A progressive tax is a tax in which the in- about 1% and a flat on each adult, this made creases as the taxable amount increases.[1][2][3][4][5] The the tax system less progressive (as it no longer only taxed term “progressive” refers to the way the tax rate pro- wealth) and closer to an .[18] gresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate.[6][7] The term can be applied to individual taxes or 1.2 Modern era to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is a , where the relative tax rate or burden decreases as an individual’s ability to pay increases.[5] The term is frequently applied in reference to personal income taxes, in which people with lower income pay a lower percentage of that income in tax than do those with higher income. It can also apply to adjustments of the tax base by using tax exemptions, tax credits, or selective taxation that creates progressive distribution effects. For A caricature of William Pitt the Younger collecting the newly in- [8] example, a wealth or property tax, a on luxury troduced income tax. goods, or the exemption of sales taxes on basic necessi- ties, may be described as having progressive effects as it The first modern income tax was introduced in Britain by increases the tax burden of higher income families and Prime Minister William Pitt the Younger in his budget [9][10][11] reduces it on lower income families. of December 1798, to pay for weapons and equipment Progressive taxation is often suggested as a way to mit- for the French Revolutionary War. Pitt’s new graduated igate the societal ills associated with higher income in- (progressive) income tax began at a levy of 2 old pence equality,[12] as the tax structure reduces inequality,[13] in the pound (1/120) on incomes over £60 (£5,641 as of but economists disagree on the tax policy’s economic and 2015),[19] and increased up to a maximum of 2 shillings long-term effects.[14][15][16] Progressive taxation has also (10%) on incomes of over £200. Pitt hoped that the new been positively associated with happiness, the subjective income tax would raise £10 million, but actual receipts well-being of nations and citizen satisfaction with public for 1799 totalled just over £6 million.[20] [17] goods, such as education and transportation. Pitt’s income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1 History 1801, after Pitt’s resignation over Catholic Emancipation. The income tax was reintroduced by Addington in 1803 1.1 Early examples when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo. A tax on In the early days of the Roman Republic, public taxes incomes over a certain amount is a two bracket graduated consisted of assessments on owned wealth and property. progressive tax, similar to those still in use in Sweden. The tax rate under normal circumstances was 1% of prop- Bottom brackets of 0% are almost universal, whether they erty value, and could sometimes climb as high as 3% in are called “earned income credits” or appear explicitly in situations such as war. These taxes were levied against tax tables. land, homes and other real estate, slaves, animals, per- The United Kingdom income tax was reintroduced by sonal items and monetary wealth. By 167 BC, Rome no Sir Robert Peel in the Income Tax Act 1842. Peel, as longer needed to levy a tax against its citizens in the Ital- a Conservative, had opposed income tax in the 1841 ian peninsula, due to the riches acquired from conquered general election, but a growing budget deficit required provinces. After considerable Roman expansion in the a new source of funds. The new income tax, based on 1st century, Augustus Caesar introduced a wealth tax of Addington’s model, was imposed on incomes above £150

1 2 3 ECONOMIC EFFECTS

(£12,611 as of 2015),[19]. Although this measure was ini- marginal rate will be constant. Usually, the average tax tially intended to be temporary, it soon became a fixture rate of a tax payer will be lower than the marginal tax rate. of the British taxation system. A committee was formed In a system with refundable tax credits, or income-tested in 1851 under Joseph Hume to investigate the matter, but welfare benefits, it is possible for marginal rates to fall as failed to reach a clear recommendation. Despite the vo- income rises, at lower levels of income. ciferous objection, William Gladstone, Chancellor of the Exchequer from 1852, kept the progressive income tax, and extended it to cover the costs of the Crimean War. By 2.2 Inflation and tax brackets the 1860s, the progressive tax had become a grudgingly accepted element of the English fiscal system.[21] Many tax laws are not accurately indexed to inflation. Ei- ther they ignore inflation completely, or they are indexed In the , the first progressive income tax to the Consumer Price Index (CPI), which tends to un- was established by the . This was derstate real inflation. In a progressive tax system, failure signed into law by President and re- to index the brackets to inflation will eventually result in pealed the flat tax, which had had been brought in under effective tax increases (if inflation is sustained), as infla- the Revenue Act of 1861. By the mid-20th century, most tion in wages will increase individual income and move countries had implemented some form of progressive in- individuals into higher tax brackets with higher percent- come tax.[22] age rate. This phenomenon is known as bracket creep and can cause fiscal drag. 2 Measuring progressivity 3 Economic effects Indices such as the Suits index,[8] Gini coefficient, Kakwani index, Theil index, Atkinson index, and Hoover index have been created to measure the progressivity of 3.1 Income equality taxation, using measures derived from income distribu- tion and wealth distribution.[23] Main article: Economic inequality

