10/25/2023 0 Comments Flat tax definition economics![]() ![]() Gale and John Karl Scholz (1994) indicates that much of the IRA deposits came from households that had already accumulated considerable wealth and could simply transfer it into the tax-favored accounts. Venti and David Wise (1987) suggest that individual retirement accounts (IRAs) were successful in encouraging new saving, but a study by William G. Second, household saving fell in the face of tax rate cuts and substantial targeted tax incentives for saving, strongly suggesting that taxes have a limited impact, at best, on saving. ![]() Moreover, the idea of vertical equity (i.e., the “proper” amount of progressivity) often directly contradicts another notion of fairness, the “benefit principle.” According to this principle, those who benefit more from the operations of government should pay more tax. However, a significant minority takes the position that tax rates should be flat, with everyone paying the same proportion of their taxable income. Most people believe that fairness dictates that taxes be “progressive,” meaning that higher-income taxpayers pay not only more, but also proportionately more. And even if one taxpayer is clearly better off than another, there is little agreement about how much more the better-off person should pay. For example, one taxpayer might receive income from working while another receives the same income from inherited wealth. There is little agreement over how to judge whether two taxpayers are equally situated. Although these objectives seem clear enough, fairness is very much in the eye of the beholder. Fairness, to most people, requires that equally situated taxpayers pay equal taxes (“horizontal equity”) and that better-off taxpayers pay more tax (“vertical equity”). ![]()
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