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Is progressive taxation fair and economically effective?
Most Validated
Sweden has a top tax rate of 70% and ranks consistently high on the Global Innovation Index.
Sweden's 70% top tax rate comes into play after c. $98,000 dollars, yet it remains one of the most successful high-income countries in the world.
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Less Validated
Sweden has problems with tax evasion because its tax is so progressive.
The Panama Papers and Paradise Papers revealed that some 400 Swedish companies and people had been keeping money in tax havens to avoid paying tax.
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Unchallenged
Progressive taxation incentivizes tax evasion and avoidance.
Some progressive tax structures incur greater total losses to tax evasion and avoidance and its associated costs than regressive tax structures. Tax evasion costs the US roughly $450 billion a year. Russia, which has a flat tax rate, loses roughly $40 billion dollars a year.
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Flat taxation systems are not necessarily better predictors of economic strength than progressive taxation systems.
Latvia, Estonia's neighbour, also adopted a flat tax and emerged as a strong economy after leaving the Soviet Union. But it was one of the worst-hit countries of the global financial crisis, with its economy falling by 10.5% in the last quarter of 2008 alone.
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Less Validated
Countries that have adopted a flat taxation rate have enjoyed significant growth.
Having emerged from the Soviet Union in 1991 and adopted a flat tax policy in 1994, Estonia grew by an annual average of 9% between 2001 and 2007—during which time it was also able to gradually reduce its tax rate.
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Less Validated
1 in 5 Estonians now lives in poverty.
21.1% of the population of Estonia (276,000 people) live in poverty. The country desperately needs progressive taxation policies.
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Most Validated
The tax system of the 1950s had so many loopholes that it created less revenue than periods of less progressive tax.
Tax revenues were 7.7% of GDP in1951-63. But by the end of Reagan's second term as president of the USA, tax revenues were 8.1% of GDP with a top tax rate of 28%. In the 1950s, the rich had plenty of options for avoding tax.
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Less Validated
During one of the strongest periods of economic growth in the USA, the top tax rate was far higher than today's.
The 1950s was a period of economic growth in the USA, where the economy saw an average real GDP growth rate of 4.2% year on year. The top tax bracket was 90%.
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Unchallenged
Despite paying more by way of progressive taxation, top earners have benefited from disproportionately high income growth rates.
The growth rate of real income for non-financial C-levels in the top 0.1% was 7 times higher even than those in the top 1% to 0.5%. Progressive tax does little to account for the huge disparities that exist right through to the top of the ladder.
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Most Validated
Progressive taxation reduces economic inequality.
In their study, economists Denvil Duncan and Klara Sabirianova Peter found that an increase in the top personal income tax rate by 1% is related to a decrease in GINI by 0.95 points.
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Less Validated
The difference in income inequality between American states with and those without a progressive tax hasn't changed in 10 years.
From 2007 to 2017, the average GINI coefficient in states with progressive tax rose from 0.453 to 0.468, which is the same increase as was seen in states without a progressive tax (0.445 to 0.460).
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Unchallenged
The cost of implementing progressive tax could be much higher than that of other systems of taxation.
Vittana reports that the Internal Revenue Service (IRS) estimates it could cost up to $200 billion to run a progressive taxation system across the United States. That money could be better spent on a range of other means of helping the poor.
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Unchallenged
Progressive tax means lower-income earners have more spending power and are better empowered to make decisions that affect economic demand.
With flat tax, someone who nets $41,000 ($50,000 after 18% tax) has a worse ratio of income to the dollar than someone netting $820,000 ($1 million after 18% tax). Conversely, progressive tax would increase the former's spending power, freeing up capital for big fiscal decisions.
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Unchallenged
The more progressive the tax in a country, the healthier it is likely to be both economically and socially.
Plotting data of 54 countries, researchers at the University of Virginia showed that the more progressive a country's taxation system, the more it can invest in public goods such as education and publication transportation, i.e. the more economically and socially healthy it is.
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Most Validated
Progressive tax reform results in a reduction in economic output.
Using a model of the US economy, Giménez and Pijoan-Mas find that less progressive tax reform results in a 2.4% increase in economic output, and more progressive reform results in a 2.6% decrease in economic output.
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Less Validated
Progressive tax systems for the poor do more to stimulate the economy than do tax breaks for the rich.
An Economy.com study shows that a $1 food stamp creates a value of $1.73 in terms of demand, whereas tax breaks for the rich only have a value of $1.33 in terms of demand.
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Unchallenged
Progressive tax can have a negative impact on welfare (even after improving economic inequality).
Heathcote, Storesletten and Violante find that progressive tax can mean fewer people seek further education as the return on investment is taxed more and hence the value of further education is worth less. This can mean increases in welfare spending.
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Most Validated
Alexandria Ocasio-Cortez's call for a 70% top marginal rate falls in line with cutting-edge analyses by leading tax economists.
In 2012, Peter Diamon (MIT) and Emmanuel Saez (Berkeley) made the case for 73% top rate. In line with developments in optimal tax theory, 73% would maximize tax revenue from top taxpayers whilst taking into account the variables that affect the tax elasticity of top incomes.
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Less Validated
Higher income taxes are not an effective way of taxing the rich.
As Bill Gates argued against Alexandria Ocasio-Cortez, raising the top tax rate to 70% is a "misfocus". The wealthy are wealthy because of the value of their stock and assets; the incomes of the ultra-rich don't always reflect how much they're worth.
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Unchallenged
Progressive taxation helps the poor pay for preventative health care, which in turn lowers the cost for everyone.
Hospital visits made by the uninsured cost $10 billion/year and 46% of hospital visits are made by people who can't afford preventative health care. Obamacare, a form of progressive tax levied on those who earn over $200,000/year, reduces the cost of health care for everyone.
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Unchallenged
The fairness of progressive tax depends on the system of the country in which it is applied.
In the UK progressive tax is found to be largely fair and has a net-zero effect on worsening income inequality. Once you factor in tax and benefits, those in the richest 20% have on average only five times more market spending power than those in the poorest 20%.
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Unchallenged
A tax rate too progressive can start to have a negative effect on a country's birth rate.
Finland's birth rate is declining and the country has a progressive tax, which includes marginal rates like 57% from €33,000 and 65% from €127,000. Per capita savings are very low for a wealthy country, which FT argues is why fewer young couples are inclined to have children.
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Unchallenged
Most people in advanced economies are in favor of more progressive taxes.
An OECD survey found that two-thirds of people in economically rich countries want higher taxes on the wealthy. Those from high-income households perceived their countries less fair than those with broad social infrastructure (like Denmark, Norway, and the Netherlands).
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Unchallenged
Elizabeth Warren's wealth tax is a more effective way of taxing the ultra-wealthy than progressive income tax.
Ultra-wealthy Warren Buffet, worth $84 billion, pays himself $100,000/year. But the presidential candidate Elizabeth Warren's plan is to tax people with wealth above $50 million 2%/year and then 1%/year on wealth over $1 billion. This will generate more in tax revenue.
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Unchallenged
More progressive tax means fewer barriers to education and training for high-earning jobs.
For example, the cost of becoming a dentist in the USA averages $215,000. But in Sweden, where tax is more progressive, education is free; students are given $340/month, and can borrow an additional $700/month. The max a 5-year dental programme can cost you is only $42,000.