Proportional Income Tax Research Articles

Determinants of the Proportional Income Tax Revenue: A Comparative Assessment of Russia and Bulgaria

Initially flat-rate income taxes only existed in tax havens, but presently, 26 countries have adopted the proportional tax as a fiscal instrument to increase budget revenues and accelerate economic growth. This article empirically examines the determinants affecting the revenues from a proportional income tax with non-taxable minimum (negative flat tax) used in Russia and a proportional income tax without non-taxable minimum (pure flat tax) used in Bulgaria. The research objective is to estimate the impact of the macroeconomic variables such as gross disposable income, employment, gross capital formation and government expenditures on the revenue from the proportional income tax in Russia and Bulgaria. The study employs an ordinary least square (OLS) method and quarterly seasonally adjusted data for the period 2008–2020. For Russia, quarterly seasonally adjusted data for the period from March 2008 till December 2020 were used, including 52 observations. For Bulgaria, quarterly seasonally adjusted data for the period from March 2008 till March 2020 were used, including 49 observations. Basing on the results, it may be inferred that the increase of the gross disposable income and higher marginal tax rate of the proportional tax with a non-taxable minimum collect more nominal revenue in the budget, as Russia’s example showed. The increase of the employment related with a lower marginal tax rate of the proportional income tax without a non-taxable minimum collect less nominal revenue as Bulgaria’s example shows. A standpoint of the revenue in the budget the proportional income tax with non-taxable minimum is more effective than proportional income tax without non-taxable minimum.

Aspects of income inequality in a creative region

We analyze a stylized creative region’s economy. There are two goods (consumption and creative capital) and creative class members differ in their income generating abilities. The distribution of abilities in the creative class population is such that the median ability is less than the average ability. There is a proportional income tax rate and all tax revenues are redistributed to the creative class members by the regional authority (RA) with a uniform, lump-sum transfer. In this setting, we perform four tasks. First, we determine the tax rate that maximizes the lump-sum transfer. Second, we show that income equality requires the tax rate to equal unity and that the poorest creative class member is better off with a lower tax rate and hence more inequality. Third, given the ith creative class member’s preference over the tax rate and the transfer, we ascertain the tax rate that will be chosen by majority voting. Finally, we discuss the connection between increasing inequality and the majority chosen tax rate.

How the proportional income taxation increases inequality in Bulgaria

The proportional income tax is popular in countries of Central and East Europe and 14 CEE countries adopted it with different tax rates from 1994 till 2008 year. But four of them have replaced it with the progressive tax yet. The main criticisms towards the proportional income tax is that it leads to an increase of the inequality after taxation. The article aims to evaluate the impact of the proportional income tax without non-taxable minimum on inequality in Bulgaria, measured by the Gini index. The relationship between the Gini index and the growth rates of GDP per capita, the gross average income and net average income was studied. The methods of Ordinary Least Square (OLS) and correlation were applied to determine the impact of proportional income tax on income inequality in Bulgaria. The research covers the period from 2008 till 2019. National statistical institute of Bulgaria data (12 observations) has been used. The empirical results confirm positive relationship between Gini index and the growth rates of GDP per capita, the gross average income and net average income in system of proportional income tax. Inequality in Bulgaria had increased by 22% after introducing the proportional income tax in 2008, the highest incomes have increased by 113% and the lowest only by 85%. The results of the study show that the increase of the gross average income and net average income leads to increase of the inequality measured with Gini index. Therefore, after taxation of incomes with proportional income tax the inequality does not decrease, but continues to increase. It may be inferred that the proportional taxation increase inequality in Bulgaria.

Long-run equilibrium between personal income tax and economic growth in Bulgaria

The study analyzes the relationship of personal income tax and economic growth in the long and short runs to show which type of income tax (progressive or proportional) is more compatible with Bulgaria’s economic growth. The methods of Vector Error Correction and Correlation are applied to determine the long-run and short-run impacts of the two types of income tax. The research covers the period from the first quarter of 1999 to the first quarter of 2020. Eurostat data (85 observations) were used. The empirical research has been divided into two periods. The long-run and short-run relationships between economic growth and tax revenue from progressive income tax in Bulgaria have first been studied, followed by the relationship between economic growth and the tax revenue from proportional income tax. The research results show that there is a long-run equilibrium relationship, but not a short-run relationship, between personal income tax and economic growth. The results imply that the progressive income tax is more compatible with economic growth than proportional income tax in Bulgaria in the long run. In the short run, the progressive income tax and proportional income tax have not shown statistically significant relationships with economic growth. Therefore, a progressive income tax leads to greater economic growth than a proportional income tax. From a long-run equilibrium standpoint, it is advisable that Bulgaria switch from proportional to progressive income taxation. It may be inferred that progressive taxation is more appropriate for economic growth than proportional taxation. The results are in conformity with the theory of endogenic growth and reject the neoclassical theory.

