[ 30th November 2012 by Kumar Gaurav 0 Comments ]

Income tax policy: is a single rate tax optimum for long term economic growth?

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Income tax policy: is a single rate tax optimum for long term economic growth?

Purpose – The purpose of this research is to show an optimum Income Tax Policy, given that the government must raise sufficient tax revenue to fund public goods and services as well as income transfer programmes. This paper exams the different types of taxes and then suggests a policy that is efficient, equitable, easy to administer and leads to a higher level of economic growth.
Design/methodology/approach – A literature review has been done to find all scholarly work that relates to income tax policy and its effect on economic growth. Results from endogenous growth models have been utilised to determine both the significance and the magnitude of income tax policy’s effect on the growth rate of real GDP.
Findings – After examining the benefits of each type of taxation and reviewing the principles of Capitalism, a proportionate (single rate) tax of 12 per cent on all income would be approximately revenue neutral in the US, and would add to the growth of real GDP, thereby improving the standard of living.
Originality/value – While the literature shows varying studies concerning the impact of tax policy, there is a gap when searching for an optimum policy. Many scholars have made suggestions but none of them seem to be optimal. This topic is of particular interest in the US and the rest of the developed and non-developed world, since the recent performance of GDP growth has been very slow and in many instances negative. Most countries have tried combinations of Monetary and Fiscal Policies to encourage growth, but none seem to be working effectively. The solution may be to change income tax policy. The proposal for an optimum income tax policy is new and different from any that has been suggested as yet.
Practical implications – In the US today, the majority of people favour changing the current income tax code. The debate is about what to change and how to change it. This debate is also important to developing nations who try to set an income tax policy that reaches the goals while encouraging growth.
Social implications – Societies generally demand that tax policy conforms to some notion of fairness. There is wide debate about exactly what is fair and what is not. This paper attempts to justify the single rate tax as the fairest as well as the most efficient.
Keywords Tax policy, Flat Rate Tax, Regressive tax, Progressive tax, Economic growth
Paper type Research paper

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