Flat Tax - Tutto quello che c'è da sapere! - YouTube

Goodmorning guys and welcome back to Nickonomics, the YouTube Channel of economics.

A few days ago, a friend of mine asked me: "Hey Nick, why don't you make a video about the flat-tax?".

Thus, after discussing with him about this idea, I decided to make this video

in which we're going to see together what we're talking about when we speak of flat-tax in general,

leaving to specific videos the discussion of the different concrete proposals at the centre of the current debate.

Obviously, I'll also continue the series focusing on the history of economic thought

and, if you have lost the first videos related to Bullionism and Mercantilism, you can find the links below.

Well, let's not waste time and let's get started.

The flat-tax is a personal comprehensive-income tax with progressivity by a constant marginal tax rate

that considers as a taxable unit either the family or the single taxpayer, indifferently.

As you certainly understood, the definition of the flat-tax involves a number of technical aspects

that should be studied in order to have a clear and precise idea of what we are talking about.

First, the flat-tax is a tax on comprehensive income, i.e. on the sum of all income earned by a single taxpayer.

Hence, the flat-tax eliminates the different tax treatment currently in place in the majority of western countries

between labour income and capital income, where

labour income includes income from employment, self-employment and business, and retirement, while

capital income includes dividends paid by companies, financial investments, and real estate leases.

Furthermore, the flat-tax is a tax system with progressivity by a constat marginal rate

which involves a unique tax rate and the implementation of progressivity by means of specific exemptions,

deductions, and tax credits decreasing as taxable income increases.

Let's see, through an example, how a generic flat-tax works.

Let's consider a flat-tax with a constant marginal tax rate equal to 20% and a no-tax area of 8,000 euros.

John is a bank-officer and receives a salary of € 27,000

has government bonds that earn interests for € 5,000 per year

and has two flats in the city centre which are leased for a total of € 14,400 per year.

John will pay taxes equal to 20% of the income exceeding the no-tax area of € 8,000.

Thus, John's fiscal debt will be equal to the 20% of (27,000+5,000+14,400)-8,000 - i.e. € 7,680.

In accordance with the definition of flat-tax that we have seen before, we know that it can have as tax-unit

either the single taxpayer or the family, indifferently.

This means that taxes can be determined on either the income of the single taxpayer or the family income.

This is due to the particular technical characteristics of the flat-tax, thanks to which

the choice between the individual and the family doesn't affect the total amount of taxes due by the household.

Let's try to better understand this particular characteristic of the flat-tax by using our example.

John is married to Mary, who is a part-time employee in a lawyers' office and earns a salary of € 14,000.

John and Mary have an adult son, Henry, who is attending the university and works as a waiter

earning a salary equal to € 9,000 per year.

If our flat-tax considers as tax unit the single taxpayer, John's tax debt is still equal to € 7,680

Mary's tax debt is equal to € 1,200 and Henry's tax debt is equal to € 200, i.e. a total family tax debt of € 9,080.

If our flat-tax considers as tax unit the family, on the other hand, the total family tax debt

will be determined as 20% of the total family income exceeding the sum of the individual no-tax area

that is, (8,000+8,000+8,000) = 24,000.

Therefore, the total family tax debt will be equal to 20% of (46,000+14,000+9,000)-24,000 - i.e. € 9,080.

This characteristic of the flat-tax is extremely important because enables the flat-tax to fulfil

those goals of neutrality, equality, efficiency and simplicity that each tax system should achieve.

Leaving to specific videos the detailed discussion of these goals,

we can say that the extent to which they are achieved depends largely on the specific concrete proposal

and particularly on the tax's progressiveness degree

Within the personal income tax, the progressiveness of the tax can be achieved by means of different methods:

on one hand, there are methods of progressivity by an increasing marginal tax rate

that implement progressivity by means of increasing tax rates as income increases.

These methods are: continue progressivity, progressivity by income classes, and by income levels.

On the other hand, there are methods of progressivity by a constant marginal tax rate - i.e. flat-tax -

which apply a unique tax rate to taxable income and implement progressivity by means of exemptions,

deductions, and tax credits decreasing as income increases.

To verify if a tax is progressive, we need to consider the average tax rate,

that is the ratio between the tax debt and the taxable income.

If the average tax rate increase as taxable income increases, until to reach the higher (or unique) tax rate,

this means that the considered tax is progressive.

Let's see now, through our example, if our generic flat-tax is progressive or not.

John's taxable income is equal to € 46,400 and his tax debt is equal to € 7,680.

The average tax rate for John is thus equal to 16,55%.

Mary's taxable income is equal to € 14,000 and her tax debt is equal to € 1,200.

The average tax rate for Mary is thus equal to 8,57%.

Henry's taxable income is equal to € 9,000 and his tax debt is equal to € 200.

The average tax rate for Henry is thus equal to 2,22%.

Therefore, since who has a higher income level pays proportionally a higher income tax,

that is his/her average tax rate is higher,

we can say that the flat-tax is progressive.

Obviously, the progressiveness degree depends on the chosen tax rate and on the exemptions, deductions,

and tax credits provided by each concrete proposal.

Then, there should be a value judgement on the socially preferable progressiveness degree,

which means whether the single concrete proposal has a progressiveness degree that is higher or lower than

the current tax system and if this is socially acceptable.

Well, guys, I hope you liked this video and it could be useful for you to understand something more about

the flat-tax. Let me know through your comments and giving a like to this video.

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I leave you reminding that economics is a too serious thing to let economists do it for us

and this is the very reason because we talk about it here, at Nickonomics!