Progressive Tax System Research Articles

U.S. v. Davis and Prof. Cain’s Rewritten Opinion: An Intersectional Argument for Capping Section 1041

Tax cases are about rich people. Given the demographic distribution of income and wealth in the United States, that means tax cases are mostly about rich White people. The tax issue in Davis can be stated simply: when shall transfers of appreciated assets incident to divorce be taxed? But thinking about these rules only from the point of view of the taxpayers themselves, and what is “fair” inter se or as compared to others similarly situated, may distract us from seeing broader issues also properly considered in tax policy. When we take into account not just sex/gender and marital status, but also race and class, the focus on one sort of inequality (between divorcing couples in different states) obscures another that is larger and more far-reaching (race-based wealth inequality). To address this, I suggest an amendment to Section 1041, a limit on tax-free transfers of appreciated assets incident to divorce. The cap is intended to balance desirable flexibility and asset preservation at divorce with legitimate fiscal and equity concerns in what at least aspires to be a progressive tax system.

A proposal for a simple average-based progressive taxation system

This paper is a first theoretical presentation of a simple progressive taxation system. The system is based on two adaptations of one easily calculable formula that is based on the societal average income of the previous year. The system contributes to academic discussions as it is a novel approach. It is a progressive tax that does not discriminate against anyone as the progression increases continuously and the increase in tax payment does not go beyond the additional income. The analysis in the paper shows that the core advantage of the system is its simple, transparent and adaptable mechanism.

Fiscal policy, institutions and inclusive growth: evidence from the developing Asian countries

Purpose The purpose of this paper is to examine the impact of fiscal policy and institutional quality on the inclusive growth process of the selected developing Asian countries. Inclusive growth is a growth process which ensures that everyone is participating and benefited by growth process. Design/methodology/approach This study uses system generalized method of moment to address the problem of endogeneity and omitted variable bias. Findings Empirical results showed that both fiscal policy and institutions have positive effects on inclusive growth. Our empirical results confirmed that fiscal policy can work more efficiently in the presence of good quality institutions in the developing Asian countries. Research limitations/implications Government should take measures to improve infrastructure, roads and transport system, and main share of government expenditures should be allocated to development, education and health projects. There is a need to transform the tax structure of the countries with the huge emphasis on the progressive tax system and this is likely to benefit the lower segment of the population. There is a need to develop institutions as they serve as a road map for the development of a country. There should be coordination between government policies and institutions. Supervision of fiscal policy through good institutions is needed for the proper allocation and utilization of public resources. Practical implications By restructuring the taxation system subject to the provision of quality institutions, government can incentivize entrepreneurs to make significant investments. This creates jobs for lower segment of a society, brings down poverty and increases the income level of a country. This increases the individual and collective welfare of an economy that ensures the inclusive growth within a country. Originality/value In this study, proxies used for fiscal policy are government expenditures and tax revenues as a percentage of gross domestic product (GDP) to examine its impact on the certain measures of inclusive growth such as employment, income inequality and GDP per capita. This study provides useful insights for the policy makers using fiscal policy to achieve the goal of inclusive growth in developing countries.

Zakat: Islam’s Missed Opportunity to Limit Predatory Taxation

One of Islam’s five canonical pillars is a predictable, fixed, and mildly progressive tax system called zakat. It was meant to finance various causes typical of a pre-modern government. Implicit in the entire transfer system was personal property rights as well as constraints on government—two key elements of a liberal order. Those features could have provided the starting point for broadening political liberties under a state with explicitly restricted functions. Instead, just a few decades after the rise of Islam, zakat opened the door to arbitrary political rule and material insecurity. A major reason is that the Quran outlines the specifics of zakat as they related to conditions in seventh-century Arabia, without making explicit the underlying principles of governance.

