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Debate: Progressive tax vs. flat tax

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Should there be a progressive tax system or, for example, a flat tax?

Background and context

This is a straightforward question of fiscal policy – should people who earn more pay direct tax (tax on income) at a higher rate or not? Where progressive tax rates operate, different rates usually apply for different bands of income. For example, the first $5000 of income might be tax-free, the next $20 000 of income might be taxed at 20%, income between $25 000 and $50 000 at 30% and any income above $50 000 at 40%.

Sometimes the top band of income has been subject to a very high tax rate (e.g. over 70%), as in the UK in the late 1970s.

"Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence disproportionately to those with a higher ability-to-pay.

The term is frequently applied in reference to personal income taxes, where people with more disposable income pay a higher percentage of that income in tax than do those with less income. It can also apply to adjustment of the tax base by using tax exemptions, tax credits, or selective taxation that would create progressive distributional effects. For example, a sales tax on luxury goods or the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption or decreases a tax burden on low end consumption respectively. The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount subject to taxation increases. In between is a proportional tax, where the tax rate is fixed as the amount subject to taxation increases.

Contents

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Equality: Does progressive taxation uphold principles of equality?

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Yes

  • Progressive taxation makes all citizens sacrifice equally John Stuart Mill wrote in 1848: "As a government out to make no distinction of persons or classes in the strengths of their claims on it, whatever sacrifices it requires from them should be made to bear as nearly as possible with the same pressure upon all...equality of taxation, therefore, as a maxim of politics, means equality of sacrifice."[1]
  • Progressive taxation affords individuals equal opportunity. One idea behind progressive taxation is to level the playing field so that the wealthy don't hold an iron-grasp of economic opportunity. Rather, a progressive tax system aims to enable the poor to climb the socio-economic ladder.


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No

  • Progressive taxation wrongly aims for equality of outcome Progressive tax systems wrongly aim to combat inequality in people's circumstances, aiming to produce greater equality of outcome. The main problem with this is that it does not apply a strict principle (such as equality under the law), but rather engages government in the subjective and impossible act of balancing individual rights with an effort to produce equal outcome.


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Socialism: Is progressive taxation compatible with capitalism?

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Yes


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No


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Earned: How does the principle of earned income related to progressive taxation?

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Yes

  • Progressive taxation recognizes not all wealth is "earned" A common argument against progressive taxes is that wealthy people earn their money, just as poorer people do, so it's unfair to alienate wealthy people with progressive taxes. Yet, not all wealth is "earned" in the sense of labor or time being expended to obtain it. Much comes from investments, rent, inheritance, or ownership of a company.


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No

  • Progressive taxes violate rule that men earn what they deserve Edwin R. A. Seligman. "Progressive taxation in theory and practice". American Economic Association. 1894 - "Time was when the progressive tax would not have been accepted as equitable even by a majority of the poor. Traditional equity required that taxes should be levied proportionately, not progressively. This was in accordance with the belief that’ a man’s property, or his income, was an index of deserving achievement, or of value contributed in the market place to society. True, some men inherited their property or incomes—but that was something to be handled or regulated under laws of inheritance. In any case the erosion of time could be counted on to take care of the inefficient use of inherited fortune—“shirtsleeves to shirt-sleeves in three generations” expressed the common wisdom in this matter of luck in the choice of one’s parents."


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Wealthy: Is a progressive tax system fair to the wealthy?

