Economics
Progressive Tax System
A progressive tax system is a structure in which the tax rate increases as the taxable amount increases. This means that individuals with higher incomes are taxed at a higher rate, while those with lower incomes are taxed at a lower rate. The aim of a progressive tax system is to reduce income inequality and provide more support for those with lower incomes.
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10 Key excerpts on "Progressive Tax System"
- Andy Lymer, Lynne Oats(Authors)
- 2021(Publication Date)
- Fiscal Publications(Publisher)
If the average rate of tax is less than the marginal rate of tax the system is progressive (at least for that particular taxpayer at that point). If the average rate of tax equals the marginal rate of tax the tax system is proportional, and if the average rate of tax is greater than the marginal rate of tax it is regressive. To illustrate this with the progressive income tax system example we gave above, for the first taxpayer (with £10,000 income), the average rate of tax is 10%, and the marginal rate of tax is 20% (as they would pay 20p extra in tax if they earned £1 more) so the system is progressive for them (10% < 20%) at their current point. The same applies for the second taxpayer (15% < 20%). An exercise illustrating the relationship between personal allowances and progressivity can be found on the website. You could now attempt it to further develop this idea of tax burdens. Distribution of the tax burden 3.6 The example of progressivity above is simplified by only looking at the rate of tax, to illustrate the point about how progressive tax rates work. When other tax factors are taken into account, for example tax relief on particular payments made by the taxpayer, or when combined with the effects of other taxes, a fuller analysis of a tax system may not give the same results. It may also vary from taxpayer to taxpayer even though the rules are the same for all, because the tax system rules may affect one taxpayer differently to the way they affect another (not all will have the same income, some may be allowed tax reliefs others can’t claim etc.). The tax burden is the degree to which a tax, specific collection of taxes, or a tax system viewed in its entirety, affects a taxpayer or group of taxpayers. It is a question of who in society bears the impact, or the so-called incidence, of tax.
eBook - PDFEquity
In Theory and Practice
- H. Peyton Young, Hobart Peyton Young(Authors)
- 2020(Publication Date)
- Princeton University Press(Publisher)
At first these taxes were adopted as temporarymeasures, and they were, by modern standards, at very low rates. Gradually, however, they became an entrenched part of fiscal policy, and they also became markedly progressive. 2. The Progressivity Principle A tax is strictly progressive if the amount of tax paid as a proportion of income rises with income. Progressivity is a feature of many types of assessments besides taxation. Membership dues in professional associations are often pro-gressive. The American Political Science Association, for example, currently has the following dues schedule: $55 for those with annual incomes under $30,000; $75 for those with incomes between $30,000 and $40,000; $85 for those with incomes between $41,000 and $50,000; $90 for those with incomes between $51,000 and $60,000; $95 for all higher incomes. Progressivity is also common in the allocation of unexpected losses or shortfalls. When a firm falls on hard times and must cut employees' wages, it would not be unusual for them to cut the wages of higher-salaried workers by a larger percentage than lower-salaried workers. 3 1 For an informative history of progressive taxation in Great Britain, see Shehab (1953). 2 See Adam Smith (1776, vol. 2, book V, chap. 2.) 3 In 1991 US Air announced the following schedule of paycuts for its employees: Workers who make less than $20,000 per year receive no reduction. Workers who make between $20,000 and $50,000 take a cut of 10 percent on the amount they earn above $20,000. Those who make between $50,000 and $100,000 take a 10 percent cut on the amount between $20,000 and $50,000 (i.e., a cut of $3,000) plus 15 percent of the amount they earn over $50,000. Those who make over $100,000 take a cut of $10,500 plus 20 percent of the amount they earn in excess of $100,000 (Washington Post, October 14, 1991).
