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. A tax that actually took all income above some specified subsistence level would imply a Marginal Tax Rate of 100%, a case to which the arguments against progressive taxation apply most strongly (see below).

• Some believe that the wealthy have a disproportionally greater interest in maintaining societal goods typically supported by taxation such as defense and infrastructure, as they have much greater to lose if these fail than do the poor.

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

• 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.

• It is inherent in tax policy that it implements economic and social policy. People who are concerned about a runaway, cancerous character in the global economy, greenhouse gases, etc., see benefits in progressive taxation, both in its braking effect on the economy and in helping shape economic activities towards necessities more effectively than purely monetary or fiscal policies.

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. Consider again someone who makes twice the minimum required to live on, but pays all income above the minimum living threshold in taxes. Such a person had no monetary incentive at all to try to increase his or her income above the base levelWhen the ‘optimal’ tax rates are derived in -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.

• --- 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. magazine tends to rate the U.S. tax codes as being surprisingly progressive (below the levels of the super-rich) – perhaps because U.S. citizens rarely emigrate or move away from urban centres. However, in comparison to European Social Democratic countries, U.S. rates are certainly not unusually progressive, and many countries have any even greater proportional " Disenfranchisement " of the rich. they only have 5% of the voting weight. This argument can be reversed into the Plutocrat ic case that if tax is to be progressive it should be accompanied by greater say in elections for those who contribute most. However, it must be noted that those of higher incomes are more likely to serve in public office, as well as helping to finance politicians with whom they share ideological similarities.

• 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.” Quote from the June 7 2005 NYT editorial: “The Bush Economy” a series of articles on the subject of effectively falling tax rates for the “super-rich” were published by the Times in June 2005.

• Tax Incidence


• Laffer Curve


• Proportional Tax


• Regressive Tax


• Robin Hood Effect


• Suits Index

• Revised 2003 Tax Rate Schedules


• Income Tax Rates for Individuals - New Zealand


• ''The Progressive Income Tax: Theoretical Foundations''


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


• Punitive – And It Works - A Guardian article by George Monbiot , on the Swedish tax system. It focuses on its positive effect to the country’s economic competitiveness, while at the same time reducing inequality.