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Yes

  • Wealthy benefit more from system, so owe a greater tax debt George Lakoff and Bruce Budner. "Hidden Truths Of Progressive Taxes". Tom Pain. 16 Apr. 2007 - "Ordinary people just drive on the highways; corporations send fleets of trucks. Ordinary people may get a bank loan for their mortgage; corporations borrow money to buy whole companies. Ordinary people rarely use the courts; most of the courts are used for corporate law and contract disputes. Corporations and their investors — those who have accumulated enough money beyond basic needs so they can invest — make much more use, compound use, of the empowering infrastructure provided by everybody's tax money.[...]The wealthy have made greater use of the common good—they have been empowered by it in creating their wealth—and thus they have a greater moral obligation to sustain it. They are merely paying their debt to society in arrears and investing in future empowerment."
  • Existence of corporate subsidies helps justify progressive taxes Michael Parenti notes the "whole basketful of handouts” given to the business class "from federal, state and local governments…[B]illions of dollars in start-up capital, research and development funding, equity capital, bailout aid, debt financing, low-interest loans, loan guarantees, export subsidies, tax credits, and other special favors."[2]



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No

  • Progressive taxes unfairly punish the rich and successful. It is unfair to punish people for succeeding in society. They should be rewarded for succeeding, or at least left to reap the benefits of their success.
  • Flat tax fairly has wealthy pay proportionally more in taxes. It is unfair that people who earn more should pay at a progressive rate. Even on a standard rate, they already pay more tax, because they have a higher taxable income. Therefore progressive tax rates are a form of double taxation, as higher earners pay tax on more income, and then at a high level. This is further unfair to them since high earners are the least likely group to benefit from much taxpayer-funded activity e.g. welfare.
  • The wealthy pay more taxes, but aren't given more voting power. Justice in representation. Economic equity is sometimes used to argue against progressive taxation, on the grounds of representation being out-of-proportion to taxation: While the top 5% in income in most countries pay over half the taxes[22] they only have 5% of the voting weight. This argument can be reversed into the plutocratic case that if tax is to be progressive it should be accompanied by greater say in elections for those who contribute most.
  • Progressive taxes are unfair to the short-lived high earner Basketball players, for example, make substantial incomes for around eight years. They are taxed, during this period, as if this was their constant, long-term income, which means they are often left having to find other jobs later in life.
  • Progressive tax systems open door to unfair tax avoidance Progressive taxes are often so complicated and with so many loopholes that the wealthy are able to evade their obligations. As a result, they end up paying a smaller rate than other, less wealthy citizens. A Flat Tax would eliminate this unfair tax avoidance and force the wealthy to pay their full burden.


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Dollar utility: Does each marginal rich dollar have less utility?

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Yes

  • Progressive taxes recognize each wealthy dollar has less utility. 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-linearly with income.


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No

  • Progressives wrongly assume wealthy dollars have less utility Friedrich A. Hayek. "Taxation and Redistribution". The Constitution of Liberty. 1960 - [One argument's] basic conception is that of the decreasing marginal utility of successive acts of consumption. In spite of, or perhaps because of, its abstract character, it has had great influence in making scientifically respectable what before had been admittedly based on arbitrary postulates.[...]Modern developments within the field of utility analysis itself have, however, completely destroyed the foundations of this argument. It has lost its validity partly because the belief in the possibility of comparing the utilities to different persons has been generally abandoned and partly because it is more than doubtful whether the conception of decreasing marginal utility can legitimately be applied at all to income as a whole, i.e., whether it has meaning if we count as income all the advantages a person derives from the use of his resources."


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Tyranny of majority: Is it wrong to call progressive taxation this?

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Yes


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No

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Poverty: Does progressive taxation help the poor?