- Andy Lymer, Lynne Oats(Authors)
- 2023(Publication Date)
- Fiscal Publications(Publisher)
The same applies for Belinda (15% < 20%). An exercise illustrating the relationship between personal allowances and progressivity can be found on the website. You could now attempt it to further develop this idea of tax burdens. Distribution of the tax burden 3.6 The previous section was concerned with the structure of the tax rate scale that is applied to a tax base for a particular taxpayer. But there are other tax factors to take into consideration, for example tax relief on particular payments made by the taxpayer, or the combined effects with other taxes, when considering the burden of taxes. Even though the rules are the same for all, the tax system rules may affect one taxpayer differently to another. For example, not everyone will have the same income, and some may be allowed tax reliefs others can’t claim. The tax burden is the degree to which a tax, specific collection of taxes, or a tax system viewed in its entirety, affects a taxpayer or group of taxpayers. It is a question of who in society bears the impact, this is also called the incidence, of tax. Governments may try to spread this burden evenly throughout society, or may instead decide that it is fairer if the wealthy in society are asked to bear a higher burden than those who are poorer. Progressivity and Regressivity 3.7 Confusingly, we also use the terms progressive and regressive when we talk about a tax and its burden or incidence. A progressive tax, or tax system, is one where wealthy taxpayers bear a higher burden of tax overall, not just a higher rate of tax, although of course these two things are connected. 3 Principles of tax system design 36 A regressive tax on the other hand, is one that places a heavier burden on poorer taxpayers than wealthy taxpayers. For example, unlike most income taxes that are usually designed to be progressive, VAT is generally considered to be a regressive tax because everybody pays the same rate (most items are taxed at 20%).
eBook - PDF- Geoffrey Hale(Author)
- 2019(Publication Date)
- University of Toronto Press(Publisher)
74 THREE •• THE TAX SYSTEM AS ECONOMIC CONSTITUTION EGALITARIANISM, REDISTRIBUTION, AND FOSTERING OPPORTUNITY The tax system has been used not only as a means of fostering equality of economic opportunity through widespread business ownership and capital accumulation, but as a means of redistributing economic opportunity in dif-ferent ways. Both supporters and critics of the existing tax system appeal to different concepts of tax fairness in promoting their economic and ideo-logical agendas: 33 > horizontal equity—the concept that individuals with similar incomes and in similar circumstances should pay similar amounts of tax; > equity in diversity—taxpayers in significantly different circum-stances should be subject to different tax treatment, particularly if the imposition of a uniform tax structure would impose economic hardship or deprive certain groups of economic and competitive opportunities enjoyed by other taxpayers; > vertical equity—a progressive tax rate structure that imposes higher marginal tax rates as income levels increase; > procedural equity—taxpayers should have the same protections against governmental abuses of power, such as retroactive or retro-spective tax laws and the presumption of innocence in tax disputes, as in other areas of law; in recent years, this concept has been expanded to limit creative tax avoidance through the unintended use of various tax preferences; > generational equity—limiting the ability of one generation to shift excessive financial and tax burdens to its successors through sys-temic deficit financing for current expenditures or the underfund-ing of public pensions. 34 Canada's income tax system has promoted the redistribution of incomes through a progressive rate structure since its introduction during World War i.
- Jeremy Leaman, Attiya Waris(Authors)
- 2013(Publication Date)
- Berghahn Books(Publisher)
• Since the greater beneficiaries of public intervention on the economic systems are the richer, because they make greater use of the economic institutions, a more progressive tax schedule is a fair intervention in the 236 | Paolo Ermano economy that allows government to develop better institutions and infrastructures. Different proposals can be advanced to enhance the extent of economic redis-tribution between individuals, like the minimum or maximum wage. According to us, the less distressed procedure would be a tax system with a strong progressive schedule similar to the tax system applied, for example, in the US between the Second World War and the 1965 tax-rate cuts, the first of several tax-rate cuts which ended in 2003 with the top marginal rate set at 33 per cent. Tax brackets should be calibrated according to wealth distribu-tion to prevent the spread between the top decile and the bottom decile of the population stretching above a certain ratio, a procedure adopted in many cooperative firms. Such decisions clearly involve the ethical sphere or, with Rawls, ‘the Sense of Justice’ (Rawls 1971). 9 However, the current economic crisis has shown how politics might be in trouble in proposing a modification of the tax schedule to favour the less able members of society: even if important economic and social reasons support strong progressive taxation, shifting the tax burden onto the wealthy is being strongly resisted everywhere. Recent examples of this resistance include the pictures of President Obama depicted against the background of the communist hammer and sickle during the campaign over the new health care policy; the same denigrating campaign against financial reforms in the US; more recently, the difficulties in finalising the Basel III agreement; the letter posted by President Sarkozy and Prime Minister Brown in the Wall Street Journal advocating higher taxes for bankers (Brown and Sarkozy 2009).