Progressive taxation has a direct effect on reducing 2.1 Marginal and effective tax rates income inequality.[13] This is especially true if taxation is used to fund progressive government spending such as transfer payments and social safety nets.[12] However, the effect may be muted if the higher rates cause in- creased tax evasion.[13][24] When income inequality is low, aggregate demand will be relatively high, because more people who want ordinary consumer goods and ser- vices will be able to afford them, while the labor force will not be as relatively monopolized by the wealthy.[25][26] High levels of income inequality can have negative effects on long-term economic growth, employment, and class conflict.[27][28] Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality.[12] The difference between the Gini index for an income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation.[29] German marginal and average income tax rates display a pro- There is debate between politicians and economists over gressive structure. the role of tax policy in mitigating or exacerbating wealth inequality and the effects on economic growth. For ex- Main articles: Marginal tax rate and Effective tax rate ample, economists Thomas Piketty and Emmanuel Saez wrote that decreased progressiveness in US tax policy in The rate of tax can be expressed in two different ways; the post World War II era has increased income inequal- the marginal rate expressed as the rate on each additional ity by enabling the wealthy greater access to capital,[14] unit of income or expenditure (or last dollar spent) and Conversely, a report published by the OECD in 2008 the effective (average) rate expressed as the total tax paid presented empirical research showing a negative relation- divided by total income or expenditure. In most progres- ship between the progressivity of taxes and economic sive tax systems, both rates will rise as the amount subject growth.[15] Describing the research, economist William to taxation rises, though there may be ranges where the McBride stated that progressivity can undermine invest- 3

ment, risk-taking, entrepreneurship, and productivity be- cause high-income earners tend to do much of the saving, investing, risk-taking, and high-productivity labor.[30][31] Professor Robert H. Frank states that tax cuts for the wealthy are largely spent on positional goods such as larger houses and more expensive cars, which could have been used to pay for things like improving public ed- ucation and conducting medical research,[32] and sug- gests progressive taxation as an instrument for attacking positional externalities.[33]