Does Household Tax Burden Have an Impact on Individuals’ Savings in Banks? The Case of Ukraine

Abstract This paper aims to assess the impact of the effective and nominal household tax burden on household deposits in Ukrainian banks. We used the effective tax burden, which includes personal income taxes and value-added tax (VAT) paid. We considered changes in Ukrainian tax law from 2003 to 2016, which included a change from progressive income taxation to proportional income taxation, a decrease in tax rates in 2003, and an increase in tax rates in 2014–2016. The data sample consists of publicly available data on Ukrainian households’ income, savings, and taxes paid in 1996–2019. The analysis was performed using panel regression and the difference-in-difference (DID) method. The tax burden impact on bank deposits is significant and is caused partly by the shadow economy. The results of the study are relevant for Ukraine and countries with similar economies. The methodological approaches developed in the paper can be used for similar studies in other developing countries.

Unionised labour market, environment and endogenous growth

This paper develops an endogenous growth model where the labour market is unionised and the labour union is concerned not only about wages and employment but also about workers’ health, safety and environmental protection. Bargaining takes place between the labour union and the firm; and, in the bargaining solution, the firm is forced to forgo a share of its output to choose a more environment-friendly but less productive technology. The government finances public abatement expenditure using proportional income tax. We analyse properties of the welfare maximising income tax rate as well as the growth rate maximising one. We also analyse how the employment orientation bias in the preference structure of the labour union plays an important role to ensure a positive effect on the employment level, economic growth rate and on the level of welfare.

ВЕРОЯТНОСТНАЯ МОДЕЛЬ РАСЧЕТА УРОВНЯ БЕДНОСТИ ПРИ РАЗНЫХ ФОРМАХ ПОДОХОДНОГО НАЛОГООБЛОЖЕНИЯ

The article highlights a probabilistic model constructed for calculating the number of poor and the total income tax levied on all taxpayers under different income tax systems. There is considered the proportional income tax system adopted in the Russian Federation, as well as single-stage systems with both fixed and variable tax rates, in which individuals with low incomes are exempted from income tax. For these tax systems there have been found the dependences of the expected value of the number of the poor and the total income tax on the tax rate, tax-free minimum, and also on the laws of probabilities distribution of total income and the living wage of an individual. A numerical simulation of the found dependences was carried out. The conditions under which the abolition of income tax for individuals with low incomes reduces the number of poor were determined. Mathematical criteria are formulated with the help of which it is possible to assess the feasibility of moving from a proportional system to single-stage income tax systems.

Public capital, endogenous growth, and tax concession on savings

An endogenous growth model is developed where, on one hand income tax revenue is utilized to finance investment on public capital, and on the other hand tax concession is given on savings. If one of the two instruments—proportional income tax rate and proportional tax-concession rate on savings—is used as the policy variable to maximize the balanced growth rate while the other is treated as a parameter, an exogenous increase in the value of the parameter raises the optimum value of the policy variable and generates a positive effect on endogenous growth rate as well as on the rate of savings in the steady-state equilibrium.

The failure of stabilization policy: Balanced-budget fiscal rules in the presence of incompressible public expenditures

We consider an infinite horizon neoclassical model with a government that (i) balances its budget at each point in time, (ii) faces unavoidable (incompressible) public expenditures, and (iii) further uses a fiscal rule for the share of variable government spending in output with the purpose of stabilizing the economy. We show that insulating this economy from belief driven fluctuations is not possible if the government finances these two components of public spending using a distortionary proportional income tax. In this case, we always have steady state multiplicity (two steady states) and global indeterminacy, while local indeterminacy is also possible. More precisely, even if a sufficiently procyclical share of the variable government spending component in output is still able to eliminate local indeterminacy, two saddle steady states prevail, so that, depending on expectations, the economy may either converge to the low steady state or to the high steady state. This implies that a regime switching rational expectation equilibrium, where the economy switches between paths converging to the two different steady states, easily arises. As expectations influence long run outcomes, our model is able to generate large and sudden expansions and contractions in response to expectation shocks.

