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World: Progressive Vs. Proportional -- Debating The Best Tax System

  • Mark Baker

Income tax in some form or another has been around for thousands of years, yet the debate over who should shoulder the tax burden remains as fresh as ever. On one side are supporters of a progressive system in which the wealthy pay a higher percentage of their income in tax than the poor. On the other are those who say everyone should pay equally, regardless of income.

Prague, 13 February 2003 (RFE/RL) -- Historians tell us governments have taxed their citizens for as long as governments have been in existence. Incomes and wealth taxes, in one form or another, have been traced back some 6,000 years. But despite this long history, disagreement still exists on how the tax burden should be distributed. Should the wealthy pay more of their income in tax, or should each citizen contribute equally?

In countries around the world, governments have overwhelmingly opted for the former. Income tax rates are usually structured to be "progressive" in that the more a person earns, the higher the percentage of income paid in tax.

John Hills is a social policy professor and taxation expert at the London School of Economics. He told RFE/RL that a moral case is often made for progressive taxation. "Clearly, those who are most interested in reducing the gap between the rich and the poor tend to argue in favor of a progressive system, so that those with the 'broadest shoulders' bear the biggest load."

This moral argument remains potent. In the United States, for example, a recent proposal by President George W. Bush to cut taxes was strongly criticized for allegedly benefiting the rich at the expense of the poor. Critics said that while the average tax bill would fall by $1,000 a year or more under the plan, those earning the lowest wages would see almost no reductions.

Hills said there are also practical reasons for progressive taxation. He says market economic systems, by their nature, generate inequalities by rewarding the brightest or best workers. These inequalities can be disruptive, leading to social tension and crime. Hill said progressive taxation can reduce these inequalities.

"The market throws up huge inequalities, and those inequalities in a lot of countries have become much wider in the past two decades. That may be an efficient way to run one's economy because you do want people to have incentives, you do want people to be making their own decisions about where businesses are located and what investments are made. But you don't necessarily, as a society, have to put up with the degree of the gap between rich and poor that that generates," he said.

In recent years, opposition to progressive taxation has gained ground in some countries -- notably the United States -- in favor of a "proportional" system. Under such a system, all taxpayers pay a flat tax rate -- say 20 percent -- regardless of their income.

Proponents of a proportional system advance several arguments to support their position. They say a flat rate is easier for taxpayers to calculate, more efficient, and ultimately "fairer" since everyone is taxed at the same rate.

Moreover, flat-tax advocates say a progressive system discourages the creation of wealth because it "punishes" higher levels of income with higher tax rates. They also say it encourages deception as individuals hide their wealth to avoid taxation.

Hills conceded this point but argued that research shows otherwise. "The first effect is people might say 'Why bother [working more]? Why should I run my business, why should I go and do that extra hour's work?' And that of course could damage the economy. The evidence [however] tends to be that you have to have pretty high tax rates for that kind of effect to come in."

Hills said any analysis of a country's tax system must look beyond income tax and include other forms of taxation, such as mandatory social-security payments, sales taxes, and "sin" taxes levied on products like tobacco and alcohol. These types of taxes are by nature "regressive" in that they take up a higher percentage of a poor person's income than that of a wealthy person.

Ironically, he says, even if the goal of a society is to ensure that everyone contributes equally, income tax needs to be progressive to some extent to compensate for these other, regressive taxes. "But you've got to look at the overall tax system as a whole. Quite often, indirect taxes on 'sin' -- things like smoking and drinking and so on, but also quite a lot of other types of indirect tax -- bear more heavily on the poor. So even if your aim is that overall you want to make sure that people pay the same share of their income in tax in total, you probably need a progressive income-tax system in order to offset the fact that the indirect taxes -- the taxes on things like consumer items -- are going to be 'regressive,' in other words, [they will weigh] more heavily on the poor," Hill said.

Hills uses the United Kingdom as an example. Anyone looking at only the income tax would say it is strongly progressive. He said, however, that if sales and other taxes are added in, the overall system is proportional.