Tuesday, February 21, 2017
Jason Oh (UCLA) presents Are the Rich Responsible for Progressive Marginal Rates? at NYU today as part of its Tax Policy Colloquium Series hosted by Daniel Shaviro and Rosanne Altshuler:
Why do income tax systems across the world consistently feature progressive marginal rates? The existing literature tells a political story focusing on the top of the rate schedule and the preferences of the poor and middle class. According to the standard view, higher rates at the top result from the poor and middle class using the political process to “soak the rich.” However, this explanation is inconsistent with research showing that public policy is generally more responsive to the preferences of the rich. Explaining marginal rate progressivity as a universal (and exceptional) triumph of the poor and middle class rings hollow.
This Article resolves this tension in the extant literature by showing how progressive marginal rates are in fact consistent with the preferences of the rich.
Marginal rate progressivity is the combination of two policies–higher rates at the top and lower rates at the bottom. This Article shifts the focus to the bottom of the rate schedule and argues that the middle class and the rich benefit from rate cuts at the bottom of the rate schedule. The intuition is that taxpayers benefit from rate cuts if they occur at a level that is at or below their own income.
To test this theory, a series of Markov chain Monte Carlo (“MCMC”) simulations explore what rate schedules are most likely under majoritarian voting. The simulations suggest that (1) rate progressivity becomes more likely as political power is concentrated in the hands of the rich and (2) progressive rate schedules are predominant even if there are relatively more rich than poor. In short, it may be the rich that are responsible for progressive marginal tax rates