eBook - PDF- Benjamin I. Page(Author)
- 2023(Publication Date)
- University of California Press(Publisher)
Public fi- nance economists, even rather conservative ones, argue that government should perform a "distributive" function by means of progressive taxation of personal income together with cash transfer payments to the poor. 1 We tend to assume that that is exactly what the U.S. govern- ment does. Historically, much agitation over the income tax has concerned issues of redistribution. The original impetus for a federal income tax, which culminated in the Sixteenth Amend- ment to the Constitution, came from populists and progres- sives, who aimed to curtail great fortunes and to tax on the basis of "ability to pay." It was opposed on the Senate floor as "social- ism, communism, devilism." 2 To be sure, the Taft and Wilson administrations and their leg- islative supporters who helped enact the income tax in 1913 did so largely in order to make up revenue lost by lowering tariffs rather than from any intention of soaking the rich. The rates were initially set far too low (7 percent on the top bracket) to have any substantial redistributive effect. Still, statutory tax rates became quite progressive during World War I, reaching a high of 77 percent on income over $1 million. There was a sharp decline in the progressivity of the tax schedule in the 1920s, a rise in the 1930s and during World War II (with a top rate of 90 percent in 1944), and a moderate decline in the 1960s and later. But since 1932 the nominal rates of the federal income tax, that is, the rates published in the official schedules, have generally looked quite progressive. In the 1970s, for example, the rates for single persons were 14 percent on taxable income below $500, 28 percent on $8,000-10,000, 50 percent on $22,000-26,000, and 70 percent on income over $100,000. 3 The reality of U.S. tax policy, however, and the effective rates that people actually pay, are quite different from this appear- ance, especially when we go beyond the personal income tax to consider the whole tax structure.
eBook - PDFPublic Sector Economics
Made Simple
- D. I. Trotman-Dickenson(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
The latter theory postulates that contributions should be related to the means of an individual. 3 Equity in taxation can be considered from the point of view of horizontal equity and of vertical equity. 4 In order to achieve horizontal equity people in the same circumstances should be treated in the same way for tax purposes. 5 In order to achieve vertical equity people in different circumstances should be treated differently, with the richer paying more than those who are less well off: in this way the burden of sacrifice can be equalised. 6 Taxes can be (i) progressive, when the rate of tax rises more steeply as income increases, (ii) proportional, when the rate of tax is the same percentage irrespective of the level of income, (iii) regressive when the burden of tax is greater on smaller than on higher incomes. 7 Principles of taxation lay down the requirements for a 'good' tax. To the canons of taxation formulated by Adam Smith new principles have been added since taxes are now used to regulate the economy and not only to raise revenue. 8 The tax system of a modern state comprises: direct taxes (on income), indirect taxes (on consumption) and taxes on capital. 9 Two of the important advantages of direct taxes are that they can be related to the ability to pay and that they can be levied at progressive rates. Their possible Fig. 6.2. An example of Laffer curve analysis. 88 Public Sector Economies disincentive effect to work is one of their greatest disadvantages. Indirect taxes are regressive but are nevertheless a necessary source of revenue for most governments. 10 What the pattern of taxation of any one country will be depends not only on what is desirable but on what is practical, and this will be influenced by the country's stage of economic development and the level of revenue it requires. Suggested Further Reading Brown, C. V., and Jackson, P. M., Public Sector Economics, Martin Robertson, Oxford, 1978.
