.
Advocates of the flat tax state that it is more balanced than marginal tax rates, because the remittances are proportional for tax payers. While critics of the flat tax, argue that the marginal value of income declines with the amount of income, one dollar is worth more to a poorer household than to a millionaire, thus rendering it unfair.
Without limiting the average tax rate on positive values of the exemption for incomes below a certain threshold allowance, it acts as a negative income tax as proposed, for example, by Milton Friedman in the book Capitalism and Freedom. There are basically two types of flat tax with a tax-free allowance. The unit has negative income tax with a higher tax allowances at the same high leveling effect as a flat tax with a limit of the average tax rate to the positive range.
Compared to the progressive income tax rates, for which the average tax burden at the top rate is almost linear, the flat tax rate is average at the beginning of the curve. This means that the top income tax threshold is much lower than in a progressive tax schedule. The minor difference between marginal tax rates and average tax could increase the pressure on wages in collective bargaining, and thus cost jobs.