Monday, April 15, 2002

Flat Tax Economics- Doug Turnbull had a good Tax Day piece on a flat tax and wondered about the economic effects of a flat tax. Megan's pager's off, so I'll give it a shot. If we assume that the flat rate is less than the current tax rate for most people, it would encourage hard work and investment for people whose current marginal tax rate is higher. If you have higher take-home pay as a result of lower marginal tax rates, the opportunity cost of leisure just got higher. Likewise, the flat tax will encourage investment, as the opportunity cost of spending went up as after-tax returns on investment will have gone up. The fewer the deduction, the lower the flat tax can be. The overall effect of a flat tax will depend on how many deductions will still be there. For instance, if the mortgage interest deduction was taken away, there would be less money borrowed to buy houses.

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