Flat tax

About: Flat tax is a research topic. Over the lifetime, 647 publications have been published within this topic receiving 9709 citations. The topic is also known as: flat-rate tax & flat taxation.

Taxing Capital? Not a Bad Idea after All!

Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.

The Flat Tax

Abstract: First proposed twenty-five years ago, the flat tax concept has since been adopted by six states-Colorado, Illinois, Indiana, Massachusetts, Michigan, and Pennsylvania-and several countries around the world. In this new and updated edition of The Flat Tax, Robert Hall and Alvin Rabushka set forth what many believe is the most fair, efficient, simple, and workable tax reform plan on the table: tax all income, once only, at a uniform rate of 19 percent. Hall and Rabushka go beyond mere academic abstraction, designing new tax forms, rewriting tax regulations, and working out all the practical details. They show how all wage earners would pay less tax than under the current system, flat tax plan tax returns could be filed on a postcard, and April 15 would no longer be a national nightmare!

Simulating Fundamental Tax Reform in the United States

Abstract: This paper uses a new, large-scale, dynamic life-cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the U.S. federal income tax, including a proportional consumption tax and a flat tax. The model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems. Simulation results project significant long-run increases in output for some reforms. For other reforms, namely those that seek to insulate the poor and initial older generations from adverse welfare changes, long-run output gains are modest.

Taxation and economic growth

Abstract: Tax reforms are sometimes touted as having strong macroeconomic growth effects. Using three approaches, we consider the impact of a major tax reform—a 5 percentage point cut in marginal tax rates—o...

Optimal Taxation in Theory and Practice

Abstract: The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be designed, and it discusses the extent to which these lessons are reflected in actual tax policy. We begin with a brief overview of how economists think about optimal tax policy, based largely on the foundational work of Ramsey (1927) and Mirrlees (1971). We then put forward eight general lessons suggested by optimal tax theory as it has developed in recent decades: 1) Optimal marginal tax rate schedules depend on the distribution of ability; 2) The optimal marginal tax schedule could decline at high incomes; 3) A flat tax, with a universal lump-sum transfer, could be close to optimal; 4) The optimal extent of redistribution rises with wage inequality; 5) Taxes should depend on personal characteristics as well as income; 6) Only final goods ought to be taxed, and typically they ought to be taxed uniformly; 7) Capital income ought to be untaxed, at least in expectation; and 8) In stochastic dynamic economies, optimal tax policy requires increased sophistication. For each lesson, we discuss its theoretical underpinnings and the extent to which it is consistent with actual tax policy. To preview our conclusions, we find that there has been considerable change in the theory and practice of taxation over the past several decades—although the two paths have been far from parallel. Overall, tax policy has moved in the y N. Gregory Mankiw is Professor of Economics, Matthew Weinzierl is Assistant Professor of Business Administration, and Danny Yagan is a Ph.D. candidate in economics, all at Harvard University, Cambridge, Massachusetts. Their e-mail addresses are ngmankiw@