Question

According to the Russ Roberts podcast, proposing a flat tax rate of 19% as opposed to our current tax system generates controversy over tax progressivity. According to Roberts’ guest, Alvin Rabushka, approximately what proportion of business income is taxed?

Select one:

a. A quarter (1/4) of business income.

b. Three quarters (3/4) of business income.

c. Half of business income.

d. 35% of business income.

Answer 1

The answer is option 'C'.

Because  Personal income in the United States is about $5 trillion. A raft of exclusions reduces this number to about $3.6 trillion in adjusted gross income and $2.4 trillion in taxable income. A lower rate on all or most personal income would collect the same amount of money as a much higher rate on taxable income. The same situation applies to business income. Much of this income escapes taxation because it does not fall into the net of taxable income. Altogether, less than half the national income is subject to income taxation, which means that relatively high rates of tax are required to collect enough money to run the government. The only way to enjoy the economic benefits of low tax rates and achieve real simplification is to broaden the tax base to all national income. The only exclusions in the flat-tax base from the entire gross domestic product are personal allowances, which inject a large measure of progressivity into the flat tax, and the investment incentive of 100 percent first-year writeoff, which transforms the flat tax into a tax on consumption.