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There's a presidential candidate in USA that promises to change IRS laws in order that everybody pays the same % in taxes, i.e., the rich will pay the same percentage as the poor. This would seem to generate more income inequality in the long run. Another effect would seem to bleed the Government treasury . I do not how much it accounts for, but I don't think it's at all negligible...

What type of impacts can we expect if this measure is implemented. I'm not interested in politics, just economics.

Any help would be appreciated.

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    $\begingroup$ This is called a flat tax rate. To my knowledge this is currently implemented in several countries, for example in Switzerland. $\endgroup$ – Giskard Jan 24 '16 at 12:10
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    $\begingroup$ @denesp Switzerland does not have a flat tax. These countries have a flat tax. en.wikipedia.org/wiki/… $\endgroup$ – rocinante Jan 24 '16 at 20:37
  • $\begingroup$ @rocinante You are right, my mistake. $\endgroup$ – Giskard Jan 24 '16 at 20:54
  • $\begingroup$ I understand that there is still a personal deduction in the plan... IE., it's something like 'X% of earnings over $Y', which greatly changes the distribution at low incomes. $\endgroup$ – Ask About Monica Feb 3 '16 at 23:01
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Looking at the matter from a strictly positive and not normative or political view, then

1) Ignoring "Laffer-curve" effects, bleeding the Government treasury may not happen, if the flat tax rate is set to a suitable level (the specific politician has exactly in mind to bleed the federal government treasury, but that's discussing politics)

2) As regards income inequality, if indeed the current taxation system is effectively progressive and not just nominally, then it will indeed increase inequality, since this flat tax rate should be expected to lie above the current minimum tax rate implemented, and below the current maximum tax rate implemented.

A plausible anticipated effect is that lower incomes will reduce their saving (i.e. we should expect that the loss in disposable income will hurt savings more rather than consumption), while higher incomes, which will now have more disposable income, will increase savings. While the overall effect on the "consumption/savings" mix may be ambiguous, this will affect also the distribution of wealth, increasing also wealth inequality.

Is inequality bad for economic performance? Check some recent work by S. Turnovsky, that models links between inequality and growth.

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  • $\begingroup$ Alecos, Thanks for your answer and reference. ;) $\endgroup$ – An old man in the sea. Jan 25 '16 at 10:15

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