To put this into perspective, imagine you are interviewing for a job. On the whole, the evidence from 2010 shows that the fiscal system in South Africa is progressive overall: the tax system is mildly progressive and government spending is highly progressive. When you ask what the job pays, your prospective employer says, “Well that depends on how hard you work.” You say, “Good, because I am a hard worker.” To which the employer responds, “You don’t understand. 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). But as federal taxes became more progressive starting in the 1980s, the gap between before-tax and after-tax income inequality widened. “It’s all right here in the irs tax tables. This enhancement to the benefits principle, which introduced a mild degree of progression by comparison to a pure proportionate tax (a tax from the first dollar of income), became known as a “degressive” tax. 14 John Stuart Mill, Principles of Political Economy with some of their applications to social The strongest arguments against progression are the rebuttals to the arguments for progression.  The Gini coefficient compares the distribution of income in a population to a scenario where there is perfect equality. “Paying the same percentage of our income is not fair. Figure 4 illustrates how the combined effect of taxation and government spending reduces South Africa’s Gini coefficient from 0.77 (for market income) to 0.59 (for ‘final’ income). 10 Arthur C. Pigou, A Study in Public Finance (Macmillan, 1951), 85-86. This is a very large change. Utilizing digital tools in tax collection can also be part of a comprehensive strategy to boost domestic revenue. Secretary General of the All-Africa Students Union Peter Kwasi Kodjie has charged African governments to formulate progressive policies aimed at reducing the tax burdens on women. . 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. some instances grievously so. World Bank Group, 6 November 2014. The biggest coronavirus relief package so far, March’s CARES Act, gave three times as much ($135 billion) in one tax break to millionaires than it spent on safety net programs ($42 billion). increases pre-tax inequality Increases in taxes (or progressivity) causes individuals to shift the tax burden onto their employers thus increasing pre-tax inequality. What is the equity principle that justifies this taking? Among people whose aptitudes are the same, the only way one person can earn more than a peer is by working harder. “You make much more money than we do.” Harry was puzzled. 19 Johnson, et al., “Economic Inequality.”, 20 Bruce D. Meyer and James X. Sullivan, “Consumption and income inequality in the U.S. since the 1960s” (2010) working paper, available at Third, this interpretation of the benefits principle overlooks the principle of marginal utility. South Africa has evidently made limited progress in reducing income inequality since the end of apartheid. Had Bill Gates decided to finish Harvard and become a high school math teacher, he almost certainly would have been successful, but he would not have become a multi-billionaire. . All three were employed as carpenters making $25 per hour, working 50 weeks a year. In this hypothetical situation, and within each occupation, incomes would vary across a distribution curve almost identical to the aptitude curve. For instance, 61.3% of aggregate consumption expenditure comes from the richest 20% of South Africans, compared to 55.7% in Brazil (StatsSA 2014; SEDLAC). the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit.25. Government protections extend to much more than property. A progressive tax doesn't hurt the wealthy as much because, even after the tax, they can afford the basics. The figure of merit for the Gini coefficient ranges from zero to 1.0, where zero equals total equality (all persons have identical incomes) and 1.0 equals total inequality (one person has all of the income). According to the Luxembourg Income Study (which uses a very comprehensive measure of income) median disposable personal income in the U.S. in 2002 was: 19.3 percent higher than Canada; 68 percent higher than Finland; 45 percent higher than Germany; 59 percent higher than Italy; 31 percent higher than Norway (despite its vast oil and gas wealth); 73 percent higher than Sweden; and 31 percent higher than the United Kingdom. Join the Hoover Institution’s All these services can be regarded as in-kind transfers. It is founded on a double assumption: first, that the well-being of men, while not caused by the government, is dependent upon it in that government is a necessary condition for its existence; second, that the only aspect of well-being which is measurable is wealth or income and that it is therefore appropriate to take either of these as an index of the benefits flowing from government.9. It is important to note that, among the proponents of the degressive tax, there was clear consensus that the income exempt from tax should be set no higher than the level of subsistence. They do not include Government spending is progressive if the share of the monetary value of government goods and services (i.e. In 2010, the poorest 40% of individuals (rows 1 to 4 of table 2) contributed 5% of total indirect tax collections, compared with their share of 4.8% in total disposable income. 3 As defined here, the term aptitude is similar to but distinct from other terms In either of these scenarios, taxing Harry at a higher marginal rate than Tom (as required by a progressive income tax) would be inconsonant with sacrifice theory, and by its own standard, inequitable. Fifth, the analogy to an insurance company is specious. In fact, in comparing the marginal-utility curves of Tom, Dick, and Harry Class, there are any number of reasons why Harry’s marginal utility curve might decline less steeply than Tom’s and Dick’s. Under the current progressive tax system, Harry’s after-tax income will be $63,275 (after $11,725 in tax, which assumes that, since Harry’s labor income is 50 percent of his total family income, the tax attributable to him is 50 percent of the $23,450 tax paid by the family). 