Progressive income taxes: Equity vs Efficiency????

This article (written by Ezra Klein) is from a year ago. In an interesting way, it addresses many of the issues that we have discussed through the course.

Most agree that a progressive income tax is needed to narrow the market-determined distribution of income (which is often inequitable), reduce some of the externalities of poverty, and redress the regressiveness of sales taxes (the consumption tax in Japan). The main argument against high marginal rates of tax has been that they could reduce the incentive to work and to take risks and thus impede the rate of economic growth.

But look at these charts*
Taxes and Growth

Since the 1930s, the top marginal tax rate has swung from a high of 94 percent to a low of 28 percent. But, contrary to conventional wisdom, America has often grown faster during high-tax periods than low-tax periods.

In the article Mr Klein refers to the income and substitution effects of higher taxes. The implication is that the former is stronger. A “rich man” states that if he had had to pay higher taxes, he would have worked harder to reach his target income.

I recommend you read the whole article. It is very well written.


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