A STUDY ON PROGRESSIVE INCOME TAX
A CASE STUDY OF US & BRAZIL
INSTRUCTOR: DALIA EL-EDEL
ECON 310-02 TERM PAPER - BY:
JIHAD MASHAMOUN 900-08-2910
LARA AZZAM 900-09-3033
LUJANE MULLA 900-10-1019
There is no doubt that the widening income disparities were a major driving force fueling the recent uprisings within the Middle East. One solution that has been put forth for adoption is the progressive income tax. This paper intends to assess the theoretical bases and popular arguments surrounding this very dynamic topic. The first section provides a brief definition of progressive taxation in contrast with other forms of taxation. It ...view middle of the document...
As the individual’s income enters a higher tax bracket, only the share of income that falls into that bracket is taxed at the higher rate. Hence the marginal tax rate is always above the average tax rate. Opposite to the progressive tax rate is the regressive tax rate whereby tax rate decreases as income increases. The simplest form of taxation is the flat tax rate in which one constant tax rate applied to all regardless of income level. (D. Hyman, 2011)
Progressive Tax Rate Regressive Tax rate Flat Tax Rate
There have been numerous debates regarding the economic costs and benefits of the progressive income tax rate especially with regards to equality, efficiency and overall tax compliance and revenue collection.
To begin with in terms of equality, some believe that the basic idea of different tax rates opposes equity favoring other forms such as lump sum tax or flat tax. However this argument falls apart when considering the declining marginal utility of money; a dollar has a greater marginal benefit, more valuable, in the hands of low income earners than for high income earners. Progressive income tax is ideally the best implementation of the ability to pay principle which states that citizens with greater ability to earn income should be taxed more heavily than those with less capacity to earn. (D. Hyman, 2011) Thus theoretically it achieves both horizontal and vertical equity, not only in nominal terms, as with the flat tax rate, but also in terms marginal benefit and sacrifice.
Flat Regressive Progressive
Vertical equity (Nominal): those with differing economic capacity pay annual tax bills that differ in dollar amount.
Vertical equity accounting for Sacrifice (MB): those with differing economic capacity pay annual tax bills that reflect their marginal benefit and sacrifice
Horizontal equity; same economic capacity pay same amount of taxes
On the other hand, the resultant redistribution of income violates the core of the benefit principle which states that those who enjoy the benefits should pay the cost. However when considering the benefits individuals and corporations get from the government as highlighted in President Obama’s “You didn’t build that” speech: “There is nobody in this country that got rich on his own — nobody. You built a factory out there….You moved your goods on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for…. you built a factory and it turned into something terrific — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.” (Obama, 2011)
In addition progressive tax rates protect those in lower income brackets during recession because they are the most vulnerable. (Clarke, 2009) Not only do they depend more on income to cover for...