Flat-rate tax systems and their effect on labor markets

Optimal taxation and public provision for poverty reduction

“…Linear income taxes are not very common in practice: less than 30 countries had flat tax rates for personal income in 2012, with some concentration in ex-Soviet Eastern Europe (Peichl 2014). It is noteworthy that even though flat taxes are not particularly common in low-income countries, in many instances in such countries the progressive income tax reaches only a small share of the population.…”

“…This is one motivation for our interest of modeling optimal linear taxes. Peichl (2014) suggests that simplification benefits can be especially relevant for developing countries. 3 In conventional optimal taxation models, the government's objective function is modeled as a social welfare function, which depends directly on individual utilities.…”

“…In fact, as Sen (1985) has argued, one can be critical of utilitarianism for many reasons. Note also that the objective of poverty minimization is not at odds with the restriction of a linear tax scheme that we impose: a flat tax regime together with a lump-sum income transfer component can achieve similar amounts of redistribution toward the poor as a progressive tax system, if specified suitably (Keen et al 2008;Peichl 2014). In all our analysis, we first present welfarist tax rules (which are mostly already available in the literature) to provide a benchmark to examine how applying poverty minimization as an objective changes the optimal tax and public service provision rules.…”

“…2.1. The most recent description of linear income tax models can be found in Piketty and Saez (2013). They also emphasize how linear tax rules, while analytically more feasible, provide the same intuition as the more complicated nonlinear models.…”

Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria’s 2008 flat tax reform

“…That is, labor in indivisible in the official sector, and divisible in the grey economy. More specifically, each Source: Peichl (2014) individual will face a two-stage decision: (i) whether or not to work full-time in the official labor market (the "participation margin" in the official sector), and (ii) conditional on not working in the registered economy, whether to work in the grey economy(the "participation margin" in the unofficial sector), and if so, how many hours to supply there (the "intensive margin" in the unofficial sector). The wage in the unofficial sector will be approximated by the minimum wage rate, while the rate in the official sector would correspond to the average wage rate in the economy.…”