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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. wherewithal. 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. Reducing Income Inequality. Surprisingly, the literature contains only infrequent and oblique references to this crucial aspect of tax theory. Moreover, this is the largest reduction in inequality of 12 middle-income countries analysed using the same method. This book is an exhaustive review of the prior literature on this topic, interspersed with the authors’ own analyses and critiques of the arguments presented. But based on an examination of the various tax principles and theories described in the literature, together with a critical analysis of the arguments supporting and opposing progression, it’s possible to put forward a new doctrine of fairness. An efficient tax system is one that does the least to distort the allocation of resources in the economy, thus maximizing overall production. . Redistribution has been justified by some as a means of rectifying social injustice in the economic system. However, there are several difficulties with the sacrifice theory itself that render it untenable as an argument for progression. That said, over the longer term too much inequality may be inimical to growth. The income tax has become much more progressive in the past 30 years, resulting in a situation in which a relatively small minority of taxpayers pay the bulk of … Your gift helps advance ideas that promote a free society. The most compelling argument against the use of the progressive income tax to redistribute income is simply that it is inequitable. Government spending is progressive if the share of the monetary value of government goods and services (i.e. Ironically, a progressive income tax can even have the extraordinary effect of increasing rather than reducing income differences. The intellectual basis for the exemption, from the point of view of the state, emanated from the notion that income needed for subsistence constituted an expense of production, while income above this amount was “surplus” or “clear” income, i.e., net of production costs (an insight attributed to the economist David Ricardo). Harry and his wife, on the other hand, saved most of her after-tax income over many years, gradually accumulating $300,000. This indicates that more progressive income tax policies (e.g., higher income taxes on the wealthy and a higher earned-income tax credit) would reduce after-tax income inequality. Now consider Tom’s and Dick’s situation: Knowing that Harry is the most industrious of the brothers and was unlikely to need their help, Harry’s parents made it clear that when they died they would leave all of their rather significant estate to the less industrious brothers, leaving nothing to Harry. The Founding Fathers made clear their vision for America in the Declaration of Independence when they spoke of the “unalienable rights” of all Americans to “life, liberty and the pursuit of happiness.” There is no basis for believing that a low-income person’s life is worth more or less to an individual (as contrasted with an insurance actuary, an economist, or a jury assessing damages in a wrongful death case) than the life of a high-income person. Taxes are an important source of revenue for the government and progressive tax is one of the structures of the tax system, it refers to that system in which as the income of the individual increases his or her tax liability will increase and vice versa. These tax systems are outside the scope of this essay. Thus, a proportionate or degressive tax as proposed, would favor lower-income persons at the expense of higher-income persons. The Census Bureau’s so-called “15th measure of income” adds to money income, transfer payments, insurance supplements, capital gains, Medicare, Medicaid, net imputed return on equity in owned homes, and subtracts taxes. 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. At the top of the income distribution, our research shows that marginal tax rates can be raised without sacrificing economic growth. The Inequity of the Progressive Income Tax . The results indicate, first, that direct taxes (personal income tax plus payroll taxes) are progressive, since the richer income groups pay a proportionally higher share of total direct tax collections than their share of market income. The Distributional Impact of Fiscal Policy in South Africa. advancing ideas defining a free Cash transfers – especially the child support grant – are the most progressive of all spending programmes. Since 1932, statewide income tax proposals have failed nine times. . A progressive tax, which taxes incremental income at higher marginal rates as income rises, resulting in an increase in taxes as a percentage of income as income increases. By Brian Garst. It is noteworthy that this “ingenious” approach is entirely consonant with the “greater-value” interpretation of the benefits principle. 2015. Again, our parable is instructive: Assume that Harry’s boss is a construction foreman who works 40 hours a week at $37.50 per hour, thus earning $75,000 per year (which is the entirety of the family income). A more progressive tax system would reduce income inequality if nothing else changes. Ironically, if by “progressive income tax” Buffett’s ultimate goal is to have the wealthy pay a greater share of the tax burden, lowering the tax rates is the best way to achieve it. Another common claim is that incomes in the U.S. have been stagnant for “decades.” But this claim is at odds with data from the Congressional Budget Office, which uses a measure of household income that, like the Luxembourg measure, is quite comprehensive, taking into account transfer payments, health and retirement benefits, profits from retirement accounts, imputed interest on owner occupied homes, differences in household size, and taxes paid. Fourth, even if the protection argument had merit, it would, at best, argue for a proportionate rather than a progressive tax. But as federal taxes became more progressive starting in the 1980s, the gap between before-tax and after-tax income inequality widened. This significantly raises their ‘final’ incomes. Reversing these policies and top-heavy tax cuts like the 2017 Tax Cuts and Jobs Act would help ensure that the tax code does not exacerbate racial inequity. EXECUTIVE SUMMARY 3 transfers have typically lowered the measure of overall income inequality (the Gini Together these comprise about 64.5% of general government tax revenue in 2010/11. Another clear message from the data is that Australia’s progressive tax system and highly targeted transfer system substantially reduce income inequality. This was quickly met with lawsuits and a ruling that it violated current law. Fifth, the application of sacrifice theory would be plainly unfair to the people in a society who work the hardest. 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. This suggests that the most notable economic inequality in the world is that between Americans and the citizens of all other countries. (Note that in this all-too-common circumstance, where both aptitudes and benefits are equal, even a proportionate or degressive tax is redistributive with respect to the hardest workers.) 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. These rebuttals to the arguments for progression, should be sufficient to settle the case. Sacrifice theory is dependent upon the economic principle that holds there is a marginal-utility curve for money to the effect that the more money one earns, the less utility (or satisfaction) will be derived from the last dollar earned. Both the IRS and California assess tax based on tax brackets, which are the divisions at which tax rates change in a progressive tax system. In the view of British economist Arthur Pigou and others, there is no way to prove this is true: All that the law of diminishing utility asserts is that the last ₤1 of a ₤1000 income carries less satisfaction than the last ₤1 of a ₤100 income does. Tom was ready with his answer. Empty homes should automatically be taxed at a higher rate. 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. Inchauste G, Lustig N, Maboshe M, Purfield C & Woolard I. Why are some societies much more innovative than others, and thus much more prosperous? Support for this latter surmise comes from a 2010 study which concluded that “in the 2000s overall consumption inequality shows little change.”20. The estimated benefits of budget components such as defence or infrastructure (e.g. 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. Neither Tom’s nor Dick’s wives worked, while Harry’s wife worked 40 hours per week as an office manager making $50,000 per year (the same hourly rate as her husband). On conceptual grounds alone, sacrifice theory appears to be a very weak foundation for tax policy. In their World Inequality Report published in December 2017, Piketty, Saez and coauthors revealed that in "Russia and the United States, the rise in wealth inequality has been extreme, whereas in Europe it has been more moderate." A downward slope indicates, for example, that an incremental $1,000 has greater utility to a person earning $10,000 a year than it has to someone earning $100,000. 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