Self-employment in developing countries: A search-equilibrium approach

This paper develops and estimates a life-cycle on-the-job search model with self-employment that captures labor market stylized facts typical of middle-income developing economies. Workers flow across unemployment, self-employment, formal and informal wage employment. Individuals differ across and within employment sectors in terms of earnings, self-employment ability and transition rates. Counterfactual analysis shows that a flat reduction in payroll taxation increases the share of formal sector workers mainly due to a drop in self-employment. A proportional reduction in payroll taxes improves total welfare by increasing formal sector wages and profits, and allowing for a better allocation of high education workers. Converting to a progressive payroll tax system, equivalent to a flat reduction, is ineffective in reducing informality and leads to a decline in total welfare.

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.

Where Does the Money Come From? Humanizing High Socioeconomic Status Groups Undermines Attitudes Toward Redistribution.

The concentration of wealth in the hands of a few at the expense of general impoverishment is a major problem in some modern societies. However, there is a general opposition to redistribution policies or to the application of a progressive taxation system. The goal of this research was to explore one factor that might drive the attitudes toward income redistribution: The (de)humanization of high socioeconomic status groups. Previous studies have shown that high socioeconomic status groups tend to be considered as unemotional machines without any concern for others. However, the consequences of mechanizing (vs. humanizing) high socioeconomic status on the interpretation of socioeconomic differences has not been explored yet. We considered that humanizing high socioeconomic status groups might have an unexpected negative effect on attitudes about income inequality and wealth concentration. Specifically, this research aims to determine how humanizing high socioeconomic status groups influences people’s perceptions of the group’s wealth and preferences for income redistribution. We conducted two studies in which we manipulated the humanity (mechanized vs. humanized in terms of their Human Nature traits) of a high socioeconomic status group. Results of these two studies showed that humanizing (vs. mechanizing) high socioeconomic status groups led to lower support for income redistribution/taxation of wealthy groups, through considering that the group’s wealth comes from internal sources (e.g., ambition) rather than external ones (e.g., corruption). These results were independent of the group’s likeability and perceived competence/warmth. The present research provides valuable insight about the possible dark side of humanizing high socioeconomic status groups as a process that could contribute to the maintenance of the status quo and the legitimation of income inequality in our societies.

Four Levers of Redistribution: The Impact of Tax and Transfer Systems on Inequality Reduction

We use harmonized survey data from the Luxembourg Income Study to assess the redistributive impact of taxes and transfers across 22 OECD countries over the 1999–2016 period. After imputing missing tax data (employer social‐security contributions), we measure the reduction in income inequality from four key levers of tax and transfer systems: the average tax rate, tax progressivity, the average transfer rate, and transfer targeting. Our methodological improvements produce the following results. First, tax redistribution dominates transfer redistribution (excluding pensions) in most countries. Second, targeting explains very little of the cross‐country variation in inequality reduction. In contrast, both tax progressivity and the average tax rate have large impacts on redistribution. Last, there seem to be political tradeoffs: high average tax rates are not found together with highly progressive tax systems.

Political Costs of Tax-Based Consolidations

This paper studies the impact of tax-based consolidations on reelection outcomes. Using a granular database of tax-based consolidations for a panel of 10 OECD countries over the last 40 years, we find that tax reforms are politically costly but some reforms are costlier than others. Measures aimed primarily at reducing existing deficits and debt are costlier than tax consolidation policies for improving long-term growth prospects. Electoral costs are particularly high for broad-based indirect tax and corporate tax reforms. Voters tend to penalize governments less if tax consolidations are announced early in the government's term or if the government has a strong political mandate. Favorable economic conditions increase public support for tax-based consolidations. Personal income tax reforms are electorally salient if the reforms are frontloaded, announced during recessions, and in less progressive tax systems.

Redistributing the gains from trade through progressive taxation

Should a nation's tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income losses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses. A progressive tax system is valuable, as it substitutes for imperfect insurance and redistributes the gains from trade. However, it also reduces the incentives for labor to reallocate away from comparatively disadvantaged locations. We find that optimal progressivity should increase with openness to trade with a ten percentage point increase in openness necessitating a five percentage point increase in marginal tax rates for those at the top of the income distribution.

