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The penalty on risky personal income due to tax rate progression

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  • Jan Vlachý
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    Abstract

    This paper analyzes the tax penalty on volatile personal income under progressive tax rates. The phenomenon may have an effect on long-term entrepreneurial decisions as well as risky occupational choice. An options-based model is used to estimate the expected effective rate due from tax-payers at different income levels and volatilities under the current Czech legislation. A comparison is made to the system which has been in place until 2005, as well as to the Slovak flat-rate schedule. The model shows that volatile incomes incur a substantial penalty of up to 2 percentage points on the effective rate peaking just below the official income statistics mean. The effect is more pronounced than under the former parameters of the tax code. A severe impact on below-average earners due to the mandatory minimum tax-base regulation has been demonstrated. On the other hand, the Slovak flat tax with a single marginal rate bears virtually no sensitivity to income volatility, with the slight exception of very low incomes.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 2007 (2007)
    Issue (Month): 5 ()
    Pages: 625-636

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    Handle: RePEc:prg:jnlpol:v:2007:y:2007:i:5:id:616:p:625-636

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    Related research

    Keywords: income tax; option model; tax rate progression; personal income; income volatility; risk-taking; occupational choice;

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