Progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term progressive refers to the way the tax rate progresses from low to high, with the result that a taxpayer's average tax rate is less than the person's marginal tax rate. The term can be applied to individual taxes or to a tax system as a whole. 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 regressive tax, such as a sales tax, where the poor pay a larger proportion of their income compared to the rich.
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 example, a wealth or property tax, a sales tax on luxury goods, or the exemption of sales taxes on basic necessities, may be described as having progressive effects as it increases the tax burden of higher income families and reduces it on lower income families.
Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality, as the tax structure reduces inequality; economists disagree on the tax policy's economic and long-term effects. One study suggests progressive taxation is positively associated with subjective well-being, while overall tax rates and government spending are not.
Early examples
In the early days of the Roman Republic, public taxes consisted of assessments on owned wealth and property. For Roman citizens, the tax rate under normal circumstances was 1% of property value, and could sometimes climb as high as 3% in situations such as war. These taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth. By 167 BC, Rome no longer needed to levy a tax against its citizens in the Italian peninsula, due to the riches acquired from conquered provinces. After considerable Roman expansion in the 1st century, Augustus Caesar introduced a wealth tax of about 1% and a flat poll tax on each adult; this made the tax system less progressive, as it no longer only taxed wealth. In India under the Mughal Empire, the Dahsala system was introduced in A.D. 1580 under the reign of Akbar. This system was introduced by Akbar's finance minister, Raja Todar Mal, who was appointed in A.D. 1573 in Gujarat. The Dahsala system is a land-revenue system which helped to make the collecting system be organised on the basis of land fertility.Modern era
The first modern income tax was introduced in Great Britain by Prime Minister William Pitt the Younger in his budget of December 1798, to pay for weapons and equipment for the French Revolutionary War. Pitt's new graduated income tax began at a levy of 2 old pence in the pound on annual incomes over £60 and increased up to a maximum of 2 shillings on incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but actual receipts for 1799 totalled just over £6 million.Pitt's progressive 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 1801, after Pitt's resignation over Catholic emancipation. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.
The present form of income tax in the United Kingdom was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150. Although this measure was initially intended to be temporary, it soon became a fixture of the British taxation system. A committee was formed in 1851 under Joseph Hume to investigate the matter but failed to reach a clear recommendation. Despite the vociferous 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 the 1860s, the progressive tax had become a grudgingly accepted element of the English fiscal system.
In the United States, the first progressive income tax was established by the Revenue Act of 1862. The act was signed into law by President Abraham Lincoln, and replaced the Revenue Act of 1861, which had imposed a flat income tax of 3% on annual incomes above $800. The Sixteenth Amendment to the United States Constitution, adopted in 1913, permitted Congress to levy all income taxes without any apportionment requirement. By the mid-20th century, most countries had implemented some form of progressive income tax.
Both Karl Marx and Friedrich Engels supported a progressive income tax.
Negative Income Tax
The idea of Negative Income Tax was stumbled upon and discussed by various thinkers and is most commonly attributed to Milton Friedman, who made it more prominent in his 1962 work ‘Capitalism and Freedom’. The theory places itself as an alternative to the contemporary progressive tax systems which are deemed too bureaucratic and inefficient, it’s emphasized for its lower administrative costs and unitary system of providing welfare and support without discrediting the beneficiaries. It also eliminates unnecessary processes and institutions by directly providing to the substandard.NIT is a system where the flow of the tax payment is inverted for salaries falling below a specified threshold; individuals surpassing the given level have to contribute money to the state, while those below are recipients of said funds. Theoretical frameworks of this idea could be referred back to William Petty, Vilferdo Pareto, and Paul Samuelson among others.
The adjustability of subsidies given to the poor households by the system eliminates the welfare trap issue faced by other proposals. The ‘wage subsidy’ is best demonstrated by the gap between ones salary, base pay, and real income post-subsidy. Once the minimal criteria defined by the according government is met, the recipient becomes the payer.
Friedman provides five other advantages to NIT. It allows households and families to sustain themselves directly from their income without having to rely on other programs or plans. Secondly, it provides cash to the recipient, which is perceived as the most superior means of support. Thirdly, Friedman claims that negative income tax could replace all other supporting programs and work as the universal program on its own. Fourthly, lower administration costs associated with NIT compared to other systems. Lastly, it should not, in theory, interfere with market mechanisms unlike other government interventionist laws.
A survey conducted in 1995 established that the majority of American economists advocated for the addition of a negative income tax into the welfare system. The United States federal government took a key interest on the matter and between 1968 and 1982 sponsored four experiments across various states to see the effects of NIT on labor supply, income, and substitution effects. As part of the result, most participants reduced their labor supply, especially the youth by as much as four weeks. These responses may seem imminent from a generous system like NIT.
NIT saw extensive use under President Nixon's Family Assistance Plan in 1969. It was also implemented in 1975 for the working poor through the earned income tax credit. The system is still in power today, but differs from the original theories of Friedman and his supporters.
Measuring progressivity
Indices such as the Suits index, Gini coefficient, Kakwani index, Theil index, Atkinson index, and Hoover index have been created to measure the progressivity of taxation, using measures derived from income distribution and wealth distribution.Marginal and effective tax rates
The rate of tax can be expressed in two different ways; the marginal rate expressed as the rate on each additional unit of income or expenditure and the effective rate expressed as the total tax paid divided by total income or expenditure. In most progressive tax systems, both rates will rise as the amount subject to taxation rises, though there may be ranges where the marginal rate will be constant. Usually, the average tax rate of a taxpayer will be lower than the marginal tax rate. In a system with refundable tax credits, or income-tested welfare benefits, it is possible for marginal rates to fall as income rises, at lower levels of income.The effective marginal tax rate is a marginal tax rate that includes welfare benefits along with taxes. It is the percentage of additional income that a taxpayer pays in taxes less any changes in the value of welfare benefits and tax credits received. It
Usually tax progressivity considers only the distribution of the costs of the tax, or the tax incidence. The distribution of costs and benefits of government expenditures may also be analyzed, which together with the tax incidence is the fiscal incidence.