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.

Income redistribution through taxation – how deductions undermine the effect of taxes

This paper shows the potential of administrative data to grant us a more complete picture of the redistributive effects of the visible (tax rates) and hidden (tax deductions) instruments of the fiscal welfare state. Based on administrative tax data from a large Swiss canton, we apply a gini-based redistributive effect decomposition to demonstrate how several taxes and deductions impact the post-tax income distribution. We show that tax deductions drastically reduce the redistributive effect of taxes because lump sum deductions in a progressive tax system lead to greater tax relief for higher income earners. Moreover, high income earners have additional options to claim deductions such as real-estate expenses or extra-mandatory payments to the pension scheme. Comparison over time furthermore shows that the role of deductions for real-estate expenses decreased. All in all, because deductions reduce the redistributive effect of taxes, they lead to higher post tax income inequality compared to a hypothetical system without deducations. The redistrubtive effect of the tax system should therefore be studied, not only with respect to tax rates, but also with respect to deductions.

Implications of US Tax Policy for House Prices, Rents, and Homeownership

This paper studies the impact of the mortgage interest tax deduction on equilibrium house prices, rents, homeownership, and welfare. We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible. We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership. (JEL H24, H31, R21, R31)

The Federalist Safeguards of Progressive Taxation

This Article considers the distributional consequences of the Supreme Court’s federalism jurisprudence over the past quarter century, focusing specifically on the anti-commandeering, anti-coercion, and state sovereign immunity doctrines. The first of these doctrines prevents Congress from compelling the states to administer federal programs; the second prevents Congress from achieving the same result through offers that for practical purposes the states cannot refuse; the third prohibits Congress from abrogating state sovereign immunity outside a limited class of cases. These doctrines vest the states with valuable entitlements and allow the states to sell those entitlements back to Congress for a price. In this respect, the doctrines have an intergovernmental distributional effect, shifting wealth from the federal government to the states. The distributional consequences of the anti-commandeering, anti-coercion, and state sovereign immunity doctrines are not purely intergovernmental, however. The doctrines also have potential implications for the distribution of wealth across individuals and households. By forcing Congress to bear a larger share of the costs of federal programs, and by shifting some of the costs of liability-imposing statutes from the states to Congress, these doctrines allow the states to raise less revenue and compel Congress to raise more. For a number of historical as well as structural reasons, the federal tax system is dramatically more progressive than even the most progressive state tax systems, and so the reallocation of fiscal responsibility resulting from these federalism doctrines causes more revenue raising to occur via the more progressive system. The likely net effect is a shift in wealth from higher-income households (who bear a larger share of the federal tax burden) to lower- and middle-income households (who would have borne a larger share of the burden of state taxes). This conclusion comes with a number of caveats. The distributional consequences of the Supreme Court’s federalism doctrines may be moderated—or magnified—by differences in federal and state spending priorities. Moreover, the doctrines may affect the size of government as well as the allocation of fiscal responsibility across levels of government (though the net effect on government size is ambiguous). And the doctrines may have distributional consequences that are not only interpersonal, but also intergenerational. What seems clear from the analysis in this Article is that federalism doctrines affect the distribution of income and wealth in subtle and sometimes unexpected ways, and that a comprehensive understanding of wealth inequality in the United States requires careful attention to key features of our fiscal constitution.

Welfare state structure, inequality, and public attitudes towards progressive taxation

AbstractRecent research indicates that while higher tax levels are politically unpopular, greater tax progressivity is not. However, there remain unanswered questions regarding public support for more progressive taxation. In particular, little is known about how individual attitudes towards tax progressivity are affected by their institutional context. Building on existing theories of redistribution, this article develops the argument that the structure of the welfare state shapes public attitudes towards progressive taxation—support for progressive taxation among both average and high-income households is undermined by ‘pro-poor’ welfare spending. We support our argument with a cross-sectional analysis of rich democracies, interacting household income with country-level indicators of welfare state structure. In doing so, we contribute a micro-level explanation for the paradoxical macro-level phenomenon that larger, more redistributive welfare states tend to be financed by less progressive tax systems.

