Progressive vs. Flat Tax: Trade-offs in Tax Design

The US federal income tax has seven brackets from 10% to 37%. The effective (average) tax rate rises with income but is always below the marginal rate due to bracket structure. Using the model, estimate the 10-year revenue effect of: (a) Raising the top rate from 37% to 39.6% (+2.6pp) on income above $400K (b) Cutting the bottom rate from 10% to 8% (−2pp) on income below $50K Compare the two effects. Which has a larger revenue impact? Why?

A flat tax applies a single rate to all taxable income above a personal exemption. To be revenue-neutral, it must raise the same amount as the current system (~$2.2 trillion/year in individual income taxes). Given a $15,000 personal exemption, there are roughly 130 million taxable filers with average taxable income of ~$55,000. Total taxable base (above exemption) ≈ 130M × ($55,000 − $15,000) = $5.2T At what flat rate does revenue = $2.2T? Answer: $2.2T / $5.2T = ____% Enter the required flat rate as a percentage (e.g., enter 22.5 for 22.5%).