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 … Within that environment, individual economic outcomes are the product of a combination of three elements: aptitude, work effort, and choice of occupation. “By an amazing coincidence, our total taxes paid were exactly equal to the $30,000 expended on our street improvements. The American military and other protective agencies and institutions of government exist to protect and preserve these rights for all Americans equally, regardless of how rich or poor they are. Assume also that all of the persons in this society work exactly the same number of hours and at exactly the same intensity, resulting in incomes that correlate closely with aptitudes. These tax systems are outside the scope of this essay. On the surface, sacrifice theory appears to be a respectable argument for progression. Pretoria: National Treasury. II (D. Appleton and Company, 1894), 99, 401. More progressive taxes mean higher income tax rates for high-income individuals and … 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. (Technically a per-capita tax is not an income tax, but it is almost universally accepted as the most economically efficient tax system.). It remains at roughly the pre-1980 level. This Article examines trends in economic inequality and the role of the tax system in reducing it. Progressive income tax states have higher income inequality and have been unable to slow the rise in the income gap. But it has to be understood as capacity; aptitude does not produce income until it is combined with individual effort. Sacrifice denotes something psychical; something psychological . In addition to producing higher income in its own right, work effort applied to strengthening one’s skill — resulting in “learned” or “enhanced” aptitude — can make a substantial contribution toward increasing income. Accordingly, persons with more highly valued aptitudes would earn more income than their lower-aptitude counterparts, and thus derive greater value from government. A tax decreases their ability to invest in stocks, add to retirement savings, or purchase luxury items. ‘transfers’) going to the poor exceeds their share of aggregate market income – while the richer groups receive transfers of a value less than their share of market income. d) Progressive tax because as income increases people tend to buy more expensive houses. The foreman’s hourly rate is commensurate with his aptitude as a manager, while Harry’s $25 per-hour rate is commensurate with his aptitude as a carpenter. But proponents of this view have not provided a convincing argument that such injustice even exists.22. The brothers were quite happy with the outcome and felt the $30,000 was a worthy expenditure given the benefits provided each family. governments, including taxes on capital gains, dividends, estates, sales, and used to fund a broad range of government services as described above, while South Africa’s levels of inequality are even greater than those in Brazil, another highly unequal country. The opinions expressed on this website are those of the authors and do not necessarily reflect the opinions of the Hoover Institution or Stanford University. This is the progressive income tax system all U.S. taxpayers live under, and I don’t see why the Class families should be different.  VAT revenue constitutes about a quarter of government’s total tax revenue, compared to about 3.5% for excise taxes and 5.2% for the fuel levy. One of the inherent characteristics of the U.S. system of government (and that of all Western nations) is the tension that exists between the political system (majoritarian) and the economic system (free enterprise). Money income is the income definition most often used when citing income inequality measures,16 even though this definition of income does not include many variables that might affect inequality and standard of living, such as transfer payments, taxes, employer-provided fringe benefits (primarily retirement benefits and health insurance, which can amount to as much as 30 percent of income17, capital gains, dividends, imputed rent from owner-occupied housing, size of household, increases in the value of home equity and other investments, etc. Those who advocate redistribution of income on grounds of social justice should consider that America’s standard of living is higher and has grown faster than virtually all of the nations exhibiting lower measured inequality. . come from a tax system that is equitable. Progressive tax systems attempt to reduce the "tax incidence" of people with a lower "ability-to-pay," as they shift the incidence increasingly to those with a … Redistribution has been justified by some as a means of rectifying social injustice in the economic system. Thus, the U.S. economy grew 43 percent faster per year than the non-U.S. G-7 countries. It has been widely reported that income inequality in the U.S. has been rising for “decades,” and by implication, that the rise is ongoing. The only things that can be stated with confidence are that all persons have marginal-utility curves that are ultimately downward sloping and that the slopes of individual curves are determined by many factors in addition to income. In the end satisfaction in the sense of happiness defies quantification. Not only are South Africa’s main fiscal instruments progressive overall, the degree and structure of progressiveness is such that these instruments achieve significant reductions in income inequality. As a result of the challenging global economic climate since 2008, the implementation of countercyclical policy has meant that South Africa has increased its net debt burden of 22.9% of GDP in 2008/09 to 39.7% in 2013/14. There are weaknesses in the logic of this doctrine that make the fairness of a proportionate or degressive tax system less than perfect. South Africa has evidently made limited progress in reducing income inequality since the end of apartheid. Progressive tax systems don't charge taxpayers a flat rate. May 24, 2020 Updated: ... working and middle-class families than the gross inequity that exists in the state of New York. How could Harry, who was clearly “rich,” ask him to pay the same amount, when it was obviously harder for him to do so? South Africa’s Gini coefficient using market income is estimated to be around 0.77. 