Video: What Is a Flat Tax?

Updated for Tax Year 2010


OVERVIEW

Note: The information in this video is applicable to taxes filed in 2010. It is here for reference only. A flat tax requires you to pay a fixed percentage of your income, no matter what that income actually is.


Video transcript:

Hello, I'm Sara from TurboTax with some information about how a flat tax system works.

Although the US does not use any type of flat tax, more than 20 countries, mainly in eastern Europe collect taxes this way.

Generally, a flat tax system requires you to pay a fixed percentage of your income to the government, regardless of how much you earn, how many people you support, or the amount of personal expenses you have. The jury is still out on whether this is a better way to collect tax. Some people argue the system is more fair while others say it places an undue burden on people with lower incomes.

Here in the US, we use what is called a progressive system. This means that as your income increases, so does the amount of tax you have to pay.

Here's how it works:

Currently there six tax brackets that range from ten to 35 percent. If you are a single taxpayer who earns 90,775 dollars during 2010, the first 8,375 dollars of income is taxed at ten percent. The next 25,625 dollars is taxed at 15 percent, and the remaining 56,775 dollars is taxed at 25 percent.

However, unlike the flat tax, progressive systems allow you to reduce your taxes with credits, deductions, and exemptions. Usually for behaviors the government wants to encourage, like buying a home or donating to charity. This means that two tax payers that earn the same salary for the year may end up paying different amounts of tax. But under a flat tax system, both would pay the same exact amount of tax.

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