eBook - PDF- Thomas Piketty, Steven Rendall(Authors)
- 2022(Publication Date)
- Belknap Press(Publisher)
We must also remember that progressive taxation, as it functioned in the course of the twentieth century, enabled us not only to more fairly distribute taxes on wealth and income but also to impose narrow limits on inequalities before taxes. This role of predistribution and not just redistribution was absolutely central. It shows to what extent pro- gressive taxation is also a form of intervention at the very heart of the process of production—together, of course, with other practices, such as labor law or the presence of employees on boards of directors. Let us stress that the drastic reduction of the salary scale that pro- gressive taxation permits, particularly the 30–90 percent rates applied to the highest incomes, is also an indispensable tool for confronting the commercial sector on equal terms. If capitalist enterprises in the information technology sector pay extravagant remunerations in 3. The debates on organizational forms that make it possible to reconcile centraliza- tion and regulation optimally in the various sectors of the welfare state are endless and can be only touched upon here. In health care, it is often thought that the French system constitutes a better compromise than the British model. That may be true in part, but on the condition that access to care and physician incomes be genuinely regulated. In higher education, the autonomy of individual institutions and decentralization is prob- ably a good thing, if they are accompanied by an appropriate system of public financing. In the realm of culture and show business, the status of casual workers includes inter- esting elements, again on the condition that financing is adequate and accepted as cul- tural policy. In the domain of water, energy, or transportation, much is to be learned from the new forms of municipal management developed in several cities in Europe and other parts of the world.
eBook - PDFInequality
What Can Be Done?
- Anthony B. Atkinson(Author)
- 2015(Publication Date)
- Harvard University Press(Publisher)
Proposal 8: We should return to a more progressive rate structure for the personal income tax, with marginal rates of tax increasing by ranges of taxable income, up to a top rate of 65 per cent, accompanied by a broad-ening of the tax base. As described below, in the case of the UK the base broadening would en-compass removal of the investor reliefs listed on the next page and the levying of National Insurance Contributions (NIC) on employers’ contri-butions to private pensions. Broadening of the Tax Base Almost invariably, reports on tax reform, in whatever country, call for a broadening of the tax base and criticise governments for “charging more and more on less and less.” The narrowing of the tax base comes about as successive governments introduce tax concessions that depart from any principled definition of income, and these barnacles on the fiscal hull prove remarkably tenacious. These concessions are typically “tax expen-ditures,” being equivalent in budgetary terms to cash outlays. A govern- progressive taxation :: 189 ment can, for example, either pay a cash child benefit of Y per child or it can allow taxpayers to deduct a specified amount, Z, from their taxable income. If they pay tax at the rate of 25 per cent on any extra income earned, then the two systems have the same financial consequences where 25 per cent of Z is equal to Y. But the former appears as govern-ment spending and the latter as a reduction of tax revenue. Tax expendi-tures are benefits delivered through the tax system. What is more, they are benefits that increase in value with the marginal tax rate, and hence with taxable income. For a person with a marginal tax rate of 50 per cent, the deduction of Z from taxable income is worth 50 per cent of Z.
eBook - PDF- A. Rayman(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
The more progressive the rates and allowances, the greater the positive incen- tive for individuals to produce more income (free of immediate tax) than they spend on consumption (subject to tax immediately). The claims of social justice, no longer work against economic efficiency; they work in its favour. 9 All taxes have a “wealth effect”; that is, an influence on behaviour caused by a response to the reduction in wealth imposed by the tax. Tax “neutrality” implies the absence of any “substitution effect” affecting the choice between alternatives. Ch. 18 PAYS: The Economic Justification 191 The Economic Case With the removal of the disincentive to production and saving, the microeconomic impact of shifting direct taxation from income to con- sumption is likely to further two of the principal objectives of economic policy: productive investment and economic growth. It is, however, in the area of macroeconomic policy that the major benefits are to be expected. The tax system, instead of being an obstacle, can be transformed into an indispensable instrument of policy: it can become a highly potent weapon for the defeat of unemployment and inflation and for the achievement of stable economic growth. Conventional economic interventionism (whether of the Keynesian or Monetarist variety) has proved unsuccessful in achieving sustained full employment without inflation. That should occasion no surprise. Macroeconomic objectives cannot be secured by the intervention of government ministers however well intentioned, or by central bankers however independent. The arbitrary intervention of economic police- men obstructs the flow of economic traffic. A reformed tax system offers a new possibility: an automatic mecha- nism triggered by the flow of traffic itself.
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