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Monday, March 27, 2017

Oh:  Are Progressive Tax Rates Progressive Policy?

Jason Oh (UCLA), Are Progressive Tax Rates Progressive Policy?, 92 NYU L. Rev. ___ (2017):

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 this 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 the tension in the extant literature by demonstrating how progressive marginal rates are 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 rich and middle class benefit from inframarginal tax cuts – rate cuts at low levels of income. The intuition is that taxpayers benefit from rate cuts if they occur at a level that is at or below their own income.

This means that rate progressivity is not entirely progressive policy. Increasing marginal rates at the top increases the progressivity of the fiscal system. But marginal rate cuts at low levels of income can have the opposite effect. They are particularly pernicious because they can be framed as “low-income” tax cuts. A cynical view of marginal rate progressivity is that it allows the rich and politicians to pay cheap lip-service to progressivity, even though there are many better tools available for achieving that goal. Unfortunately, cutting inframarginal rates remains politically popular. Both House Speaker Ryan and President Donald Trump’s tax plans feature such tax cuts prominently. Understanding the regressive effect of inframarginal rate cuts has never been more important.

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Comments


That's a very nice idea I haven't heard before. If I'm rich, I'd like to reduce the rate on income from $0K-20K of income from 15% to 5% because I save $2000. Eventually budgets need to balance, we cut poverty programs by $2000. The man who earns $10,000 is a net loser.
Frank Buckley and I wrote a paper with a different twist on why the rich would like progressivity:

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 | Mar 27, 2017 7:50:00 AM