Progressive Income Tax System Research Articles

Can revenue collection for public funding in health care be progressive? An assessment of 29 Countries

Most research on health care equity focuses on accessing services, with less attention given to how revenue is collected to pay for a country's health care bill. This article examines the progressivity of revenue collection among publicly funded sources: income taxes, social insurance (often in the form of payroll) taxes, and consumption taxes (e.g., value-added taxes). We develop methodology to derive a qualitative index that rates each of 29 high-income countries as to its progressivity or regressivity for each of the three sources of revenue. A variety of data sources are employed, some from secondary data sources and other from country representatives of the Health Systems and Policy Monitor of the European Observatory on Health Systems and Policies. We found that countries with more progressive income tax systems used more income-based tax brackets and had larger differences in marginal tax rates between the brackets. The more progressive social insurance revenue collection systems did not have an upper income cap and exempted poorer persons or reduced their contributions. The only pattern regarding consumption taxes was that countries that exhibited the fewest overall income inequalities tended to have least regressive consumption tax policies. The article also provides several examples from the sample of countries on ways to make public revenue financing of health care more progressive.

Effective salary policy as a component of the development strategy

The inefficient distribution of income in society creates a number of problems, the main of which are the following: approved social standards are at least two times lower than the actual value of the minimum consumer basket, half of the Pension Fund's income is formed at the expense of subsidies, and half of the country's households need subsidies to pay for housing and communal services. As a result, there is no solvent demand for goods and services on the market, which slows down the socio-economic development of the state. The need for radical improvement of the principles of income distribution in society determines the relevance of the research topic. The task is to determine the legal means of effective distribution of income in order to accelerate the socio-economic development of the state. The drivers of economic growth based on wages and/or profits of enterprises are analyzed. However, none of the possibilities will be realized in the absence of a stable or at least predictable exchange rate of the hryvnia, a progressive income tax system and fair market prices. The socialist ideology of the connection of wages with labor productivity, which is equated with labor intensity, does not allow to implement the optimal distribution of incomes and restrains the socio-economic development of the state. Labor productivity is determined by the level of production equipment and technology, the progressiveness of technological processes, the use of innovative materials, the introduction of patents and know-how, etc., which provides for higher qualification of personnel and higher wages and determines the direction of using the received profits and attracting investments. The regulator of the use of profits is the tax system and progressive tax rates. Income distribution in society should be determined by acceptable social standards and ensured by the application of progressive personal income tax rates. Amendments to the Tax Code of Ukraine have been proposed, which will ensure the solution of the set tasks

Progressive income tax and comparative advantage in trade

This study examines how a nation’s progressive personal income tax system impacts its comparative advantage in industries characterized by a large share of high-income occupations. While prior research has explored the economic consequences of income tax policies, little is known about their specific implications for a country’s competitive edge in international trade. We employ comprehensive world trade data to investigate the relationship between income tax progressiveness and industry competitiveness. Our analysis reveals that countries with more progressive income tax systems tend to exhibit comparative disadvantages in industries prominently featuring high-income occupations, including high-tech and professional services. This phenomenon can be attributed to a key mechanism: progressive income tax policies alter occupational choices by discouraging high-income pursuits, ultimately eroding the competitiveness of industries that heavily rely on these occupations. This research underscores the importance of policymakers considering the unintended consequences of income tax progressiveness on industry competitiveness in the global market.

Summaries of Articles

Summaries of Articles

Worldwide Fiscal Progressivity: What can we Learn from Subjective Wellbeing Economics?

The link between fiscal progressivity and subjective well-being at global level is an issue that has hardly been considered in the literature on the Economics of Happiness. Oishi et al. (2012) is almost the only work in this field, and they concluded that those countries which had more progressive income tax systems were also happier. Our work use their definition of progressivity as the difference between the upper and lower marginal rate on income, in order to prove its relationship with subjective well-being (SWB), but we have observed that such indicator is not very significant for a sample of 111 countries. Besides, we conclude that the fact that a country's maximum income tax rate is high turns out to have a strong influence on the declared subjective well-being of its citizens. One possible explanation for it could be that they are countries with a high GDP per capita in which disposable income after taxes remains high. However, it must be taken into account that in our work we have managed to isolate the influences that the GDP per capita variable could have using the principal component analysis method.

Inequality and dynamics of earnings and disposable income in Denmark 1987–2016

We document facts about earnings and disposable income inequality and growth in Denmark in the period 1987–2016. During this period, the distribution of log earnings growth exhibits skewness that varies with the business cycle and has strong excess kurtosis. Denmark has a progressive income tax system with a high level of taxes and a relatively generous and heavily subsidized unemployment insurance system. Consequently, the dispersion of log disposable income growth is much smaller than for earnings, and the distribution exhibits very limited skewness and much reduced excess kurtosis. These results emphasize the importance of distinguishing between earnings and disposable income when modeling income dynamics, and they suggest that the Danish welfare state plays an important role in reducing the impact of earnings fluctuations on disposable income.

