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What Is Wrong with the Flat Tax?


  • Sinclair, P.J.N.
  • Renstrom, T.


The simplest flat tax proposals envisage a single marginal tax rate applying on all income. In the context of a simple model where agents vary in ability to earn, we demonstrate (a) that everyone is better off in the long run with an income-tax exemption for investment, than without it, and (b) that, in a static context, the optimal two-rate income tax is Pareto-superior to the optimal single-rate tax, under both Utilitarian and Rawlsian welfare functions.

Suggested Citation

  • Sinclair, P.J.N. & Renstrom, T., 1998. "What Is Wrong with the Flat Tax?," Discussion Papers 98-18, Department of Economics, University of Birmingham.
  • Handle: RePEc:bir:birmec:98-18

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    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies


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