Under the lump sum tax, both Mary and Jamie pay the same $500 tax, even though Jamie produces and earns significantly more than Mary. In her country, all dairy farmers have to pay a $500 tax per month so that they can produce and sell their milk. Each gallon sells for $3.25, meaning Mary earns $195 per day and Jamie earns $3,900 per day. Jamie has 200 cows and produces 1,200 gallons of milk per day. Mary's neighbor, Jamie, has a dairy farm too. ![]() Mary has her own dairy farm with 10 cows who produce 60 gallons of milk per day all together. Because the tax is a straightforward value that does not vary depending on income or production, the focus lies on whether or not the tax has been paid rather than having to keep receipts and calculate if the correct amount has been paid. Lump sum taxes also require minimal administrative attention on behalf of the government and the taxpayer. As economic efficiency increases, deadweight loss decreases. This increased economic efficiency eliminates deadweight loss, which is the loss of combined consumer and producer surplus resulting from the misallocation of resources. The lump sum tax encourages efficiency because it does not affect how people behave since the lump sum tax does not change like a revenue-based or per unit tax. Producers are also not taxed on each additional unit they produce as is the case with a per unit tax. With a lump sum tax rate, producers are not "punished" for increasing their production by being subject to a higher tax bracket if they increase their revenue. Lump sum taxes are widely considered the form of taxation that promotes the most economic efficiency. This is why smaller businesses tend to oppose lump-sum taxes and why they benefit larger organizations. ![]() A person or business with a lower income will have to devote a larger portion of their income to the lump sum tax. Since lump-sum taxes are the same rate regardless of income, they can affect those with a lower income more. Figure 1 shows us how a $100 lump sum tax can take up a significant portion of a low income making the tax burden high, while taking up a smaller portion of a higher income, lowering the tax burden there. 1 - Lump Sum Tax as a portion of Incomeįigure 1 pictures how a lump sum tax burdens taxpayers differently and affects their level of disposable income. The revenue from the lump sum tax will be $100 every month.įig. It does not matter if the shop is open one day or every day that month, if fifty people buy something or no one does, or if the shop has 20 square feet or 20,000 square feet. Each shop must pay a $10 fee to operate every month. Measuring Domestic Output and National IncomeĪ lump sum tax rate is a tax that is a constant value and its revenue remains the same across all levels of GDP.Ī lump sum tax will yield the same amount of revenue regardless of GDP because it does not increase or decrease with the quantity produced.Sources of Revenue for State Government.Sources of Revenue for Local Government.Monetary Policy Actions in the Short run.Long-Run Consequences of Stabilization Policies. ![]()
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