Why post-communist countries choose the flat tax: A comparative welfare approach

Our aim is to explain why the post-communist countries were inclined to implement proportional income taxation schemes, given the broad variety of personal tax regimes and rates applied in the rest of the world. To resolve this problem a new type of social welfare function, allowing for variable (including negative) marginal utility of income, is introduced. This new approach improves our ability to comprehend the communist and post-communist social policy attitudes from a comparative standpoint. To verify our assertions, a probit regression model is applied. The empirical investigation is based on panel data including 42 countries from Europe and Central Asia for the period of 2000–2015. The primary inference is that the decisions to implement flat tax can be explained by the law of diminishing marginal utility of income and some additional policy-related factors. As it concerns the future, a successful catching-up strategy by the post-communist countries creates conditions for gradual abandonment of the flat tax practices.

The Impact of Personal Income Tax Structure on Income Inequality for Belgium, Bulgaria, Germany, Lithuania, and Poland: A Comparison of Flat and Graduated Income Tax Structures

The level of income inequality in a country is usually a contentious and politically divisive issue. How the tax structure affects this inequality is of crucial concern to policymakers. In this paper, we examine the income tax experiences of five European Union countries: Belgium, Bulgaria, Germany, Lithuania, and Poland. This paper focuses on the comparison between flat and graduated personal income tax rate structures. Various methods were used to measure the progressivity of income taxes across these countries such as the average tax rate, cumulative shares of income, and the Gini and other indices. The findings show that the graduated rate income tax structure of Germany and Belgium are the most effective at reducing inequality. On the other hand, Lithuania’s proportional income tax structure is much more effective at reducing income inequality when compared to the graduated rate structure of Poland. Also, an appropriately-sized income tax threshold can transform a flat structure to a redistributive one that compares favorably with some graduated rate structures. In the case of Bulgaria, introducing an income tax threshold that is roughly the size of average income would reduce inequality by about 4 %.

Public funding of higher education: Who gains, who loses?

AbstractThis paper analyses the effects of public funding of higher education on individuals’ welfare, taking into account the hierarchical nature of the education system and the fact that parents may complement basic public education with private tutoring. Although public funding financed by a proportional income tax increases access to higher education, some of the agents who gain access lose in welfare terms. Moreover, it is shown that the marginal agent regarding access to higher education would always prefer a pure private funding system in which he would not send his offspring to higher education but would also not pay tuition fees or pay taxes.

Tax smoothing with immigration in an overlapping generations economy

ABSTRACTImmigration policy in an overlapping generations economy is politically determined in response to government spending shocks, where the government finances its spending with proportional income taxes and is subject to a balanced budget. The young cohort is always the majority and dictates policy. The equilibrium Markovian strategy allows immigrants when the spending shock is above some threshold and this implies a particular form of tax smoothing.

Income Taxes and Risky Investment Decisions: An Experiment on Behavioral Tax Biases

We design a controlled experiment to examine investment behavior when a proportional income tax (with and without full loss offset) is introduced. Our design enables us to disentangle tax effects predicted by standard neoclassical theory and behavioral tax biases that cannot be predicted by this theory. We observe that investment behavior can be heavily distorted by behavioral tax biases and is consequently inconsistent with theoretical predictions. However, if we isolate these effects, we find support for the theory. We argue that the unpredicted behavior is a result of a tax-induced cognitive load variation.

The political economy of higher education admission standards and participation gap

We build a political economy model allowing us to shed light on the empirically observed simultaneous increase in university size and participation gap. Parents differ in income and in the ability of their unique child. They vote over the minimum ability level required to attend public universities, which are tuition-free and financed by proportional income taxation. Parents can invest in private tutoring to help their child pass the admission test. A university participation gap emerges endogenously with richer parents investing more in tutoring. A unique majority voting equilibrium exists, which can be either classical or “ends-against-the-middle” (in which case parents of both low- and high-ability children favor a smaller university). Four factors increase the university size (larger skill premium enjoyed by university graduates, smaller tutoring costs, smaller university cost per student, larger minimum ability of students), but only the former two also increase the participation gap. A more unequal parental income distribution also increases the participation gap, but barely affects the university size.

