A comparative study on flat and progressive income taxation

Abstract

Subject of flat taxes is a bit more complex than it first seems. Quite surprisingly, Flat taxes can turn to be progressive relative to the progressive tax that existed before if the allowance for the flat tax is increased. This is something that has to be taken note of. Of course, for countries like Georgia which have eliminated allowances altogether with flat tax rate near the lowest of the marginal rates, the move is truly flat indeed. The impact on tax revenue, work incentives and compliances have been discussed. The theory and the evidence give mixed conclusions making policy much more challenging. It is difficult to track causality in economies and this is indeed quite true comparing flat and progressive taxes.