Perhaps this was true centuries ago in some feudal nations, but it is not now and never has been generally true in the United States. There is no material difference in the cost of protecting persons with high incomes or high-value property than that of persons with low incomes or low-value property. Planned tax cuts could increase inequality and do little to boost the economy, new global research suggests. “Why should we pay the same as you?” they said. Arbitrariness. The benefits principle of taxation holds that the government provides benefits to its citizens that should be paid for in taxes by each beneficiary in accordance with the value he or she receives from government services. In a country as unequal as South Africa, it is critical to deter… In percentage terms, it remains today at roughly the pre-1980 value. Thus, the degressive tax favors people who work less at the expense of those who work more. The papers document the changes during the 1980s in progressivity at the federal, state, and local level in the U.S. Lustig N & Higgins S. 2013. There is yet another interpretation of the benefits principle that is arguably superior to the others, because it comes closest to placing a true value on the benefits of government. To argue otherwise requires a belief that the price of property insurance increases faster than the value of the property (in this case, income), which is observably untrue. Taken together, the mix of progressive direct taxes and slightly regressive indirect taxes generates a mildly progressive tax system. The figure below illustrates that South Africa’s Gini reduction of almost 0.18 points compares favourably to Brazil’s at 0.14 or Mexico’s at 0.08. (One must keep in mind that corporate taxes are not included in the analysis.). It is noteworthy that this “ingenious” approach is entirely consonant with the “greater-value” interpretation of the benefits principle. The Aotearoa New Zealand Association of Social Workers (ANZASW) supports calls for more progressive taxation policies to be adopted by government in order to address the high levels of social and economic inequity in this country. By Brian Garst. used in the literature to describe capacity to earn: 1) “endowment,” which, in this context, is synonymous with genetic inheritance and is, SEDLAC (Socioeconomic Database for Latin America and the Caribbean), CEDLAS at the Universidad de La Plata and World Bank. Harry and his wife work these long hours because the marginal utility of the income produced from the extra hours is greater than the marginal utility of leisure (up to that point). Secretary-General of the All-Africa Students Union, Peter Kwasi Kodjie, has charged African governments to formulate progressive policies aimed at reducing the tax … . First, the basic premise of sacrifice theory is conceptually flawed. For example, U.S. gdp shrunk 2.6 percent in 2009, substantially less than the 4.1 percent contraction experienced in the Euro area. In the study, government spending mainly includes cash transfers and certain in-kind transfers (spending on basic services as well as on education and health). In their words, the book is, “an effort to explore what might be called the intellectual case for progression.”4 Another particularly useful source of information and analysis was a book-length article published in 1908 in the American Economic Association Quarterly, “Progressive Taxation in Theory and Practice,” by the noted economist and tax historian, Edwin R.A. Seligman.5, According to Blum and Kalven, “the most rigorous analysis of progression came only after the idea had become a political reality . On conceptual grounds alone, sacrifice theory appears to be a very weak foundation for tax policy. Inequity of the paying of taxes Commentary. It will also require interventions to achieve more inclusive economic growth to address the need for employment and higher incomes at the lower end of the income distribution (see examples in the articles of Donaldson, Econ3x3, October–November 2014). Or it may be acquired from lessons learned from parents and other life experiences. Fundamentally it is essential to attain better outcomes in terms of the initial distribution of wages, salaries and capital income (market income). South Africa’s Gini value is one of the highest in the world (StatsSA 2014:13). Under the current tax code, here is what each of us paid in income taxes last year:”1. The study actually interprets ‘transfers’ in their broadest sense: in addition to cash transfers (such as social grants), it includes an estimated monetary value of the receipt of basic services such as water and electricity, as well as the benefits of education and health spending. Age (a proxy for experience) is one of the most significant contributors to income and is also, therefore, one of the most significant contributors to income inequality. When examined carefully, the “protection theory” interpretation of the benefits principle falls short in five different ways. The flaw in virtually all of the intellectual arguments on the issue of the progressive income tax (both pro and con), is a lack of appreciation for how income is determined. Feb. 18, 2013. But while federal taxes have become more progressive, they also began shrinking in 2001 relative to before-tax income, thanks to tax cuts during the George W. Bush and Barack Obama administrations. used to fund a broad range of government services as described above, while The presentation of these facts is not meant to suggest that income inequality causes higher living standards or gdp growth. wherewithal. . The “Class Wars” parable imagined a society in which all of the members had the same aptitude. But proponents of this view have not provided a convincing argument that such injustice even exists.22. finances government services per se. Deciding how much money should be appropriated for this pool and how it should be spent is almost always a subject of contentious debate. governments, including taxes on capital gains, dividends, estates, sales, and And even that argument left them “uneasy.”