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  • Thumbnail for Taxpayer utility in a flat world : investigating the utility effects of a transition from a progressive tax to a flat tax
    Taxpayer utility in a flat world : investigating the utility effects of a transition from a progressive tax to a flat tax by Horton, Douglas, Jr.

    The method of determining tax liability in the United States is commonly questioned by policy makers and taxpayers alike. A new trend is pointing toward the possibility of America adopting a flat taxation system. Part of what this paper hopes to examine is the utility effects experienced by taxpayers resulting from a switch from progressive taxation to the flat tax. A switch from America’s current tax system to the flat tax would leave some tax payers better off, while leaving others worse off. A simulation model was designed to investigate just who these “winners” and “losers” would be in the wake of such a change. This model combined taxpayer income across a broad range and utility functions placing differing levels of preference on leisure time and income. Each simulated taxpayer was given a pre-tax income and assigned to a taxpaying group. Taxpayers fall into four groups under the both the flat and progressive tax systems: single, head of household, married filing jointly, and married filing separately. Seven simulated taxpayers were created for each tax filing option. Next, each taxpayer’s tax liability was calculated under the progressive and flat taxes. The resulting post-tax incomes were then entered into the following utility functions: U=I1/4L3/4, U=I1/2L1/2 and U=I3/4L1/4. In each case I stands for income and L stands for leisure hours, which was held constant at 16. The resulting utility functions were then compared and the difference in taxpayer utility was noted. This simulation was conducted a second time, but this time deductions were included for both the progressive and flat taxes. The end results suggest that if standard deductions are accounted for, taxpayers from a broad range of incomes and who place different levels of preference on income and leisure all experience a gain in utility brought about by a transition to the flat tax.