Question

A conservative policy think tank proposes to reform the current federal income tax system. In particular, they suggest decreasing the number of tax brackets from 7 to 3 , reducing the top marginal income tax rate from 37% to 15%, and increasing the amount of the standard deduction by half (e.g., from $25,900 to $51,800 for joint filers). They believe this policy would help implement countercyclical fiscal policy and improve the prospects of future economic growth in the country. Discuss the proposed poticy and answer all of the following questions. How would this policy affect progressivity (in other words, is it a progressive or regressive policy)? Does the policy satisfy the principles of sound tax policy (discuss all five of them)? Why or why not? What could be the implications of this policy from the behavioral tax perspective?

Answer 1

The proposed policy would result in a less progressive tax system and does not satisfy all principles of sound tax policy. The implications from the behavioral tax perspective are varied.

Step-by-step explanation:

Progressivity:

The proposed policy would result in a less progressive tax system. By decreasing the number of tax brackets from 7 to 3 and reducing the top marginal income tax rate from 37% to 15%, individuals with higher incomes would see a significant decrease in their tax liability. This means that those with lower incomes would be relatively burdened more compared to higher income earners.

Principles of Sound Tax Policy:

The proposed policy does not satisfy all five principles of sound tax policy. The five principles are efficiency, equity, simplicity, transparency, and adequacy. While the policy may improve simplicity by reducing the number of tax brackets, it is not equitable as it reduces the progressivity of the tax system. Efficiency, transparency, and adequacy are also not fully met as the policy does not address the overall effectiveness and fairness of the tax system.

Behavioral Tax Perspective:

The implications of this policy from the behavioral tax perspective could vary. Some argue that reducing tax rates can incentivize individuals to work more and increase economic growth. However, others believe that decreasing progressivity could lead to income inequality and reduce social and economic mobility.