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Yes

  • Progressive taxation applies a compassionate philosophy to poor "Progressive vs. Regressive Tax Structure". Faded.org. - "The unabated greed, lack of values, and sense of community that so many Americans hold is utterly astounding to me. The materialistic, egotistical attitude of "I got mine, screw everyone else" abounds. Not only that, but it also seems a bit hypocritical to me that these arguments come most often from the "religious" right. Astonishing how quickly the beliefs and teachings of their religion fly out the window as soon as money enters into the equation. (I'll save all of my other rants about religion in general for another post.)"
  • Progressive taxation helps combat extreme poverty This is because the lowest tax band will apply to earnings beneath an initial threshold. Therefore, the less one earns, the higher percentage of one’s pay is not taxable. The cost of basic survival needs is by definition a larger proportion of a lower earner's income and therefore a certain “block” at the bottom of each income may be tax free altogether to allow for these needs. This protection for the poorest is important, because most countries also operate customs tariffs and sales taxes, which tend to hit the poor more than the rich in terms of the proportion of their income going in indirect taxation; progressive direct taxation redresses the balance.
  • Lifting poor with progressive tax is good for economy "Progressive Taxation". Lolife. 25 June 2004 - "With a flat tax, no one could be taxed more than they make, but the taxes would still have to be fairly high on the poorest people. With a progressive tax you can generate the revenue you need while still allowing poor people the opportunity to become not-poor. This is not altruism — it’s an economic strategy to keep our economy strong by getting as many people participating in it as possible. The more poor people we turn into middle class people the easier the tax burden will be on everyone."
  • A pure flat tax would be a major burden on the poor Mark Jaquith. "Why I Support Progressive Taxation". Tempus Fugit. 18 Sept. 2005 - "you must consider the effect that a completely flat tax system would have on the poor. The people who, after buying the things they need and are left with nothing, will have a very hard time breaking that inertia. They likely won’t have time to learn new skills, because they don’t have any significant discretionary income. They have to keep going to work just to put food on the table. A tax on the basic necessities of life is a severe handicap to one’s ability to break out of that cycle. It is essentially a tax on living, which is abhorrent both from a moral standpoint (Liberals’ objection) and from an American philosophical standpoint (Conservatives’ and Liberterians’ objection)"


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No

  • Progressive tax policies erroneously "compassionate" Andrew Sullivan. "'Progressive' Taxation". The Daily Dish, The Atlantic. 27 Jun 2008 - "Am I heartless? I hope not. I just don't believe that having a heart is what government should be about. It's what the rest of us should be about. This, of course, is my core disagreement with Obama who does indeed have a notion that government has a right and a duty to take money away from those whom he believes can "afford" it and give it to those who "deserve" it. I don't believe in a government with that much power and that lofty a social goal. It's also in part a disagreement with my friends, Ross and Reihan, who see government as integral to guiding the behavior and lives of the working poor."
  • Other means than tax policy should be used to help the poor Andrew Sullivan. "'Progressive' Taxation". The Daily Dish, The Atlantic. 27 Jun 2008 - "Government's primary concern is to raise money as efficiently and as leanly and as equally as possible. I'm happy with the government then setting up programs to assist the poor, to provide better education for those at the bottom, safety-net healthcare and better policing. i.e. to gear spending toward social ends that might help the poor the most. These are measurable, practical goods. What I'm not happy with is the assumption that tax policy should really be about redistributing wealth, and engineering substantive economic outcomes. Yes, of course, at lower income levels, a 20 percent flat income tax will be more onerous proportionally than at higher incomes. So what? Why should that even concern a government that is not aiming to socially engineer more substantive equality? and the alternative - skewing taxes to target success - is an absurd set of incentives to put into a growing society."
  • Flat tax helps lower income families get out of poverty Steve Doughty. "Flat tax 'helps the poor'". Daily Mail. 11 Aug. 2006 - "Its report said: 'Flat taxes have often been seen as a means of reducing the tax burden on people with higher incomes who pay top-rate tax. However in Britain the most severe losses to the taxman from additional earnings are encountered by families on lower incomes: these stand to gain the most from a flattening of income tax rates.'[...]A flat tax has gathered support in recent years following the success of the system in encouraging economic growth in Eastern Europe. Tories flirted with the idea last year.[...]The system proposed by the Rowntree Foundation would mean families with children in 'modest to middle' income brackets seeing their income rise by 10%, while families without children in the top-earning tenth of the population would lose out by around 8%."


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Inequality: Does progressive taxation combat income inequality?

