Importantly, flat taxes avoid impacting individuals’ and businesses’ marginal decisions, or what they will do with their next dollar of income. Flat taxes are relatively transparent and simple in that they make it easier for taxpayers to estimate their tax liability and for revenue forecasters and state policymakers to estimate how a rate cut or increase would impact revenue. The analysis in most cases show that: the General Negative Income Tax strictly dominates the other rules, including the current ones the Unconditional Basic Income policy is better than the Conditional Basic Income policy Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects In-Work-Benefit policy is strictly dominated by the General Negative Income Tax and by the Unconditional Basic Income.An income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets.Ī flat tax, where a single rate is applied to all taxable income, is an appealing income tax system due to its relative simplicity, transparency, neutrality, and stability. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional (means-tested) Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The optimality criterion is the class of Kolm’s social welfare function. A procedure that simulates the households’ choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint.

For each country, we estimate a microeconometric model of labour supply for both couples and singles. We present an exercise in empirical optimal taxation for a sample of European countries from three areas: Southern, Central and Northern Europe.

What should flat negative income tax