An analysis of the distributional effects of replacing the progressive income tax with a flat tax

Abstract

Our study investigates the distributional effects of replacing the current income tax system with two prototype flat tax systems: 1) the Armey-Shelby-Craig flat tax proposal, and 2) the Specter flat tax proposal. Our analysis indicates that replacing the current income tax system with either flat tax system would result in a modest increase in the average tax rate for taxpayers in the first income decile. For the remaining taxpayers, such a switch results in reductions in the average tax rate that tend to increase as income increases. We also found that for taxpayers reporting business income: 1) the current income tax system is most progressive, and 2) both flat tax systems are partially regressive. For taxpayers reporting no business income, however, the Armey-Shelby-Craig system is most progressive. Both flat tax proposals moderate before-tax income inequality modestly, but neithe moderates income inequality as effectively as the current income tax system.