Flat Tax: What It Is, How It Works And Why It Matters

When you think of tax rates, your mind may jump to the progressive income tax system the U.S. government uses, in which your income tax rate varies based on tax brackets and how much money you earn. In contrast, in a flat-rate income tax system everyone pays the same tax rate no matter their income.

While the U.S. income tax system is progressive, when you work or buy things here you’ve paid taxes based on a flat tax system, because both payroll taxes and sales taxes are types of flat tax, more or less. Plus, 14 U.S. states currently levy a flat rate as their state income tax.

What is a flat tax?

A flat tax is one in which all taxpayers pay the same rate, no matter what their income is. Someone who earns $250,000 pays the same tax rate as someone who earns $50,000.

Critics of a flat income tax say it disproportionately burdens low-income households, partly because those households have less wiggle room than higher-income taxpayers to cover the tax burden out of their wages. Another potential downside: A flat tax may mean less revenue coming in from higher-income taxpayers, compared with a progressive tax system, and government entities may respond to that shortfall with measures that hit hardest on lower-income households.

For more, check out this report on the pitfalls of flat income taxes, from the Institute on Taxation and Economic Policy, a left-leaning nonprofit tax research organization.

On the other hand, proponents of a flat income tax rate system argue that it encourages people to earn more money and invest in their business’s growth, because, unlike a progressive tax system, taxpayers don’t face higher tax rates as their income rises. Plus, a flat tax rate can make tax filing simpler, proponents say.

Here’s an example of an argument in favor of a flat tax, from the Tax Foundation, a right-leaning nonprofit tax research organization.

What’s the difference between a flat tax rate and a progressive tax rate?

A progressive or graduated tax system is essentially the opposite of a flat tax system, because it uses different tax rates for taxpayers at different income levels. The higher the income, the higher the overall tax rate. A flat tax system, on the other hand, uses one rate for taxpayers at all income levels.

With a progressive tax system, taxpayers’ income falls into a series of tax brackets, with the tax rate on each bracket rising as income rises. The current U.S. system employs seven separate tax rates. Your marginal tax rate is your highest rate, while your effective tax rate — what you actually pay — is a combination of tax rates.

For example, a single filer with $25,000 in taxable income in 2025 will pay a 10 percent federal tax rate on their first $11,925 of income, and then a 12 percent tax rate on income from $11,925 to $25,000.

But a single filer who makes $200,000 will have their first $48,475 treated the same way as the previous taxpayer, but then they’ll pay a 22 percent tax rate on income between $48,475 and $103,350, a 24 percent tax rate on income between $103,350 and $197,300, and a 32 percent tax rate on the remaining amount.

With a progressive tax system, to calculate your total tax liability, you need to add together your tax bill for each of the tax brackets that apply to you.

Examples of a flat tax

The U.S. uses a progressive tax system to levy income taxes, but the country does have some examples of flat tax as well. Sales taxes, which are collected statewide in 45 states and the District of Columbia, are flat — everyone pays the same amount. If you spend $100 shopping in a place with a 5 percent sales tax rate, you’ll pay $5 in tax no matter what your income is.

Another example is FICA payroll taxes (FICA stands for Federal Insurance Contributions Act). The current Social Security tax is 6.2 percent for the employer and 6.2 percent for the employee, and the Medicare tax is 1.45 percent for the employer and 1.45 for the employee, for a total of 15.3 percent.

Still, these examples also show how the notion of a flat tax can quickly get tricky. The Social Security tax doesn’t apply to income above $176,100 in 2025 (that amount is adjusted for inflation each year). And while there’s no such limit for the Medicare tax, there’s an additional 0.9 percent Medicare tax on wages above $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately).

Even among the 14 states that levy a flat income tax rate, there’s some variability. For example, Idaho’s flat tax rate doesn’t apply to the first $2,500 of income for single filers ($5,000 for married filers), and Mississippi similarly shelters the first $10,000 of income from tax.

Here are the 14 flat-tax states and their income tax rates for the 2024 tax year, for returns filed in 2025, unless otherwise noted:

• Arizona, 2.5 percent
• Colorado, 4.25 percent
• Georgia, 5.39 percent
• Idaho, 5.695 percent, on most income
• Illinois, 4.95 percent
• Indiana, 3.05 percent
• Iowa, 3.8 percent, starting in tax year 2025
• Kentucky, 4 percent
• Louisiana, 3 percent, starting in tax year 2025
• Michigan, 4.25 percent
• Mississippi, 4.4 percent, on most income, starting in tax year 2025
• North Carolina, 4.25 percent, on most income, starting in tax year 2025
• Pennsylvania, 3.07 percent
• Utah, 4.55 percent

Is there a ‘flat tax revolution?’

Over the last four years, a number of U.S. states have shifted, or debated shifting, to a flat income tax, from a progressive system. The Tax Foundation has called this “something of a flat tax revolution.”

From July 2021 to December 2024, six states — Arizona, Georgia, Idaho, Iowa, Louisiana and Mississippi — enacted laws converting their progressive income tax systems to flat tax structures. In 2023 and 2024, lawmakers in Kansas, Missouri and Oklahoma debated making the transition to a flat tax system, according to a report by the Tax Foundation.

Still, while 14 states use a flat-rate income tax system, and nine states levy no income tax, the majority of states continue to use a graduated or progressive income tax system.