3.2 Educational attainment

Economist Gary Becker has described educational attain- “Tax The Rich” banner at an IUSY campaign for a financial ment as the root of economic mobility.[34] Progressive transaction tax. tax rates, while raising taxes on high income, have the goal and corresponding effect of reducing the burden on ment social programs for low income earners, calls for in- low income, improving income equality. Educational at- creasing tax progressivity have sometimes been labeled as tainment is often conditional on cost and family income, envy or class warfare,[33][45][46] while others may describe which for the poor, reduces their opportunity for educa- [46][47] [35][36] such actions as fair or a form of social justice. Law tional attainment. Increases in income for the poor professor Marjorie Kornhauser has suggested that much and economic equality reduces the inequality of educa- [37][38] of the opposition to progressive taxation is caused by tional attainment. Tax policy can also include pro- ignorance, cognitive bias, and inflammatory rhetoric, and gressive features that provide tax incentives for education, would be reduced if a nationwide education campaign such as tax credits and tax exemptions for scholarships [39][40] taught the public about progressive taxation and told them and grants. that it benefits their self-interests.[48] A potentially adverse effect of progressive tax sched- ules is that they may reduce the incentives for educa- tional attainment.[16][36][41] By reducing the after-tax in- 5 Computation come of highly educated workers, progressive taxes can reduce the incentives for citizens to attain education, There are two common ways of computing a progres- thereby lowering the overall level of human capital in an sive tax, corresponding to point–slope form and slope– economy.[16][36][41] However, this effect can be mitigated intercept form of the equation for the applicable bracket. by an education subsidy funded by the progressive tax.[42] These compute the tax either as the tax on the bottom Theoretically, public support for government spending on amount of the bracket plus the tax on the marginal amount higher education increases when taxation is progressive, within the bracket; or the tax on the entire amount (at the especially when income distribution is unequal.[43] marginal rate), minus the amount that this overstates tax on the bottom end of the bracket. For example, suppose there are tax brackets of 10%, 4 Psychological factors 20%, and 30%, where the 10% rate applies to income from $1 to $10,000; the 20% rate applies to income from Tax law professor Thomas Griffith, summarizing re- $10,001 to $20,000; and the 30% rate applies to all in- search on human happiness, has argued that because come above $20,000. In that case the tax on $20,000 of inequality in a society significantly reduces happiness, income (computed by adding up tax in each bracket) is a progressive tax structure which redistributes income 10% × $10,000 + 20% × $10,000 = $1,000 + $2,000 would increase welfare and happiness in a society.[44] A = $3,000. The tax on $25,000 of income could then be 2011 social psychology study, using data from 54 coun- computed two ways. Using point–slope form (tax on bot- tries, found that progressive taxation was positively asso- tom amount plus tax on marginal amount) yields: ciated with the subjective well-being, while overall tax rates and government spending were not. The authors added, “we found that the association between more- $3, 000+($25, 000−$20, 000)×30% = $1, 500+$3, 000 = $4, 500. progressive taxation and higher levels of subjective well- being was mediated by citizens’ satisfaction with public Geometrically, the line for tax on the top bracket passes goods, such as education and public transportation.”[17] through the point ($20,000, $3,000) and has a slope of Since progressive taxation reduces the income of high 0.3 (30%). earners and is often used as a method to fund govern- Alternatively, 30% tax on $20,000 yields 30% × $20,000 4 7 SEE ALSO

= $6,000, which overstates tax on the bottom end of the Most systems around the world contain progressive as- top bracket by $6,000 − $3,000 = $3,000, so using slope– pects. When taxable income falls within a particular tax intercept form yields: bracket, the individual pays the listed percentage of tax on each dollar that falls within that monetary range. For example, a person in the U.S. who earned $10,000 US $25, 000×30%−$3, 000 = $7, 500−$3, 000 = $4, 500. of taxable income (income after adjustments, deductions, and exemptions) would be liable for 10% of each dollar Geometrically, the line for tax on the top bracket inter- earned from the 1st dollar to the 7,550th dollar, and then cepts the y-axis at −$3,000 – it passes through the point for 15% of each dollar earned from the 7,551st dollar to (0, −$3,000) – and has a slope of 0.3 (30%). the 10,000th dollar, for a total of $1,122.50. In the United States, the first form was used through 2003, In the United States, there are seven income tax brackets for example (for the 2003 15% Single bracket):[49] ranging from 10% to 39.6% above an untaxed level of in- come based on the personal exemption and usually vari- • If the amount on Form 1040, line 40 [Taxable In- ous other tax exemptions, such as the Earned Income Tax come], is: Over— 7,000 Credit and home mortgage payments. The US federal tax system also includes deductions for state and local taxes • But not over— 28,400 for lower income households which mitigates what are sometimes regressive taxes, particularly property taxes. • Enter on Form 1040, line 41 [Tax] $700.00 + 15% Higher income households are subject to the Alternative Minimum Tax that limits deductions and sets a flat tax • of the amount over— 7,000 rate of 26% to 28% with the higher rate commencing at $175,000 in income. There are also deduction phaseouts From 2004, this changed to the second form, for example starting at $112,500 for single filers. The net effect is [50] (for the 2004 28% Single bracket): increased progressivity that completely limits deductions for state and local taxes and certain other credits for indi- • Taxable income. If line 42 is— At least $100,000 viduals earning more than $306,300.[52] but not over $146,750 New Zealand has the following income tax brackets (for • (a) Enter the amount from line 42 the 2012–2013 financial year): 10.5% up to NZ$14,000; 17.5% from $14,001 to $48,000; 30% from $48,001 to • (b) Multiplication amount × 28% (.28) $70,000; 33% over $70,001; and 45% when the em- ployee does not complete a declaration form.[53] All val- • (c) Multiply (a) by (b) ues are in New Zealand dollars and exclude the earner • (d) Subtraction amount $ 5,373.00 levy. Australia has the following progressive income tax rates • Tax. Subtract (d) from (c). Enter the result here and (for the 2012–2013 financial year): 0% effective up to on Form 1040, line 43 A$18,200; 19% from $18,201 to $37,000; 32.5% from $37,001 to $80,000; 37% from $80,001 to $180,000; and 45% for any amount over $180,000.[54] 6 Examples

