The personal income tax in the United States is very differe

The personal income tax in the United States is very different from a comprehensive income tax. Discuss how income distribution and resource use would change if a flat-rate tax on comprehensive income were substituted for the current progressive income tax

Solution

In almost all countries, and in particular , the United States, the personal income tax is different from a comprehensive income tax. However, the use of income distribution and resources would change if a flat-rate tax was substituted for the current progressive income tax. First, a solo (one) tax rate has to be set to prevent the changing of administration revenues. In case of such a replacement, the flat rate tax will enhance profits in order to produce more by reducing the marginal tax rates of the income tax payers. In addition, the taxpayers are advised to direct some of their monies into untaxed types. This change is as a result of the substitution or the use of income and it reflects the loss in the production of the economy because taxpayers dedicate resources to lower-valued use. This is because they are untaxed. In another perspective, the substitution of a flat rate tax to a comprehensive evaluation of income would circumvent the problems raised (McEachern, 2014).

Although some of the items would be offered favoured treatment, the enticement for taxpayers to maximize the tax would be lowered because of the minimal tax rate of the flat rate tax. In addition, the use of an inclusive tax base would lead to production of a fairer distribution of taxes among those having equal and actual incomes.

McEachern, W. A. (2014). Economics: A contemporary introduction.