Designing Malaysia’s Tax Structure to Achieve Higher Income Country

After four decades of rapid, inclusive growth averaging 6.4% pa since 1970, due to successful transformation of the economy from agriculture to a modern and open economy, Malaysia needs to embark on painstaking reforms to launch its trajectory to a higher growth path. Malaysia has a lower tax burden when compared to most G8 and BRIC economies. It collects about 16.9% of GDP in tax revenues, compared with the OECD average of 34.3% in 2016 (OECD, 2015). Among the urgent reforms are taxes which need a restructuring from direct and commodity taxes with overdependence on oil and gas to a more diversified tax base. Its tax dependence on the oil and gas sectors for revenue reached a 41% high of GDP in 2009, before settling to 14% with the introduction of GST/SST. The long-run elasticity of tax burden is -0.25, which implies that GDP growth will be reduced by 0.25% for every 1% increase in tax burden, compared with -0.27 for OECD countries (Arnold, 2012). In general, taxes are negatively correlated with economic growth, even after taking into account the different types of taxes. The structure of taxation showed that GST is most sensitive to economic growth and has the highest impact. Among taxes, GST, PIT and CIT are negatively correlated to growth whereby for every 1% increase in taxes, economic growth will be reduced by 0.17%, 0.06% and 0.06% respectively. PROTAX and OTHTAX are positively related to GDP growth. Tax reforms are needed to broaden the overall tax base, resize the sources to uncover additional resources to fund needed programs for inclusive growth. Over the medium time-span, it is important that the government focus on strengthening its tax collection administration to cut off leakage and in reducing the number of tax exempt items, inevitably looking into indirect taxes and a broader tax base to contribute to a progressive income tax system in its tax reform agenda.

Optimal Progressive Income Taxation in a Bewley-Grossman Framework

We study optimal income tax progressivity in an environment where individuals are exposed to idiosyncratic income and health risks over the lifecycle. Our results, based on a calibration for the US economy, indicate that the presence of health risk combined with incomplete insurance markets amplies the social insurance role of progressive income taxes. The government is required to set higher optimal levels of tax progressivity in order to provide more social insurance for unhealthy low income individuals who have limited access to health insurance. The optimal progressive income tax system includes a tax break for income below $36,400 and high marginal tax rates of over 50 percent for income above $200,000: The tax progressivity (Suits) index-a Gini coeffcient for income tax contributions by income-of the optimal tax system is around 0.53, compared to 0.17 in the benchmark tax system. Yet, the optimal tax system in our model is more progressive than the optimal tax systems in models abstracting from health risk (e.g., Conesa and Krueger (2006) and Heathcote, Storesletten and Violante (2017)). Importantly, the optimal level of tax progressivity is strongly affected by the design of the health insurance system. When health expenditure risk is reduced or removed from the model, the optimal tax system becomes less progressive and thus more similar to the optimal progressivity levels reported in the previous literature.

Personal income taxation and income inequality in Asia-Pacific: a cross-country analysis

The article examines analyze current features of personal income taxation, and also the relationship between income inequality, individual income taxes and several labor market indicators in Asia-Pacific countries. The income inequality issue affects basic social and economic terms as equity and equality. The increase in income inequality in countries worldwide led to vigorous debate about efficiency of progressive individual income taxation as a tool for achieving optimal level of social equity. The purpose of the study is to examine the features of progressive individual income taxation and its influence of reduction of income inequality in Asia-Pacific countries. The article analyzes current systems of personal income taxation in countries of this region and their relationship with key macroeconomic indicators. The methodology includes cross-country comparisons, principal component analysis, regression analysis. The main theoretical results include identification of causes of inefficiency of progressive individual income taxation in analyzed countries. The empirical results are related to the estimation of influence of macroeconomic factors, including labor market indicators, on individual income tax revenue. The applied methods, notably principal component analysis combined with regression analysis, can be used for estimation of influence of both quantitative and qualitative factors on tax revenue. HIGHLIGHTS 1. The tax theory suggests that the progressive individual income tax system can be an effective tool for reduction of income inequality 2. For developing Asia-Pacific countries, the progressive personal income tax systems cannot contribute to the reduction of inequality since the tax base is narrow because of high free-tax thresholds and large informal sector of the economy 3. The developed Asia-Pacific countries have relatively high personal income tax revenues and low Gini coefficients, except Singapore with high income inequality level and GDP per capita similar to developed countries. One of the main reasons of high inequality in this country are the features of government tax policy 4. In developing Asia-Pacific countries only statutory nominal gross monthly minimum wage has significant impact on individual income tax revenue, and this impact depends crucially on the GDP per capita; the main reason are high tax-free personal income thresholds in these countries FOR CITATION Belozyorov S. A., Sokolovska O. V. Personal income taxation and income inequality in Asia-Pacific: a cross-country analysis. Journal of Tax Reform , 2018, vol. 4, no. 3, pp. 236–249. DOI: 10.15826/jtr.2018.4.3.054 ARTICLE INFO Received July 17, 2018; accepted August 20, 2018

Can Tax Reform Solve the “Fiscal Trilemma”?

