THE PENALTY ON RISKY PERSONAL INCOME DUE TO TAX RATE PROGRESSION
140 00 Praha 4 and University of Economics
130 67 Praha 3 (firstname.lastname@example.org)
income tax, option model, tax rate progression, personal income, income volatility, risk-taking, occupational choice
This paper analyzes the tax penalty on volatile personal income under progressive tax rates. The phenomenon may have an effect on long-term entrepreneurial decisions as well as risky occupational choice. An options-based model is used to estimate the expected effective rate due from tax-payers at different income levels and volatilities under the current Czech legislation. A comparison is made to the system which has been in place until 2005, as well as to the Slovak flat-rate schedule. The model shows that volatile incomes incur a substantial penalty of up to 2 percentage points on the effective rate peaking just below the official income statistics mean. The effect is more pronounced than under the former parameters of the tax code. A severe impact on below-average earners due to the mandatory minimum tax-base regulation has been demonstrated. On the other hand, the Slovak flat tax with a single marginal rate bears virtually no sensitivity to income volatility, with the slight exception of very low incomes.
tax rate progression, risk-taking, personal income, option model, occupational choice, income volatility, income tax
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