I would assume that governments estimate the amount of extra money they need to finance public healthcare, pensions, infrastructure improvements, etc. They make the projection for the coming years, add some safety gap on top and then calculate the tax rate based on this required amount of extra income. Is that true?
If so, such calculation leads us to a flat tax rate. If we are talking about a progressive tax, how are the decisions about tax bands and rates for each band made?
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That’s to some extent true, but there’s more to it.
They also do analysis of what impact the taxes will have on the economy, it may raise or lower GDP, employment, consumption etc…and try to figure out the net impact of it.
Also they wouldn’t just stop at a flat tax, part of the analysis would be which tax brackets are affected by what and what revenue would come from who.
There’s also then all the extra things like incentives for certain things, deductions, credits etc…
The tax bands are usually then done by percentiles and they try to have kind of a smooth curve and any time they adjust they obviously look at what the current tax rates are already.
They’d also consider state and sales taxes, cost of living etc… there’s a lot that goes into it, and they don’t just match expenses to revenues, there’s of course the option to increase the debt, or lower it with a surplus.
On top of all that is just the political considerations, what’ll get votes, what will serve donors etc..
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