Are the goals we have for our tax system mutually incompatible? This is the question that we posed to a distinguished group of tax economists at a conference hosted by the Murphy Institute and the Department of Economics at Tulane University in October 2012. More specifically, we asked whether the US economy faced a ‘‘fiscal trilemma’’: Can the three goals of revenue adequacy, fairness, and promotion of economic growth all be achieved, or do we have to sacrifice one of these goals to meet the others? Many of the traditional debates in tax policy are encompassed within this trilemma framework. For example, must a progressive tax system that meets our revenue needs hamper economic growth? Do progrowth tax systems that generate needed revenues come at the expense of progressivity? Would a progressive income tax system that managed to encourage growth provide insufficient revenues? Is there an unresolvable tension between the traditional Haig-Simons notion of a ‘‘good’’ tax—a broad-based, low-rate income tax base with few if any exclusions or deductions—that emerges from a largely static view of the tax system and the more growth-oriented taxes (e.g., a personal consumption tax, a value-added tax, and a retail sales tax) that emerge from a dynamic analysis of taxes? The tensions between these three goals of tax policy—fairness, growth, and revenue adequacy—are not fully understood or quantified. Our conference brought together researchers working on these issues to explore recent

Risk and Returns to Education

We analyze the returns to education in a life-cycle framework that incorporates risk preferences, earnings volatility (including unemployment), and a progressive income tax and social insurance system. We show that such a framework significantly reduces the measured gains from education relative to simple present-value calculations, although the gains remain significant. For example, for a range of preference parameters, we find that individuals should be willing to pay 300 to 500 (200 to 250) thousand dollars to obtain a college (high school) degree in order to benefit from the 32 to 42 percent (20 to 38 percent) increase in annual certainty-equivalent consumption. We also explore how the measured value of education varies with preference parameters, by gender, and across time. In contrast to findings in the education wage-premia literature, which focuses on present values and which we replicate in our data, our model indicates that the gains from college education were flat in the 1980s and actually decreased significantly in 1991-2007 period. On the other hand, the gains to a high school education have increased quite dramatically over time. We also show that both high school and college education help to decrease the gender gap in life-time earnings, contrary again to the conclusion from wage premia calculations.

U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?

The U.S. tax policy on health insurance is regressive because it subsidizes only those offered group insurance through their employers, who also tend to have a relatively high income. Moreover, the subsidy takes the form of deductions from the progressive income tax system giving high income earners a larger subsidy. To understand the effect of the policy, we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance. A complete removal of the subsidy may lead to a partial collapse of the group insurance market, reduce the insurance coverage and deteriorate welfare. There is, however, room for improving the coverage and welfare by extending a refundable credit to the individual insurance market.

How Progressive is Germany? Comparing the Redistributive Effects of Tax Benefit Systems in Europe (Wie progressiv ist Deutschland? Das Steuer - und Transfersystem im europäischen Vergleich)

When comparing tax benefit systems across Europe, Germany is usually regarded as a country with a high level of taxes and contributions which is often seen as a main challenge for the economic performance of the welfare state in terms of growth and unemployment. Especially the progressive structure of the German income tax is subject to various criticisms in the ongoing policy debate in Germany. In this paper, we compare the progressivity and redistribution induced by the tax benefit systems in the EU-15 countries. In contrast to previous studies, we do not focus only on the income tax system but additionally consider social insurance contributions and cash benefits for a complete analysis of the whole tax benefit system. Our analysis is based on EUROMOD, a static tax benefit microsimulation model for the EU-15 countries, which allows analysing the tax benefit systems in a common framework. We compute several measures of progressivity and redistribution for the whole tax benefit system as well as for the single components. We compare the values of these measures across countries to rank the countries according to their progressivity and level of redistribution. Our analysis shows that there is considerable variety with respect to progressivity and redistribution across the countries. We show that the German system as a whole employs only a medium level of redistribution, which contradicts to some extent the existing German literature. However, this effect can be decomposed into a highly progressive income tax system, a highly unequal pre-tax income distribution and regressive social insurance contributions as well as regressive transfers. Therefore, when thinking of reforming the highly progressive income tax system, one has to take into account the regressive effects of the other elements of the tax benefit system.