The Right Tax at the Right Time

The companion paper to this (Capital Taxation in an Age of Inequality) argues that a moderate flat-rate (proportional) income tax on capital imposed and collected annually has attractive theoretical and political economy properties that can be harnessed in actual tax instrument design. This paper continues the analysis by specifying in detail how such a tax might be designed.The idea of the Dual Business Enterprise Income Tax, or Dual BEIT, is to offer business enterprises a neutral profits tax environment in which to operate, in which normal returns to capital are exempt from tax by means of an annual capital allowance termed the Cost of Capital Allowance (COCA). In turn, investors in firms include in income each year the same COCA rate, applied to their tax basis in their investments. The result is a single tax on capital income (rents plus normal returns), where the tax on normal returns is imposed directly on the least mobile class of taxpayers. Labor income continues to be taxed at progressive tax rates.The paper considers in detail three particular design issues. First, because labor is taxed at progressive rates whose top rate exceeds the capital income rate, the Dual BEIT must specify a labor-capital income tax centrifuge, to tease apart labor from capital income when the two are intertwined in the case of the owner-entrepreneur of a closely-held firm. Second, the paper considers the theory and practice behind the choice of the COCA rate. Third, the paper specifies an international tax regime that should be attractive to firm managers yet robust to stateless income gaming.Throughout, the emphasis is on developing pragmatic technical solutions that are implementable without profound transition issues, that are administrable, and that fairly balance theoretical desiderata against political economy realities.

Threshold preferences and the environment

In this article we study the implication of thresholds in preferences. To model this we extend the basic model of John and Pecchenino (1994) by allowing the current level of environmental quality to have a discrete impact on how an agent trades off future consumption and environmental quality. Thus, we endogenize the semi-elasticity of utility based on a step function. We find that for low (high) thresholds, environmental quality converges to a low (high) steady state. For intermediate levels it converges to a stable p-cycle, with environmental quality being asymptotically bounded below and above by the low and high steady state. As policy implications we study shifts in the threshold. Costless shifts of the threshold are always worthwhile. If it is costly to change the threshold, then it is worthwhile to change the threshold if the threshold originally was sufficiently low. Lump-sum taxes lead to a development trap and a proportional income tax should be preferred.

Financing and funding health care: Optimal policy and political implementability

Health care financing and funding are usually analyzed in isolation. This paper combines the corresponding strands of the literature and thereby advances our understanding of the important interaction between them. We investigate the impact of three modes of health care financing, namely, optimal income taxation, proportional income taxation, and insurance premiums, on optimal provider payment and on the political implementability of optimal policies under majority voting. Considering a standard multi-task agency framework we show that optimal health care policies will generally differ across financing regimes when the health authority has redistributive concerns. We show that health care financing also has a bearing on the political implementability of optimal health care policies. Our results demonstrate that an isolated analysis of (optimal) provider payment rests on very strong assumptions regarding both the financing of health care and the redistributive preferences of the health authority.

Support for public provision of a private good with top-up and opt-out: A controlled laboratory experiment

This paper presents the results of a revealed-choice experiment testing the theoretical predictions of political economy models regarding public support for a publicly provided private good financed with proportional income taxes when individuals can purchase the good privately and either continue to consume public provision (‘top-up’) or forego public provision (‘opt-out’), but in each case continue to pay income taxes. Our laboratory results confirm behavior is consistent with the predicted majority-preferred tax rate under mixed financing with top-up, but we identify preferences for significantly higher rates of public provision than predicted under mixed financing with opt-out. Using non parametric regression analysis, we explore the relationship between individuals’ top-up and opt-out decisions and both their income levels and the implemented tax rates.

Les effets de la congestion sur la ségrégation dans les modèles de formation endogène de juridictions

Cet article étudie les propriétés ségrégatives de la production de biens publics locaux en présence d’effets de congestion. Les ménages vivant au même endroit forment une juridiction dont le but est de produire un bien public local, dont le financement est assuré grâce à une taxe proportionnelle au revenu. Le taux de la taxe est déterminé grâce à un vote majoritaire. Les ménages peuvent quitter leur juridiction pour une autre, afin d’augmenter leur utilité. En partant des résultats obtenus par Gravel et Thoron, nous examinerons les effets de la congestion qui, bien que semblant accroître les propriétés ségrégatives de la formation endogène de juridictions, ne modifient pas la condition nécessaire et suffisante pour que toute structure de juridiction stable soit également stratifiée, à condition du moins que la congestion ne soit pas trop forte.