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

Formation of a social state as a way of successful evolution of society

The author believes that it would be expedient to continue in scientific journals and mass media the reflection started in 2017 among varied layers of the population about ways of changing the society practiced in Soviet Russia a hundred years ago - revolutionarily simplified and scientifically substantiated, evolutionary ones. The topicality of this reflection enhances under the conditions of «financialization» of global economics that has concen¬trated 80% of the global income in the ownership of 1% of the world's population. Similar property cleavage and contrast between incomes of the population appeared in the financialized economy of post-Soviet Russia. They are indicative of synergic complexity of the Russian and other societies, intensify the need for their evolutionary selfdevelopment, excluding simplifications and resting on cultural specificities of the population. In Russia, the most favourable results were obtained when the regulatory influences from above and from below - from the state and from the civil society - were compromisingly combined. This combination may ensure the implementation of the concept of a social state as the constitutional principle of the Russian Federation (article 7 of the Constitution). Now Russia has come to the possibility of self-creation of a social state as a constitutional perspective and its historically new quality. Resting on general Russian and regional specificities, it would be appropriate to use the historically tested forms and methods of this process: complex modernization; multi-level balance of incomes and expenditures, progressive tax system for high incomes; principles of social market economy; consecutive enhancement of the role of the democratic law-state in creating conditions for man's self-development, his culture and civil society. An alternative might be socio-humanitarian and civilizational misfortunes.

The Optimal Progressive Tax Policy to Reduced Vehicles Externalities

Although much of the emphasis in taxation studies relates to a particular type of tax, the contribution of this paper by try to combine different taxes in one tax, whereby it was widely agreed that a mixture of the different taxes is regarded an ideal to reduced vehicle emissions. The study used existing empirical literature to prove that the taxes on vehicles alone are not sufficient to reduce vehicles externalities or short-term effects of these taxes, therefore there is need to impose a tax on emission source strongly due to the fact that many contemporary scholars proposed to taxation based on the actual emissions test, and car types/engines. The approach of the study was shown in the diagram which used to design a proposed progressive tax system which consists of a mix of different taxes. Therefore, the current study will add to the current literature, by provides background and details on taxes on vehicles and its operations. The aim will be to comment on them in terms of design and effectiveness in reducing emissions.

Analýza daňových systémů středoevropských zemí pomocí statistické simulace

This paper uses a parametric statistical simulation (Monte Carlo) model to investigate and com-pare the effective lifetime tax burden on variable incomes for private-sector employees in the Czech Republic, Slovakia, Poland and Hungary, based on current rates and calibrated against actual income distributions. It is shown that the existing Czech system is highly inefficient, lacking horizontal as well as vertical equity, and this is aggravated by increased income volatility. On the other hand, higher income risk in all countries, except Hungary using flat tax, results in less progression than expected, primarily due to the existence of a minimum wage, which effectively serves as insurance, and which the dynamic model captures as a system feedback. This finding may contribute to a reassessment of existing assumptions on the detrimental effect of progressive tax systems on the incentives of individuals to undertake risky decisions, such as investments in human capital.

Optimal Tax Progressivity: An Analytical Framework*

Abstract What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. On the other hand, progressivity reduces incentives to work and to invest in skills, distortions that are especially costly when the government must finance public goods. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preference, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the desire to finance government purchases play quantitatively similar roles in limiting optimal progressivity. In a version of the model where poverty constrains skill investment, optimal progressivity is close to the U.S. value. An empirical analysis on cross-country data offers support to the theory.