3. Health spending is strongly progressive. In fact, income inequality moves from a situation where the combined market income of the richest decile is more than 1 000 times that of the poorest, to one where the final income of the richest decile is about 66 times higher than that of the poorest. “Transfers” include social security, welfare, etc. We also comment on the implications of their findings for policy. 22 To be sure, there are people in America who are needy or disadvantaged, in office of the European Union. These reports are arguably misleading. In 2008, the top 1 percent of taxpayers in America earned about 20 percent of all personal income and paid roughly 38 percent of federal income taxes; the bottom fifty percent of taxpayers currently pay only 2.7 percent of income taxes,23 and it is estimated that 46.9 percent of workers paid no federal income tax for the 2009 calendar year.24 Inasmuch as only a minority of taxpayers is affected by rises in tax rates, there is a built-in incentive for the majority to act in its self-interest, which opens the door to inequitable treatment of the minority. First, the basic premise of the protection theory is flawed. . In the event, their uneasy case for progression would have become an easy case for its rejection. 4 Edward Blum and Harry Kalven, The Uneasy Case of Progressive Taxation (University of Chicago Press, 1953. I make six times as much as you but you expect me to pay almost 80 percent of the total cost while you pay nothing. The greater-value interpretation of the benefits principle stands as a rejection of a per-capita tax system and as a compelling case for either a proportionate or a degressive system. His boss will take home $68,450 (after $6,550 in tax). Taxation - Taxation - Principles of taxation: The 18th-century economist and philosopher Adam Smith attempted to systematize the rules that should govern a rational system of taxation. Sacrifice theory and the marginal They were 45 years old, had virtually the same aptitude (skill), and were raised in the same home. 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. But there are other important reasons to reject progressive taxation. By Hagopian, Kip. Progressive taxes are often designed to collect a greater proportion of income from the rich relative to the poor, thus reducing the inequality of disposable income compared to taxable 4 The empirical micro literature on developing countries has long pointed out the unreliability of in- it is inaccurate to call the levies regressive. There are basically four systems of income taxation described in the literature: A per-capita, or “head” tax, which would require each person to pay his or her per-capita share of the costs of government. In the case of Medicare, the Perhaps the most effective way of enhancing aptitude is through increased study in school. If such a thing were possible, it is certain that the more highly valued aptitudes — those that would produce higher incomes — would be bid up to amounts in excess of the per-capita cost of government. Without such a system, South Africa’s income inequality would be significantly higher than its current level. Analysis: Ireland is one of the few developed countries that has seen high income growth and falling inequality in the last 30 years. However, there are several difficulties with the sacrifice theory itself that render it untenable as an argument for progression. Growth, inequality, and progressive tax. advancing ideas defining a free System, Support the Mission of the Hoover Institution, Battlegrounds: International Perspectives, http://www.bls.gov/opub/mlr/2005/04/art2full.pdf, http://harrisschool.uchicago.edu/faculty/ web-pages/Inequality60s.pdf, http://www.taxfoundation.org/ news/show/250.html, http://www.taxpolicycenter.org/UploadedPDF /1001289_who_pays.pdf, For more information, see the Hoover Press, Edward Glaeser On Joblessness And The War On Work. If it is social justice we are concerned about, what is the evidence that the level of American inequality is unjust? Work effort. Whether it is grade school, high school, vocational school or college, for any particular tier of aptitude, those who study the most almost always get the best grades, matriculate to the best colleges, and secure the best jobs. From the point of view of the taxed, government benefits only have real value when the taxpayer earns a surplus of income over what is needed for subsistence.  The reality probably is somewhere in between, as some municipalities target services to the poor, while most claim they lack the required capacity to do so. By far the most compelling condemnation of sacrifice theory is not the argument over the slopes of the marginal-utility curves, but the unfair penalty it would impose on the hardest working and most productive people in society. May 3, 2017. As a result, at any one point in time, an unacceptably large percentage of the total work force will earn less average, after-tax income per hour than their peers, simply because they worked harder. Thus, each person should share the costs of government equally, in which case the fairest tax would be per capita. Inchauste G, Lustig N, Maboshe M, Purfield C & Woolard I. This essay is an abridged version of a The following paragraphs discuss the concept of tax inequity, describe the data sample and methodologies used in this study to identify potential inequity for lodging properties, discuss the results of the study, and present conclusions and implications of this analysis. But how much more should higher-income people pay? By this measure, the U.S. has higher income inequality than almost all other industrialized nations. If you and your wife worked harder and saved more you would make as much as my family does.” To which Tom replied, “I don’t work more because I value my leisure time more than I value money. The major fallacy in the use of the benefits principle as an argument for progression is the implicit premise that the value of government benefits increases more rapidly than income.