At the end of 2016, 5,000 people were subject to lump-sum taxation in Switzerland. A lump sum tax does not create a substitution effect but it does impact a consumer’s purchasing power and a producer’s profits. There is the ethical question of whether it is right to tax a lower income household the same as a higher income household. Similarly, a lump sum tax for producers does not change depending on the producer’s output. [2] This taxation is based on estimated living expenses, rather than on real income and assets. Tax havens are often subject to higher levels of scrutiny, whereas lump sum tax countries have a higher veneer to foreign tax officials and public scrutiny. These two examples show that a lump sum tax does not lead to a substitution effect. The amount of income tax does not change depending on personal factors. All rights reserved. 2. A regressive tax indicates that the tax rate decreases as the taxable amount increases. © copyright 2018 BusinessTerms.net. Which of the following factors will affect the amount of income tax he has to pay? "Lump sum taxes,", This page was last edited on 18 February 2020, at 22:44. A lump sum tax does not affect fixed costs but it does increase variable costs. Progressive tax for person A but lump sum tax for person B. [1], If the lump-sum tax is the same for all taxpayers, it is a poll tax.[1]. This is because producers are able to earn more profits as their output increases. 3. When any tax is imposed, there are two effects to consider. To illustrate, a lump sum tax for consumers is not affected by their income. A substitution effect is when a tax or price change results in a change in consumer behavior or producer output. On the other hand, it could also encourage greater output. A lump-sum tax is a special way of taxation, based on a fixed amount, rather than on the real circumstance of the taxed entity. A tax in which the taxpayer is assessed the same amount regardless of circumstance. A poll tax means that every single person is charged the same amount, regardless of any variations between them. [2], https://en.wikipedia.org/w/index.php?title=Lump-sum_tax&oldid=941496678, Creative Commons Attribution-ShareAlike License, J. de V. Graaf (1987, 2008). Now, consider a lump sum tax on income. Each member of the society, from the richest to the poorest, is charged the same lump sum when such a tax exists. A lump sum tax is also called a poll tax. Theoretically, lump sum tax is the most efficient form of tax. The first effect is the substitution effect, which is also known as the distortion effect. However, there are socioeconomic implications that come with this form of taxing. To illustrate, a lump sum tax for consumers is not affected by their income. The amount of income tax he has to pay will depend on the income range. Both person A and person B pay the same fixed amount towards the lump sum tax. In other words, it costs more to earn more. 3. [2] However, a national abolition was rejected by referendum in 2014. [2], Seen as unfair, lump-sum taxation has been abolished in several cantons. Lump sum taxes are more of an empirical economic concept rather than a common real world economic example. A similar effect takes place when producers are given a lump sum tax. Consumers and producers cannot lower the taxed amount so there is no change in behavior that will ‘substitute’ for the taxed amount. A lump sum tax is a tax with a fixed amount that is levied on all members of a society regardless of their income levels. Similarly, a lump sum tax for producers does not change depending on the producer’s output. A poll tax means that every single person is charged the same amount, regardless of any variations between them. There is no disincentive on working more and earning more income because the taxed amount remains the same. It is one of the various modes used for taxation: income, things owned (property taxes), money spent (sales taxes), miscellaneous (excise taxes), etc. Lump-sum taxes are regressive, meaning persons with lower income pay more as a percentage of their income. A lump sum tax increases both fixed costs and variable costs. He pays a lump sum tax over his income. Rich foreign nationals resident in Switzerland can be taxed on a lump-sum basis if they do not work in the country. In that way, they are not tax havens. The lump sum tax might be too big a burden for smaller producers and could lead to fewer producers. A lump sum tax is also called a poll tax. Another example is tag fees on vehicles, which are the same regardless of the income of vehicle owners. A lump sum tax is a tax at a fixed amount which does not change with the entity’s actions. A lump-sum tax is a special way of taxation, based on a fixed amount, rather than on the real circumstance of the taxed entity. Instances of an actual lump sum tax are rare in reality, since the tax would be excessively burdensome to the poorer members of a society. The table below summarizes the impact of a lump sum tax on firms. For example, with a progressive income tax system, workers might feel less incentive to work after a certain income range. Under a progressive income tax, person A would pay income tax at 20% over annual income and person B would pay 25% over annual income. However, a lump sum tax is a fixed cost so this will not change depending on the output. Consider two people—person A with a high income and person B with a low income. It is a regressive tax, such that the lower the income is, the higher the percentage of income applicable to the tax. This is because with a higher income also comes higher taxes. An employee is about to calculate his income tax. Consider person A with an annual income of $40.000 and person B with an annual income of $60.000. The tax bracket, filing status and any involuntary deductions. Lump sum tax countries are generally NOT zero-tax countries, and they often don’t offer other tax incentives. With a lump sum tax both persons would pay $10.000 on income tax each year. In addition, does a lump sum tax eliminate the competitive chances of a smaller producer? An example of a lump-sum tax is a $55 fee on all employees who work in a township. 1. A lump sum tax increases fixed costs but it does not affect variable costs. Progressive tax for both person A and person B. However, as a percentage of total income, the lump sum tax is a smaller proportion of total income for person A than it is for person B.