Question

In: Accounting

the impact of changing our current federal tax code to a proportional tax for personal income...

the impact of changing our current federal tax code to a proportional tax for personal income from the current progressive tax we have currently. What you feel would be the impact on tax revenue, labor supply, etc. Explain in detail.

Solutions

Expert Solution

A proportional tax regime affects all the income group in same way be it lower income group or higher income group or middle income group.

Where as progressive tax has more impact on higher income individual than lower income individual.

A proportional tax is levied at same rate to all, regardless of the income earned.

Progressive tax is levied at higher rate on higher income.

In Europe and North America there has been a movement away from
highly progressive direct tax structures, towards higher indirect taxes coupled with a broadening of the
direct tax base. Social security and pensions have also come under close scrutiny. In many countries it
was the perceived disincentives to work that motivated many of these reforms and labour supply responses are commonly attributed a prominent role in the analysis of tax reform.

Higher tax rates on labor income and consumption expenditures lead to less work time in the legal market sector, more time working in the household sector, a larger underground economy, and smaller shares of national output and employment in industries that rely heavily on low-wage, low-skill labor inputs


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