Optimum Flat Tax and Basic Income
In this chapter, I elaborate on the Optimum linear income tax, discussed in simplified form in Chapter 1, and examine the light which it can cast on the Basic Income/Flat Tax (BI/FT) proposal, particularly the choice between different levels of basic income and associated rates of tax. Given that we have introduced a BI/FT, what are the arguments which support different choices from the menu of possibilities? How are the choices affected by changes in economic and social circumstances, such as increased wage inequality or an increased burden of dependency? The question of the choice between the BI/FT and the present Social Insurance/Graduated Tax arrangements is postponed to Chapter 3.
It is important to emphasize that the purpose of this analysis is not to provide precise numerical answers to these questions. We are not seeking to show that the optimum tax rate is 25 per cent or that it is 50 per cent. The aim of the analysis is to explore the structure of arguments leading up to answers. We are interested in the relationship between specified goals, assumptions about how the economy operates, and policy recommendations. We want to investigate the validity and robustness of the cases advanced for particular policies. Can we identify differences in social objectives which lead to differences in conclusions? Are the answers sensitive to the way in which the menu of possibilities is conceived?
The framework for the analysis of the optimum linear income tax is described in Section 2.2. Since the derivation of general results is not easy, I also work for illustrative purposes with a special labour supply function--that used in Chapter 1--and this is set out in detail in Section 2.3. The results of the optimum tax analysis are introduced in Section 2.4 with an account of the Rawlsian case. The general case is treated in