Just as an efficient tax system can improve a nation’s standard of living by insuring that taxes do not harm welfare, so can tax rate progressivity make important contributions to the well-being of citizens by helping to reduce inequality. Yet in recent decades, there has been an increased focus on economic efficiency in formulating tax policy, which has resulted in decreased rate progressivity in our individual income tax. That decrease has exacerbated inequality.
Inequality imposes measurable costs on the health, social well-being, and intergenerational mobility of our citizens, as well as on our democratic process. These findings are corroborated by significant empirical analysis.
In contrast, anticipated economic efficiency gains from low individual tax rates are speculative. A consensus exists among economists that taxes within the historical range of rates in the United States have little or no impact on labor supply. Moreover, economists cannot agree whether the myriad empirical studies on savings indicate that progressive tax rates decrease, increase, or have no impact on savings in the United States.
The clear harms arising from inequality and the uncertain harms arising from progressive tax rates, strongly support always giving equity at least equal weight with efficiency in formulating tax policy. But given the high level of inequality in the United States and the currently low and flat tax rate structure, equity should be given more weight than efficiency at this time.
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Professor James Repetti’s article, “The Appropriate Roles for Equity and Efficiency in a Progressive Income Tax,” forthcoming in Florida Tax Review, can be downloaded at SSRN.com. Footnotes to all source data in the information graphic can be found there.
Sources: CBO, The Distribution of Household Income; “The U.S. Income Distribution and Mobility: Trends and International Comparisons”; “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data”; “The Asset Price Meltdown and the Wealth of the Middle Class”; Bradford Tax Institute, History of Federal Income Tax Rates: 1913–2018; Tax Policy Center; “Distributional National Accounts: Methods and Estimates for the United States”; “Why Hasn’t Democracy Slowed Rising Inequality?”; Death by a Thousand Cuts; “Income Inequality, Equality of Opportunity, and Intergenerational Mobility”; The Spirit Level: Why Greater Equality Makes Societies Stronger.