Progressive Tax

• If the Utility gained from income exhibits Diminishing Marginal Returns , as many psychologists assert (see Weber-Fechner Law ), then for the tax burden to be shared in a Utilitarian way the tax-bill must increase Non-linear ly with income.

• As income levels rise, levels of consumption tend to fall. Thus it is often argued that economic demand can be stimulated by reducing tax burden on lower incomes while raising the burden on higher incomes.

• It is also argued that people with higher income tend to have a higher percentage of that in disposable income, and can thus afford a greater tax burden (this is the “ Vertical Equity ” argument). A person making exactly enough money to pay for food and housing cannot afford to pay any taxes without it causing material damage, while someone making twice as much can afford to pay up to half their income in taxes.

• In the example above, the -earners, and have no freedom to set their own hours, and secondly, the assumption that they prefer leisure to work may not apply, in which case they may be as productive when their entire income is taken by the government as when it is not.

• Societies (such as Norway , and the UK ) have occasionally set the top rate of earned income tax above the revenue-maximizing rate. This was a political choice, presumably based on the principle that equality was More Socially Important than tax income or GDP .

• Some supporters of progressive taxation favour increasing taxes on Middle Class tax-payers, who have Inelastic Household Budgets .

• If leisure is a Superior Good for very high earners, then the Income Effect may act as a disincentive to work. In this case, high marginal tax rates are critical to keep the most productive members of society working.

• A progressive tax is an Automatic Stabilizer in the sense that if a person were to suffer a decrease in wages due to a recession then the money regained by being in a lower tax bracket lessens this blow.

The diminishing returns argument applies to the fraction of income used for present consumption. As income rises, diminishing returns implies that a smaller and smaller fraction of income will be spent on consumption goods. The remaining income will (of necessity) be used to purchase capital goods. This acts as a form of positive feedback that in turn yields more income for capital spending. Meanwhile (and because) these capital goods induce a decline in the costs of production which has the effect of raising real wages generally and implicitly raising the general standard of living. The income paid back on the capital helps create the disincentive to consume that creates capital spending. Thus, those capitalists who effectively manage their property are rewarded and given control of more (newly created) property, of which they are increasingly less inclined to consume and increasingly more inclined to purchase capital goods and thus further elevate the general standard of living by driving down the costs of production. As they acquire more capital goods, eventually their ownership outstrips their ability to manage and oversee what they own; however, they only control as many capital goods as can be attributed to the income of their prior capital---which previously did not exist. Therefore, their ownership does not negatively contribute to the general standard-of-living relative to counterfactual state of them not purchasing those goods. It would thus be misleading to argue that redistributing their capital may yield further increases in the standard-of-living. Doing so may well cause that effect, but doing so neglects that it was the assumption that redistribution would not happen that induced the accumulation of capital.

• Progressive taxes lower savings rates. Thus, some argue against progressive taxation because they believe it shifts the total economic production of society away from Capital Investments (tools, infrastructure, training, research) and toward present Consumption Goods --this could happen because high-income earners tend to pay for capital goods (through investment activities) and low-income earners tend to purchase consumables. Smithian and Neo-classical Growth theory says that spending more on consumption goods and less on capital goods will slow the rise of the Standard Of Living , and possibly even reduce it since capital goods increase future Production Possibilities .

• Progressive taxes create a work disincentive. Another common argument is that progressive taxation acts as a disincentive to work. In comparing this assumption with the claim that progressive taxes work the other way, and encourage higher participation at the top end, Econometric studies are inconclusive. It may be that there is no consistent aggregate effect either way, and that the incentive/disinctive argument for/against progressive taxation are weak.


• --- Theoretically, there are two contrasting forces at work here. One is a Substitution Effect whereby work effort is decreased with higher tax rates as the ''relative'' gains from engaging in leisure (which is not taxed) increase. The other is an Income Effect whereby work effort is increased as the worker must work more hours to attain the same wage in the face of higher taxes. It is impossible to predict, '' A Priori '', which effect will dominate. The majority of econometric studies on the question suggest that, in aggregate, the two effects roughly cancel out.

• Brain drain and tax avoidance. High progressive taxes may encourage Emigration because taxes are not internationally harmonized, so very high earners are sometimes able to Relocate In Order To Pay Less Tax , or find Tax Haven s for their income. Unlike the opposing Income Effect and Substitution Effect of leisure which may make tax progressivity neutral in terms of working hours, the emigration rate can only Increase with the top rates of tax.


• --- The differential in the higher rates of tax between the United States and Europe are cited as a factor in the " Brain Drain " of high-earners to America in the 1960s , and is considered an important influence on modern "economic Migration ".


• --- The increasing energy expended on Tax Avoidance s which occur with greater progressivity produces an increase in the work of Accountant s and Lawyer s. Because tax avoidance creates no net wealth this work is unproductive, and can make taxes on the rich less efficient than on the middle class, who have less motivation to exploit tax loopholes.

• Justice in representation. ic case that if tax is to be progressive it should be accompanied by greater say in elections for those who contribute most.

• Politics of envy. The New York Times in June 2005 ran a high-profile campaign arguing that at the very-high incomes United States tax-payers actually face Regressive Taxation rates, equating income tax across wage and rental incomes. For instance, they project that if the Bush Tax Cut s are made permanent:

:“By 2015, those making between $80,000 and $400,000 will pay as much as 13.9 percentage points more of their income in federal taxes than those making more than $400,000.”

• Income from $1 to $7,300, tax bracket is 10%

• Income from $7,301 to $29,700, tax bracket is 15%

• Income from $29,701 to $71,950, tax bracket is 25%

• Income from $71,951 to $150,150, tax bracket is 28%

• Income from $150,151 to $326,450, tax bracket is 33%

• Income $326,451 and above, tax bracket is 35%

• $30,000 (gross income)


• $7,300 --- 0.10 = $730


• ($29,700 - $7,300) --- 0.15 = $3,360


• ($30,000 - $29,700) --- 0.25 = $75


• Total income tax = $4,165 (13.88% of income)

• $30,000 (gross income)


• $30,000 --- 0.062 = $1,860 (Social Security portion)


• $30,000 --- 0.0145 = $435 (Medicare portion)


• Total FICA tax = $2,295 (7.65% of income)

• Total federal tax = $6,460 (21.53% of income)

• 20.7% up to $38,000


• 34.2% from $38,001 to $60,000


• 40.2% above $60,001


• 46.2% when the employee does not complete a declaration form (IR330)

• Tax Incidence


• Laffer Curve


• Elasticity (economics)


• Regressive Tax


• Income Tax


• Value Added Tax


• Sales Tax


• FairTax


• NESARA

• Revised 2003 Tax Rate Schedules


• Income Tax Rates for Individuals - New Zealand


• ''What's Wrong with the Progressive Income Tax''