Friday, November 25, 2016

Progressive Taxation vs. Flat Rate Taxation

Another post on economic theory.

Let's start with some definitions:

Progressive Taxation: When the taxation rate is changed based upon amount of income per year.
Flat Tax: When the taxation rate is independent of amount of income.

With this in mind, I'll compare the two, and come to a conclusion.

1) Fairness

First off, a progressive tax means that a disproportionate amount of money is taken from the rich solely based upon the fact that they make more profit than others. In a flax tax, the rich still pay a larger amount of money, but this amount is proportionate to all others.

To give an example, someone who makes $300,000 a year off his business pays the same percentage as someone who makes $30,000 a year. Supposing the tax rate is flat, at, say, 20%, the richer individual pays $60,000 in taxes, and the second individual pays $6,000 in taxes. Although the richer individual has the same tax rate as the second, he is still paying 10 times what the second individual is paying.

Comparing this to the US progressive tax today, the richer individual would pay $87,904 (27%), and the second would pay $4,036 (13.5%). Now, the richer individual is paying more than 20 times what the poorer individual was, and at a disproportionate rate.

2) Complexity

This should be simple. The flax tax will obviously less complex, as there would be no brackets, tax breaks, exemptions, etc.. On the other hand, a progressive tax requires brackets, varying taxation rates, etc.. To put it into context, the US tax rule book has over 1000 pages, and is updated each year with new rules.

3) Economic Growth

With a flax tax, people are encouraged to make more. There is no penalty for becoming richer in taxes, as there are no special brackets. This leads to a more prosperous nation as a whole, giving incentive for economic growth.

However, with a progressive tax, people are punished for making more. There are many accounts of people who spend needlessly simply to stay out of a larger tax bracket instead of saving or investing. This leads to the people who are poor to remain poor, and not grow richer.

Seeing the arguments, I'm inclined to state that a flax tax is fair, simple, and leads to economic growth.

Questions?

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