7 See also

• Land value tax

• Optimal tax

• Pigovian tax

• Property tax

•

• Redistribution of income and wealth

Distribution of US federal taxes from 1979 to 2013, based on • Regressive tax CBO Estimates.[51] • Robin Hood effect See also: Tax rates around the world • Suits index 5

• Taxable income elasticity [15] Arnold, Jens (14 Oct 2008). “Do Tax Structures Affect Aggregate Economic Growth? Empirical Evidence From • Tax evasion A Panel of OECD Countries”. OECD. Retrieved 2 Jan 2014. • Tax incidence [16] Becker, Gary S.; Murphy, Kevin M. (May 2007). “The • Wealth tax Upside of Income Inequality”. American Enterprise In- stitute. Retrieved Jan 8, 2014. 8 References [17] Shigehiro Oishi, Ulrich Schimmack, and Ed Diener,. Pro- gressive Taxation and the Subjective Well-Being of Nations. Psychological Science 23(1) 86–92. (Published online be- [1] Webster (4b): increasing in rate as the base increases (a fore print December 8, 2011). progressive tax) [18] Roman Taxes. Unrv.com. Retrieved on 2014-04-12. [2] American Heritage (6). Increasing in rate as the taxable amount increases. [19] UK CPI inflation numbers based on data available from Gregory Clark (2015), "The Annual RPI and Average [3] Britannica Concise Encyclopedia: Tax levied at a rate that Earnings for Britain, 1209 to Present (New Series)" Mea- increases as the quantity subject to taxation increases. suringWorth. [4] Princeton University WordNet: (n) progressive tax (any tax in which the rate increases as the amount subject to [20] “A tax to beat Napoleon”. HM Revenue & Customs. Re- taxation increases) trieved 2007-01-24.

[5] Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. An- [21] Steven A. Bank (2011). Anglo-American Corporate Taxa- derson, Betty R. Jackson (1992), Concepts of Taxation, tion: Tracing the Common Roots of Divergent Approaches. Dryden Press: Fort Worth, TX Cambridge University Press. pp. 28–29.

[6] Hyman, David M. (1990) Public Finance: A Contempo- [22] James, Kathryn (2011). “Exploring the Origins and rary Application of Theory to Policy, 3rd, Dryden Press: Global Rise of VAT”. Journal of Economics 35 (4): 15- Chicago, IL 22. Retrieved 3 October 2014.