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Yes


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No


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Incentives: How do progressive and flat taxes affect incentives?

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Yes


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No

  • Progressive taxes disincentivize hard work and productivity "Flat Tax: What Would It Do For Ireland?". Business and Finance Magazine. 5 May 2005 - "A recent study of a revenue-neutral flat tax proposal for the US (Ventura, 1999) shows that, due to the positive effects on individual incentives to invest in productivity enhancing learning and greater hours of labour supply, a flat tax system yields up to a 9% increase in the aggregate efficiency adjusted labour force.[...] In the Irish case, this is equivalent to adding over 180,000 workers with an average productivity without incurring additional social and welfare costs of actually increasing Ireland's population. The more productive the segment of population, the higher are the increases."


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Economics: Are progressive tax rates economically beneficial?

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Yes

  • Bottom-up progressive taxation leads to stronger growth Steve Weissman. "Spread the Wealth? Soak the Rich?". Truthout. 24 Oct. 2008 - "Who should pay what for the costs of government raises the most basic issues of fairness. But who pays also determines whether we rebuild our economy from the bottom up, as Obama promises, or continue to wait in vain for good jobs and decent wages to trickle down from John McCain's friends at the top...[Progressive taxes] can help create a more vigorous economy, one based on growing demand from the bottom to encourage investment from the top. Cutting taxes for the vast majority builds that demand, spreading wealth in a way that will create greater wealth for us all."
  • Progressive tax rates stimulate higher consumer activity. As income levels rise, marginal propensity to consume tend to drop. Thus it is often argued that economic demand can be stimulated by reducing the tax burden on lower incomes while raising the burden on higher incomes.
  • More economists favor progressive taxation. In most western European countries and the United States, advocates of progressive taxation tend to be found among the majority of economists and social scientists, many of whom believe that completely proportional taxation is not a possibility. In the U.S., the vast majority of economists (81%) support progressive taxation.[3][4]
  • Even free-marketeer Adam Smith advocated progressive taxation Adam Smith wrote in The Wealth of Nations: "The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."[5]


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No

  • Progressive taxation reduces the savings rate in a society High-earners have a lower average propensity to consume, so shifting the tax-burden away from them will increase the aggregate savings rate, which should increase steady state growth (if the savings rate is initially below the Golden Rule savings rate).
  • Progressives shift money from entrepreneurs, capital investments A belief that progressive taxation 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 tax systems add risk by over-concentrating tax revenues. Progressive taxes concentrate more of a state's tax revenue around a certain social group. This concentration of taxation amongst a narrow group of taxpayers introduces a higher risk of a sudden drop in tax take, for example if a recession means lots of executive jobs are cut in a short time period."
  • Progressive taxes require a wasteful compliance. Progressive taxes require taxpayers to declare and demonstrate their income, and enormous government machinery to audit and enforce truthful declaration. With a flat tax, all that is required is to verify payment.The IRS currently costs the American taxpayer $11 billion a year.
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Employment: What are the employment effects of the two approaches?

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Yes

  • Progressive taxes help ease the blow of recession or unemployment. 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.


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No

  • Progressive taxation can cause "brain drain" from countries Progressive taxation can encourage talented workers who earn high incomes to move overseas to escape the tax system. This can create a "brain drain" effect in a country. 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.


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Revenue: Do progressive taxes generate more tax revenue than flat taxes?

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Yes


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No

  • Modern state budgets do not require progressive taxes Friedrich A. Hayek. "Taxation and Redistribution". The Constitution of Liberty. 1960 - "How small is the contribution of progressive tax rates (particularly of the high punitive rates levied on the largest incomes) to total revenue may be illustrated by a few figures for the United States and for Great Britain. Concerning the former it has been stated (in 1956) that "the entire progressive super-structure produces only about 17 per cent of the total revenue derived from the individual income tax"-or about 8.5 per cent of all federal revenue,-- and that of this “half is taken from taxable income brackets up through $16,000-$18,000, where the tax rate approaches 50 per cent (while] the other half comes from the higher brackets and rates."
  • Progressive taxation risks corrupting public officials. Progressive taxes, depending on income self-declaration, create incentives for forgery, perjury, bribery and corruption of public officials.


