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Tuesday, February 21, 2017

Oh Presents Are the Rich Responsible for Progressive Marginal Rates? Today At NYU

OhJason 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

http://taxprof.typepad.com/taxprof_blog/2017/02/oh-presents-are-the-rich-responsible-for-progressive-marginal-rates-today-at-nyu.html

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Comments

Professor Oh, you might find this old paper of mine with Frank Buckley stimulating. We suggest that progressive taxes are good because they pre-empt inefficient regulation. This is an alternative reason why the rich might like progressive taxes.
The Uneasy Case for the Flat Tax (with F. H. Buckley), Constitutional Political Economy , (December 2000) (lead article) 11(4): 295-318. There is a secret paradox at the heart of social contract theories. Such theories assume that, because personal security and private property are at risk in a state of nature, subjects will agree to grant Leviathan a monopoly of violence. But what is to prevent Leviathan from turning on his subjects once they have lain down their arms? If Leviathan has the same incentives as his subjects in the Hobbesian state of nature, he will plunder them more thoroughly than ever they plundered themselves in the state of nature. Thus the social contract always leaves subjects worse off, unless Leviathan can fetter himself. And how can Leviathan bind himself, if he can always impose confiscatory taxes or choke off trade through inefficient regulations? This article suggests that schemes of progressive taxation, in which marginal tax rates increase with taxable income, may be seen as a useful incentive strategy to bribe Leviathan from imposing inefficient regulations. Income taxes give Leviathan an equity claim in his state's economy, and progressive taxes give him a greater residual interest in upside payoffs. Leviathan will then demand a higher side payment from interest groups to impose value-destroying regulations. Of course, progressive taxation imposes its own incentive costs, by reducing the subject's private gains. However, these costs must be balanced against the gains from correcting Leviathan's misincentives, and it may that such gains exceed the costs of progressive taxation. In Ascii txt and pdf ( http://rasmusen.org/published/Rasmusen_00.CPE.king.pdf)

Posted by: Eric Rasmusen | Feb 22, 2017 12:51:06 PM