[7] James, Simon (1998) A Dictionary of Taxation, Edgar El- [23] Philip B. Coulter: Measuring Inequality, 1989, ISBN 0- gar Publishing Limited: Northampton, MA 8133-7726-9 (This book describes about 50 different in- equality measures.) [8] Suits, Daniel B. (September 1977). “Measurement of Tax Progressivity”. American Economic Review 67 (4): 747– [24] Duncan, Denvil, Klara Sabirianova Peter (October 2012). 752. Retrieved 28 January 2014. “Unequal Inequalities: Do Progressive Taxes Reduce In- come Inequality?" (PDF). Institute for the Study of Labor. [9] at the Wayback Machine (archived August 16, 2007): The luxury tax is a progres- [25] The Economics of Welfare| Arthur Cecil Pigou sive tax – it takes more from the wealthy than from the poor. [26] Andrew Berg and Jonathan D. Ostry, 2011, "Inequality and Unsustainable Growth: Two Sides of the Same [10] Luxury tax – Britannica Online Encyclopedia: levy Coin?" IMF Staff Discussion Note SDN/11/08, on goods or services considered to be luxuries rather than International Monetary Fund necessities. Modern examples are taxes on jewelry and perfume. Luxury taxes may be levied with the intent of [27] Alesina, Alberto; Dani Rodrick (May 1994). taxing the rich... “Distributive Politics and Economic Growth” (PDF). [11] Clothing Exemptions and Sales Tax Regressivity, By Jef- Quarterly Journal of Economics 109 (2): 465–90. frey M. Schaefer, The American Economic Review, Vol. doi:10.2307/2118470. Retrieved 17 October 2013. 59, No. 4, Part 1 (Sep., 1969), pp. 596–599 [28] Castells-Quintana, David; Vicente Royuela (2012). [12] Pickett, Kate; Wilkinson, Richard (April 26, 2011). “Unemployment and long-run economic growth: The role The Spirit Level: Why Greater Equality Makes Societies of income inequality and urbanisation” (PDF). Investiga- Stronger. Bloomsbury Press. ISBN 978-1608193417. ciones Regionales 12 (24): 153–173. Retrieved 17 Octo- ber 2013. [13] Moyes, P. A note on minimally progressive taxation and absolute income inequality Social Choice and Wel- [29] Shlomo Yitzhaki (1998). “More than a Dozen Alterna- fare, Volume 5, Numbers 2-3 (1988), 227–234, DOI: tive Ways of Spelling Gini” (PDF). Economic Inequality 10.1007/BF00735763. Accessed: 19 May 2012. 8: 13–30.

[14] Piketty, Thomas, and Emmanuel Saez. “Income Inequal- [30] McBride, William (December 18, 2012). “What Is the ity in the United States, 1913–1998”. Tech. 1st ed. Vol. Evidence on Taxes and Growth?". Tax Foundation. Re- CXVIII. Quarterly Journal of Economics, 2003. trieved January 2, 2014. 6 9 EXTERNAL LINKS