. Once upon a time in the land of America, there lived triplet brothers named Tom, Dick, and Harry Class. Second, the validity of the theory depends on more than just the existence of a downward sloping marginal-utility curve. Throughout history, many arguments have been advanced both for and against the progressive income tax. . To do so would be self-defeating, since the hardship imposed would deprive the state of production. Under the greater-value theory, since income — a proxy for well-being — is what each individual receives from the economic system, income is a reasonable measure of the value each individual receives from government. whatever the reasons, it is clear that the political history affords little insight into the merits of the principle of progression.”6. Join the Hoover Institution’s By its nature, a system that taxes people progressively without the support of an accepted equity-based principle may breed resentment, particularly when so many pay no tax at all. If they did, what would be the logic of a tax based on proportionate sacrifice rather than one based on shared cost or value received? For the population as a whole, a tax is progressive if the combined share of the tax paid, for example, by the poorest 10% of the population is lower than their share of the aggregate income while the tax share of the richer income groups (e.g. Those who cite protection theory as an argument for progression assert that individuals with higher incomes should pay a disproportionately greater share of the cost of government than lower-income individuals because the higher-income group would have disproportionately more to lose if the protections of government were withdrawn. (Proponents of this meaning of ability-to-pay often draw on sacrifice theory for intellectual support, but as shown above, the application of sacrifice theory results in inequitable outcomes.) Whether this is true or not, dissension is just as likely to be caused by tax laws that are deemed unfair by those being taxed. amount paid into the system is proportionate to income while the benefits (paid A progressive tax doesn't hurt the wealthy as much because, even after the tax, they can afford the basics. Perhaps the main benefit of a progressive tax system is that it helps reduce income inequality. Statistics South Africa (2014). It is important to note that the U.S. income figures cited above come from the Census Bureau, which uses what it calls “money income” (income before taxes, excluding the value of non-cash benefits). The worst thing in all of this is that the staggering inequity in superannuation tax concessions is bi-partisan. Or perhaps Harry has an obsession with saving enough money to send his two children to the best private secondary schools and universities. Article excerpt. 16 Gini coefficients cited herein come from The CIA World Fact Book 2010, the Census Bureau report on Income, Poverty, and Health Insurance Coverage in the United States: 2009 and other U.S. government publications, and Eurostat, the official statistical Offprint: High Progressive Tax Rates: Inequity and Immorality?, 1968 Spring. water, electricity, sanitation and refuse removal, are strongly progressive when assumed to be effectively targeted at the poor, while they are only slightly progressive when provided as an equal subsidy to everyone, irrespective of income. Observed in one type of studies. The same is true for liberty and the pursuit of happiness. But when it came time to divide up the bill, the problems began. Comments may be screened by an editor before they appear online. For taxes, a positive value indicates that the tax is progressive overall and acting to reduce inequality. Our level of income inequality after redistributive efforts is still higher than income inequality in all the other countries in the study before they apply redistributive fiscal policies. This inability to prove the sameness of the marginal-utility curves of different people troubled Blum and Kalven to the point that they dismissed sacrifice theory as a theory on which to base a fair tax system: The error lies in trying to translate money, which can be measured in definite units, into corresponding units of satisfaction or well-being. The graph above shows the impact of Federal Government’s tax and transfer policy on each fifth of the population and on the top 1 percent. This article explores these questions by reporting on work by an international group of researchers (Inchauste et al. Among people whose aptitudes are the same, the only way one person can earn more than a peer is by working harder. Since the focus of this essay is on the issue of tax equity, the economic efficiency arguments will not be discussed beyond noting that logic and the weight of empirical evidence appear to favor less progression rather than more. Harry and his wife, on the other hand, saved most of her after-tax income over many years, gradually accumulating $300,000. This involves comparing the income of different individuals in the population in terms of two measures: Market income is formally defined as the income a person receives from wages, salaries, capital, private transfers and contributory pensions before paying taxes – and not counting benefits from government spending. Reducing Income Inequality. The Aotearoa New Zealand Association of Social Workers (ANZASW) supports calls for more progressive taxation policies to be adopted by government in order to address the high levels of social and economic inequity in this country. 2015. 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