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Simplicity: Are progressive tax systems simple enough?

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Yes

  • Tax code can be simplified without ending progressive tax Daniel Nemiroff. "Simplification without a flat tax". The Gazette (Montreal). 1 May 2008 - "Both William Watson and Neils Veldhuis make compelling cases for simplification of the tax code. They are largely correct, and most Canadians would agree that loopholes ought to be closed, extravagant deductions disallowed, and all forms of income - salary, capital gains or stock-option bonuses - be treated the same[...]Both men then commit the fallacy of equating tax code simplification with a flat tax.[...]There is no reason we can't implement most of Veldhuis's shortcuts and keep a progressive taxation system. We'll still have to fill out a return, but as long as we keep the math simple - e.g., 10 per cent on the first $50,000, 20 per cent on anything up to $250,000, 90 per cent on anything over $10 million - we should be able to keep within postcard dimensions."


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No

  • Progressive taxation is an inefficient and costly system Linda Leatherdale, Business Editor for Toronto Sun. "Flat is where it's at". Toronto Sun. 13 Jan 2008. - "with a flat tax on our incomes, what a fairer, simpler world it would be.[...]Imagine being able to complete your income tax return in just five minutes on a post-card-sized form. That's what's possible if Canada would adopt a 15% flat tax, says Dr. Alvin Rabushka, an internationally renowned tax reform expert with the Hoover Institution at Stanford University.[...]Think about it: No more high-paid accountants and lawyers. No more shoe boxes full of receipts. And no more auditors trying to bully you into admitting you intentionally cheated. It would be so simple, who'd want to cheat?"


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CEO pay: Is constraining CEO pay with progressive taxes a good idea?

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Yes

  • Progressive taxation helps combat excessive CEO pay There is a decreasing marginal benefit to high, or higher, wages, since the earner will see less and less of the extra gross pay actually appearing in their net pay packet. Therefore, the upward pressure on pay will reduce and excessive remuneration will become less common.


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No

  • Government should not set CEO pay with progressive taxes. Wages are a reward for work done which are largely a private matter between the employer and employee. Therefore, government has no legitimate interest in using a prohibitively high marginal tax rate to discourage high incomes.
  • Progressives wrongly presume society can determine proper income The presumption under a progressive tax system is that society can determine what is too low and too high of an income. Yet, this is a highly subjective question for society and government to be involved in. The markets are a far better suited for answering this question.
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Global economy: How does progressive taxation fit into the global economy?

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Yes


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No


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Social: Are progressive taxes socially valuable?

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Yes

  • Progressive taxation encourages social cohesion. It sends out a clear policy signal that income and wealth are social means which can be used for the collective good. It also reduces the disparity in net pay and so lessens the economic divisions between different members of society.
  • Progressive taxation can help combat crime Nick Netzer. "Bribing Thieves. A Theory of Crime and Progressive Taxation" - "The level of crime is often claimed to be correlated with the degree of inequality in a society, and redistribution is suggested as a remedy. This paper analyzes a producer-predator model of theft in large heterogeneous societies and examines the effect of public redistribution on individual incentives and consumption levels. It turns out that redistribution of income by moving from a linear to a progressive tax schedule can be Pareto improving under a large variety of circumstances. If the ratio of high-skilled to low-skilled individuals is small, progressive taxation acts as a substitute for direct law enforcement. Otherwise, redistribution and law enforcement are complements, in the sense that the introduction of progressive taxation should go along with stricter law enforcement. Altogether, the existence of crime is never Pareto effcient as soon as progressive taxation is admitted."