How Progressive is Germany? Comparing the Redistributive Effects of Tax Benefit Systems in Europe

When comparing tax benefit systems across Europe, Germany is usually regarded as a country with a high level of taxes and contributions which is often seen as a main challenge for the economic performance of the welfare state. In this paper, we analyse the progressivity and redistribution induced by the tax benefit systems in the EUR-15 countries. We show that the German system as a whole employs only a medium level of redistribution. However, this can be decomposed into a highly progressive income tax system, a highly unequal pre-tax income distribution and regressive social insurance contributions.

The Economics of Workaholism: We Should Not Have Worked on This Paper

Abstract A large literature examines the addictive properties of such behaviors as smoking, drinking alcohol, gambling and eating. We argue that for some people addictive behavior may apply to a much more central aspect of economic life: working. Although workaholism raises some of the same health-related concerns as other addictions, compared to most of the more familiar addictions it is more likely to be a problem of higher-income individuals and is more likely to generate negative spillovers onto individuals around the workaholic. Using the Retirement History Survey and the Panel Study of Income Dynamics, we show that high-income, highly educated people exhibit behavior that is consistent with workaholism with regard to retiring–they are more likely to postpone earlier plans for retirement. The theory and evidence suggest that the presence of workaholism calls for a more progressive income tax system than otherwise, although other more targeted policies may be part of optimal policy.

U.S. Tax Policy and Health Insurance Demand: Can a Regressive Policy Improve Welfare?

The U.S. tax policy on health insurance is regressive because it favors only those offered group insurance through their employers, who tend to have a relatively high income. Moreover, the subsidy takes the form of deductions from the progressive income tax system, giving high-income earners a larger subsidy. To understand the effects of the policy, we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance. We use the Medical Expenditure Panel Survey to calibrate the process for income, health expenditures, and health insurance offer status through employers and succeed in matching the pattern of insurance demand as observed in the data. We find that despite the regressiveness of the current policy, a complete removal of the subsidy would result in a partial collapse of the group insurance market, a significant reduction in the insurance coverage, and a reduction in welfare coverage. There is, however, room for raising the coverage and significantly improving welfare by extending a refundable credit to the individual insurance market.

Progressive taxation in a dynastic model of human capital

We develop a quantitative theory of economic inequality to investigate the effects of replacing the current U.S. progressive income tax system with a proportional one. The cross-sectional implications of the theory are used to discipline the assessment of the effects of tax policy and circumvent the lack of conclusive micro-evidence on the parameterization of the human capital production technology. We find that the elimination of progressive taxation increases steady state level of output by 12.6%, capital by 21.8%, and consumption by 13.2%. Moreover, it increases economic inequality and its persistence across generations.

Public Insurance against Idiosyncratic and Aggregate Risk: The Case of Social Security and Progressive Income Taxation

In this paper I discuss the role a progressive income tax system and a redistributive pay as you go (PAYGO) social security system can play in insuring and reallocating idiosyncratic as well as aggregate risk. I also argue that the underlying source of market failures generating such a role for government intervention may be crucial when

Health Insurance and Tax Policy

The U.S. tax policy on health insurance favors only those ofiered group insurance through their employers, and is regressive since the subsidy takes the form of deductions from the progressive income tax system. The paper investigates alternatives to the current policy within a framework of a dynamic general equilibrium model. We flnd that despite the issues about the current policy, a complete removal of the subsidy results in a partial collapse of the group insurance market and a signiflcant reduction in the insurance coverage, negatively afiecting the welfare of many. There is, however, room for raising the coverage and signiflcantly improving welfare by extending refundable credits to the individual insurance market. Our work is the flrst in highlighting the importance of studying the tax policy associated with health insurance in a general equilibrium framework with an endogenous demand for the insurance. We use the Medical Expenditure Panel Survey (MEPS) to calibrate the process for income, health expenditure shocks and health insurance ofier status through employers and succeed in producing the pattern of insurance demand as observed in the data, which serves as a solid benchmark for the policy experiments.

After the Death of Inflation: Will Fiscal Drag Survive?

Declining inflation rates might have negative consequences for tax revenues. Phenomena like the inflationary bracket creep in a progressive income tax system do not work any longer. With this background the paper analyzes the extent of fiscal drag for OECD countries since 1965. Some considerations on the role of money illusion and indexation in this context lay the theoretical base followed by a descriptive view on the relation between inflation, growth and tax revenues in the past decades. A framework is presented that allows for the classification of fiscal structures with regard to the type of fiscal drag. The subsequent econometric analysis is performed for total and disaggregated government revenues. The results reveal that an end of inflation would have a negative impact on tax revenues for a number of OECD countries. The results also back theoretical considerations on inflation's impact on different kinds of taxes: This impact tends to be positive for individual income taxes and social security contributions, it is neutral or negative for corporate income, property and indirect taxation. The paper concludes that both declining inflation and recent trends in tax reforms can be expected to limit the potential for future fiscal drag.