Arguments from different philosophical perspectives on relationships between society, economy, and public policy identify complex issues that need to be reconciled to achieve a rational tax system. Today, opinions on the extent and purpose of taxation are often politically charged, making it impossible to design a tax system that is acceptable to all positions.
Historically, the extent and purpose of taxation generally was not to benefit society as a whole. A tax system deals with the flow of money from society to government, as tax revenues are collected and given back to society as government spends tax revenue, including government transfers in relation to wealth redistribution. Many forms of taxation evolved organically in different political and economic systems over human history. To minimize government dependency while maximizing after-tax income, the effective tax rate ( ETR) as a function of income percentile takes the shape of the letter, V, inspiring the name victory tax, where the middle class has the lowest ETR. An income distribution that mimics the United States, and a series of log-normal distributions are considered to quantitatively compare detailed characteristics of this tax system to progressive and flat tax systems. A general framework emerges with three parameters that determine a minimum allowed tax deduction, a maximum allowed itemized deduction, and a maximum deduction defined by income percentage.
How can an income tax system be designed to exploit human nature and a free market to create a poverty free society, while balancing budgets without disproportional tax burdens? Such a tax system, with universal character, is deduced from the following guiding principles: (1) a single tax rate applies to all income types and levels (2) the tax rate adjusts to satisfy budget projections (3) government transfer only supplements the income of households with self-generated income below the poverty line (4) deductions for basic living expenses, itemized investments and capital losses are allowed (5) deductions cannot be applied to government transfer.
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