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No

  • Progressive taxes rely on and worsen envy between groups Policymakers are argued to be under a pressure from lower and middle income voters to limit higher incomes by the means of progressive taxation. A few economists argue against inequity aversion: "If policy makers' primary goal is … economic prosperity for all, they should avoid focusing on the politics of envy." (Gregory Mankiw)[23]
  • Progressive system causes government to favor wealthy for tax revenue "Are Progressive Taxes a Good Thing?" Critical Mastiff. 9 Aug. 2005 - "In our present fiscal situation, wealthy people and corporations pay high Federal income taxes, and poorer people pay no income taxes at all or very few. Therefore, it makes sense for our rational actor, the Federal Government, to make laws that give preference to the rich and corporations over the poor, since tax revenues respond much more quickly when the rich get richer than when the poor get less poor. Such additional revenues can naturally be used to succor the same poor that the government has just victimized, making the poor indebted to the government and to the particular elected officials of each district."
  • Progressive taxes create imbalanced sense of civic ownership. It is the case that paying taxes gives citizens a sense of ownership of the democracy and society in which they live. For this reason, a flat tax would offer an more equitable sense of ownership of wealthy and poor citizens. Progressive taxation, however, skews this sense of ownership toward the wealthy.


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Public support: Is there public support for progressive taxes or flat taxes?

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Yes


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No

  • Public support for progressive taxes varies over time Jean Hindriks. "Is there a demand for income tax progressivity?". Elsevier Science B.V. 15 June 2000 - "Recently, Marhuenda and Ortuno-Ortin [Economics Letters 48 (1995) 319] have provided a popular support for progressivity theorem that says that a marginal progressive tax always defeats a marginal regressive tax as long as individuals vote for the tax scheme minimizing their tax liabilities and the median income is less than the mean income. In this paper we provide, under similar circumstances, a popular support for regressivity theorem according to which for any existing tax scheme there is always a majority support for a regressive reform reducing marginal progressivity (or increasing marginal regressivity). This regressive reform is supported by both extremes of the income distribution. Combining this result with Marhuenda and Ortuno-Ortin’s result implies that vote cycling between regressive and progressive tax reform is inevitable and thus that the demand for progressivity cannot be established in the standard Downsian framework with self-interested voters.


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Happiness: Is progressive taxation a route to happiness?

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Yes

  • Progressive taxation fosters greater happiness in society Thomas D. Griffith. "Progressive Taxation and Happiness". Boston College - "Abstract: This Article explores the optimal level of income redistribution by examining the potential welfare gains from redistributive tax and spending policies. Drawing on recent research on human happiness, this Article argues that while wealthy nations are generally happier than their poorer counterparts, neither national nor individual economic growth appear to have an appreciable impact on the subjective well-being of the citizens of relatively wealthy nations. Significant causes of this finding include the problem of rivalry—that increases in the income of some depress the happiness of others—and the fact that individuals overestimate the degree to which additional consumption will improve their happiness. Studies show the level of inequality in a society also may affect levels of happiness. Ultimately, happiness research is consistent with the strongest justification for adopting a progressive tax structure—income has declining marginal utility thus redistribution can increase total welfare in a society."


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No

Richard Layard of the London School of Economics and the UK’s House of Lords produced an elegant, brief and influential exposition of the new doctrine two years ago. That doctrine itself, as he explains, is a modern reincarnation of Jeremy Bentham’s utilitarianism*.
What is Professor Layard arguing? First, happiness is the sole goal of human activity. Second, happiness is measurable. Third, we know what makes people happy and unhappy. Finally, policy should aim at achieving the greatest happiness. We will then realise that “there is more to life than prosperity and freedom”."


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Pro/con sources

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Yes


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No

Motions

  • This House supports a progressive tax rate
  • This House would "squeeze the rich until the pips squeak"
  • This House believes that the more you earn the more you should pay
  • This House believes that all tax should be progressive

In legislation, policy, and the world

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