Friday, April 29, 2005

Flat tax

Arguments for
1) there will be no additional incentive to hire two people to do a job one person could do better - this is significantly more efficient since it leaves these two people to find other jobs.
How this works is that if you have lets say 60,000 dollars you could hire 2 people at 30,000 or 1 at 60,000 but the fellow on 60,000 is getting less in dollar terms than the other two people put together.

2) It is simpler (the argument used most widely)
It is harder to abuse a simple system

3) Poor people are encouraged to go overseas while rich people are encouraged to stay.
This soulds like a cynical benefit but basically if we stack the country with rich people standards of living go up as does our stock of talented individuals

Argument against
1) Fairness - the first dollar you earn is actually a lot more valuable than the last dollar you earn. This means that if I take one dollar from a poor person that prevents purchases in regards to food lets say if you take money from a rich person that may prevent purchases of European cars.

2) Incentives - The flat tax supporters would say that a progressive tax rate creates negative incentives to work BUT this is wrong.
First everyone realises that it is harder to earn your first dollar than your last dollar. For example take any book on getting rich and they will note that having money helps you to make money. ALSO a poor uneducated person will find it harder to make one dollar than a rich person. A worker would therefore apply a certain amount of effort to get a certain amount of benefit (not distorted) there should be a progressive tax rate that increases as income increases.

3) Sustaining capitalism
The problem here is that capitalist economies are driven in a sense by the redistribution of money from those that cannot manage it to those that can. BUT as time goes buy the economy draws on this resource of equality as certain people accumulate money and others loose it. If this is allowed to continue eventually the system breaks down because money becomes far too concentrated in the hands of a few there is no longer a mass market, but instead just a few people trading amongst themselves and the economic system (plutocracy) no longer even vaguely approximates democracy.
Taxes like death duties and progressive tax systems alow the government to build the system back up again so htat the rest of the system can then use up that equality.

I think argument 2 against is the strongest as long as we assume people are not too mobile or that we could have mutual taxation agreements with other countries. On the whole I think that is the case.


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