Let’s say the current progressive personal income tax is now replaced by a flat tax, as advocated by many people

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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M 18

 Let’s say the current progressive personal income tax is now replaced by a flat tax, as advocated by many people for efficiency reason. A flat tax keeps only the standard deduction for a married couple (say in this case, $40,000) and a single tax payer (say $20,000), and gets rid of all other kinds of exclusions, adjustments, exemptions, deductions and tax credits. What remains of your income will be subject to a flat tax rate of, say, 20%.

Here are two questions:

a) Is this a proportional tax or is it still a progressive tax? (To help you answer this question, think of two hypothetical families with two different income level at $50,000 and $100,000. What is the average tax rate for these? two families under this flat tax system?)

b) How is this flat tax compared to our current personal income tax design, as the one in Question 1, in terms of vertical equity?

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