[31] McBride, William (February 20, 2013). “Comments on [42] Krueger, Dirk; Ludwig, Alexander (May 2013). “Optimal Who Pays? A Distributional Analysis of the Tax Systems Progressive Labor Income Taxation and Education Sub- in All 50 States”. Tax Foundation. Retrieved January 2, sidies When Education Decisions and Intergenerational 2014. Transfers Are Endogenous”. American Economic Review 103 (3): 496–501. doi:10.1257/aer.103.3.496. Retrieved [32] Frank, Robert H. “Positional Externalities Cause Large 28 January 2014. and Preventable Welfare Losses” (PDF). American Eco- nomic Association. Retrieved March 17, 2014. [43] Ansell, Ben (2010). From the Ballot to the Blackboard: The Redistributive Political Economy of Education. Cam- [33] Frank, Robert H. (June 2003). “Are Positional External- bridge University Press. p. 175. Under conditions of high ities Different from Other Externalities?" (PDF). Brook- income inequality and tax progressivity, there will be even ings Institution. Retrieved March 17, 2014. greater support for higher education spending even if most people do not receive it [34] Becker, Gary S. (October 15, 2013). “Becker Explores the Roots of Upward Mobility”. The University of [44] Griffith, Thomas D. (2004). “Progressive Taxation And Chicago. Retrieved January 24, 2014. Happiness”. Boston Law Review. Retrieved March 17, 2014. [35] Campbell, Mary; Haveman, R.; Sandefur, G.; Wolfe, B. (2005). “11 Economic inequality and educational attain- [45] Powell, Jim (October 17, 2012). “Class Warfare: The ment across a generation”. Focus 23 (3): 11–15. we found Mortal Enemy Of Economic Growth And Jobs”. Forbes. that family income and wealth have positive and statisti- Retrieved February 3, 2014. cally significant links to attainment: children who grow up in families with higher income and greater wealth receive [46] Kim, Susanna (Sep 19, 2011). “Warren Buffett Rule: more schooling. Class Warfare or Tax Fairness?". ABC News. Retrieved February 3, 2014. [36] Mueller, Richard (May 2008). Access and Persistence of Students from Low ‐ Income Backgrounds in Cana- [47] Egypt constitution panel rejects article on progressive taxa- dian Post ‐ Secondary Education: A Review of the Liter- tion, Ahram Online, 11 Nov 2013, retrieved February 3, ature. MESA Project. Educational Policy Institute. stu- 2014 dents from low income backgrounds are more sensitive to changes in tuition and aid packages than their colleagues [48] Kornhauser, Marjorie (September 1, 2004). “Educating from higher income families, as are students attending Ourselves Towards a Progressive (and Happier) Tax: A community colleges compared to universities. Commentary on Griffith’s Progressive Taxation and Hap- piness”. Boston College Law Review. Retrieved February [37] Campbell, Mary; Haveman, R.; Sandefur, G.; Wolfe, B. 3, 2014. (2005). “11 Economic inequality and educational attain- ment across a generation” (PDF). Focus 23 (3): 11–15. [49] Form 1040 Instructions (2003), 2003 Tax Rate Schedules, [Implications of increased economic inequality:] Average p. 74 achievement goes up slightly, but so does the variability of achievement. Average years of schooling increase by less [50] Form 1040 Instructions (2004), 2004 Tax Computation than 1 percent. Inequality, in contrast, increases substan- Worksheet—Line 43, p. 72 tially, by over 8 percent when all four measures of inequal- ity are considered together. Moreover, a higher proportion [51] “The Distribution of Household Income and Federal of students do not complete high school or 11th grade. Taxes, 2010”. The US Congressional Budget Office (CBO). 2013-12-04. Retrieved 2014-01-06. [38] Checchi, Daniele (May 2001). “Education, Inequality and Income Inequality”. Distributional Analysis Research [52] 26 USC 55. Also see IRS Form 6251 (individuals) and Programme Papers 52. Suntory and Toyota International Form 4626 (corporations). Centres for Economics and Related Disciplines, LSE. in- [53] “Income tax rates for individuals”. ird.govt.nz. Inland come inequality effectively reduces school enrollment, Revenue Department (New Zealand). Retrieved 15 May mainly at secondary level. 2013. [39] “Growth in Means-Tested Programs and Tax Credits for [54] “Individual income tax rates”. ato.gov.au. Australian Tax- Low-Income Households”. Congressional Budget Office. ation Office. Retrieved 15 May 2013. February 11, 2013. Retrieved January 28, 2014.

[40] Rachel Johnson, James Nunns, Jeffrey Rohaly, Eric Toder, Roberton Williams (July 2011). “Why Some Tax 9 External links Units Pay No Income Tax” (PDF). Tax Policy Center. Re- trieved January 28, 2014. • The Progressive Income Tax: Theoretical Founda- [41] Heckman, J., L. Lochner and C. Tabner, Tax Policy and tions Human Capital Formation, American Economic Review, 88, 293–297. Accessed: 31 July 2012. • What’s Wrong with the Progressive Income Tax 7

• Slemrod, Joel B. (2002). “Progressive Taxes”. In David R. Henderson (ed.). Concise Encyclopedia of Economics (1st ed.). Library of Economics and Lib- erty. OCLC 317650570, 50016270 and 163149563 • Apps, P. F., & Rees, R. (2014). Optimal taxation, child care and models of the household. 8 10 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

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