It is one of the various modes used for taxation: income, things owned (property taxes), money spent (sales taxes), miscellaneous (excise taxes). It is a regressive tax, such that the lower the income is, the higher the percentage of income applicable to the tax. An example is a poll tax to vote, which is unchanged no matter what the income of the voter. However, a poll tax is not Pareto efficient since low-income voters can avoid it by choosing not to vote. Other related examples include personal property taxes on cars or business equipment regardless of income or ability to pay and regardless of the value of the equipment. Real estate taxes that are levied on a per lot or per unit basis are another example; some condominium fees could be regarded as having most of the characteristics of a lump sum tax.
In economic theory, a head tax is a special type of lump-sum tax that is considered to be Pareto efficient since it does not interfere with optimal market mechanisms. A head tax will only reduce people's available income and therefore decrease their budget constraint, but leave the relative prices of goods unchanged, thus avoiding inducing altered choices based on substitution effects. In basic microeconomic consumer theory, this will then lead to an income effect: consumers buy less in general (due to an inward shift of the budget line); but there will be no substitution effect.
Similarly, a single tax on the unimproved value of land will also have the same attributes since land itself exists in a fixed amount that can not be altered (although the improvements on it can vary, which is why a property tax does not have this attribute).
Therefore, this form of taxation may have the advantage of not contributing to an excess burden of taxation, and loss in economic efficiency that results from taxes reducing incentives for production or consumption.
In practice, lump-sum taxes are often encountered, in spite of their conflict with other criteria, such as equity or ability to pay. A lump-sum tax remains a standard for measuring the performance of other imperfect kinds of taxes
Efficient lump-sum taxes are often impossible to implement in a world of imperfect information since, to be non-distortionary, they must be levied against characteristics that individuals cannot strategically change - instead personal abilities should be taxed. To be non-distortionary, the tax must be levied against something for which the individual cannot themselves change. However, it is impractical to charge people of low income a lump sum tax since it would have to be so high relative to their incomes that it would be politically unpalatable.
- Hillman, Ayre (2009). Public Finance and Public Policy: Responsibilities and Limitations of Government. Cambridge, UK: Cambridge University Press. p. 260.
- Hindriks, Myles, 2006.
- Hillman, Ayre (2009). Public Finance and Public Policy: Responsibilities and Limitations of Government. Cambridge, UK: Cambridge University Press. p. 299.
- J. de V. Graaf, 1987.
- Hillman, Ayre (2009). Public Finance and Public Policy: Responsibilities and Limitations of Government. Cambridge, UK: Cambridge University Press. p. 261.
- J. de V. Graaf (1987, 2008). "lump sum taxes," The New Palgrave: A Dictionary of Economics, v. 3, pp. 251–52.
- Hindriks,J.; Myles, G.D. (2006). Intermediate Public Economics. MIT Press. ISBN 0262083442.
- Luethi, Carol Gregor (2017). Lump-Sum Taxation in Switzerland - A Systematic Classification into Swiss Tax Law with Current References. Norderstedt: BoD. p. 9. ISBN 978-3-7448-8638-3.