A lump-sum tax is a special way of
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...
ation, based on a fixed amount, rather than on the real circumstance of the taxed entity.
["Lump sum tax"]
Oxford Reference, Oxford University Press
Oxford University Press (OUP) is the university press of the University of Oxford. It is the largest university press in the world, and its printing history dates back to the 1480s. Having been officially granted the legal right to print books ...
(page visited on 6 November 2018). In this, the entity cannot do anything to change their liability.
In contrast with a per unit tax, lump-sum tax does not increase in size as the output increases.
Description
A lump-sum tax is one of the various modes used for taxation: income, things owned (
property tax
A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inherit ...
es), money spent (
sales tax
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
es), miscellaneous (
excise
file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the Bunghole, bung of the beer barrel so when ...
taxes), etc. It is a
regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high ...
, such that the lower the
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
is, the higher the percentage of income applicable to the tax.
A lump-sum tax would be ideal for a hypothetical world where all individuals would be identical. Any other type of tax would only introduce distortions.
In the real world, lump-sum tax is not that easily applicable because many people believe that those who have higher ability to pay should pay higher taxes (progressive tax system) and if it were to happen, people with low income would have to be charged very high amounts of money relative to their income and that would be politically unacceptable.
For this reason, lump-sum taxation is rarely seen in real-world applications as it is so difficult to administer due to varying socioeconomic abilities and distributions of wealth. A tax that differs based on factors like ability or income wouldn't be lump sum, and these are also factors that can be disguised or hidden. Nonetheless, lump-sum taxation still provides important theoretical background.
A special type of lump-sum tax is poll tax (also known as head tax) and it is considered to be Pareto efficient because it reduces only people’s available income and therefore decreasing their budget constraint while leaving the prices of goods unchanged. This would lead to an income effect and consumers would buy less goods in general and there would not be any substitution effect.
Lump-sum taxing can be often similar to personal property taxes on cars or business equipment or some condominium fees.
Lump-sum taxation is often economically beneficial because it eliminates the possibility of excess burden. Opposed to other forms of taxation such as income taxes, in lump-sum taxation there is no loss to entities that is not balanced by gains to others. Essentially, eliminating dead weight loss.
One example of a country still using lump-sum taxation system is Switzerland.
Switzerland
Rich foreign nationals resident in
Switzerland
). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
can be taxed on a lump-sum basis if they do not work in the country. Around 0.1% of taxpayers are taxed using lump-sum taxation – in 2018 that meant 4,557 people which paid in total CHF 821 million in tax.
This taxation is based on estimated living expenses, rather than on real
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
and
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
s. This means that there is no need for reporting effective global earnings and assets. However, this amount is calculated using the regular tax rates in Switzerland.
The full requirements for being eligible for lump-sum taxation are no Swiss citizenship, taking up residence in Switzerland and no gainful activity in Switzerland. In case of married couples, both people have to fulfil these requirements. The right to lump-sum taxation expires if a person takes up an employment in Switzerland or becomes a Swiss citizen.
Seen as
unfair, lump-sum taxation has been abolished firstly in 2010 by the canton of
Zurich shortly followed by the cantons of Schaffhausen, Appenzell Ausserrhoden, Basel Landschaft and Basel Stadt. Four other cantons (Thurgau, St Gallen, Lucerne, and Bern) decided to implement stricter rules for lump-sum taxation. However, a national abolition was
rejected by referendum in 2014. At the end of 2016, 5,000 people were subject to lump-sum taxation in Switzerland.
See also
*
Distortions (economics) In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competi ...
*
Excess burden of taxation
In economics, the excess burden of taxation, also known as the deadweight cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of taxes or subsidies. Economic theory posits that distortions chang ...
*
Optimal tax
Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. The social welfare function used is typically a function of individuals ...
Notes and references
* J. de V. Graaf (1987, 2008). "Lump sum taxes," ''
The New Palgrave Dictionary of Economics
''The New Palgrave Dictionary of Economics'' (2018), 3rd ed., is a twenty-volume reference work on economics published by Palgrave Macmillan. It contains around 3,000 entries, including many classic essays from the original Inglis Palgrave Dictio ...
'', volume 3, pages 251-252.
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