Saturday, November 17, 2012

17/11/2012: Flat tax and economic efficiency

A new paper on flat tax systems, "Flat Tax Reform in an Economy with Occupational Choice and Financial Frictions" by Radim Boháček and Jozef Zubrický, (The Economic Journal, Vol. 122, Issue 565, pp. 1313-1345, 2012 |

The paper modeled a flat tax and capital tax reforms "in an economy with occupational choice and borrowing constraints. [The paper introduces] entrepreneurs as an occupation… [and compares] steady state allocations [between] a progressive tax schedule [and] steady states with a flat tax at different exemption levels with or without a capital tax reform. [The authors] find that for low exemption levels the flat tax reform is efficient as well as welfare improving for both occupations."

This is quite interesting, since in traditional flat tax literature, there are usually welfare gains to entrepreneurs and welfare losses to employees (of smaller magnitude than gains to entrepreneurs, so overall system of flat taxes is welfare enhancing for the economy as a whole).

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