A flat tax refers to a tax on income where the tax rate is the same at all levels of income. For example, a person who earns $20,000 of income annually will pay tax at the same rate, say 20%, as a person who earns income annually of $100,000. In other words, there is only one tax bracket. No developed country in the world has a flat income tax on individuals, although many come close in respect of corporations by having only a few tax brackets for corporations.

Most income tax systems have a progressive rate structure. This means that tax rates increase as income increases. For example, a person earning $50,000 may pay tax at 20% on the first $20,000 of income but at 30% on the next $30,000 of income. In a progressive rate system, the tax rate that applies to a particular dollar of income is referred to as the marginal rate at that level of income. In the above example, the marginal rates are 20% up to $20,000 and 30% above $30,000. In contrast, the total tax paid on income of a certain amount divided by that income is referred to as the average rate. In the example above, the average rate for the person earning $50,000 is 26%, $13,000 of tax divided by $50,000 of income. In a progressive system, the marginal rate always exceeds the average rate. In a flat tax system, the marginal rates and average rates are the same.

Since taxes are used principally to raise revenues for government operations, a major issue with a flat tax system is its revenue raising ability. Flat tax advocates normally suggest a tax rate much lower than the top rates of progressive systems (around 20% in most systems that are discussed compared to around 40% in the current US federal tax system). Consequently, it is not obvious how a flat tax system will raise sufficient revenue. The usual answer in a flat tax system to this revenue raising problem is to broaden the base for taxation. This means that more income is subject to tax because there are fewer exclusions and deductions allowed. For example, the current US tax system contains deductions for property taxes, state income taxes, mortgage interest, and charitable deductions. Under some flat tax systems these deductions would be denied or limited. If they are not denied are limited, the revenue raising ability of the flat tax is usually much less than the revenue raising ability of a traditional progressive tax system.

The low income taxpayer is a second issue with a flat tax system. The problem is that the tax rate normally advocated in a flat tax system exceeds the tax rate imposed on low income taxpayers under a progressive system. This can increase the income tax on low income taxpayers, which is both a political problem and a practical problem since such taxpayers normally have little ability to pay additional income tax. The typical solution for this problem is to provide a substantial deduction or exemption so that most low income taxpayers pay little or no tax under a flat tax system.

The result is that there is real doubt on the ability of a flat tax system to raise necessary revenue because of the need to provide an increased deduction for low income taxpayers and the political difficulty in eliminating many deductions commonly relied upon by middle income and higher income taxpayers. Some flat tax advocates argue that the increased economic activity resulting from the lower rate of a flat tax system will itself create additional tax revenue beyond the tax revenue currently generated by the progressive system. This is a controversial point.