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February 3, 2012

A True Flat Tax Versus Now

The purpose of this post is to illustrate a few aspects of current tax/subsidy policy and contrast this complex policy with a true flat tax. It should be understood that there is a lack of precision in the graph, because there are differences in these policies across states and across family circumstances . . . such as the number of children in the family. Income is measured along the horizontal axis. Sorry I didn’t get that on the graph.

The aspects of the current subsidy system that are shown are the Earned Income Tax Credit (EITC), Rent Subsidies (RS), Aid to Families with Dependent Children (AFDC), and Food Stamps (FS). The current tax system is shown with differing marginal tax rates. The overall current policy is shown with the dark line. Pretty complex, isn’t it? The dark line is the vertical summation of all the thin solid lines. That is, it represents the total of the various policies illustrated here.

The dashed line represents what could be done with a true flat tax (TFT) if one were to eliminate all the other subsidies. Pretty simple, isn’t it? Well, simplicity is only one of the advantages of the true flat tax. The major advantage is that you can monitor the marginal tax rate across the entire income spectrum. In no part of this spectrum is there a kink which acts as a disincentive to upward mobility.

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