Income Tax Progressivity and Reform

By Doak, Ervin John | Atlantic Economic Journal, June 1989 | Go to article overview

Income Tax Progressivity and Reform


Doak, Ervin John, Atlantic Economic Journal


Income Tax Progressivity and Reform

I. Introduction

The income tax system is a matter of continued controversy and debate. For example, while many, if not all, people seem to have accepted the idea that the income tax rate should rise with taxable income, at least up to some point, there is a question as to the exact pattern of progressivity. Moreover, there are the continuous complaints about loopholes and ways that the rich can escape paying their fair share of the tax burden. Recent tax reform proposals have been made in both the United States and Canada. With these in mind, this paper advances a simple theoretical model within which such issues may be discussed.

II. Basic Model (I)

The basic model assumes a certain level of national income, Y, that is distributed between two individuals, A and B, where YB > YA; T* represents the required tax revenues needed to finance government spending; X represents all tax deductions; B is the only individual who can take advantage of these deductions;1 and there is acceptance of a progressive income tax. Average tax rates are represented by tA and tB, which are determined by A's and B's respective taxable incomes, YA and (YB -- X): ti=k (Yi -- Xi).

In this case, the coefficient k is the slope of this function and measures the degree of progressivity. Its determinants also represent the first approximation to the determinants of income tax progressivity.

As can be proven, k = T*/YA2 + (YB -- X)2 and it is seen that k varies directly with T* and X, and inversely with (YA + YB) and YB.

III. Numerical Illustration Assume: T* = 300; YB = 2,000; and YA = 1,000. Then: k = 300/1000(2) + (2000 -- X)2 = 300/5,000,000 -- 4,000 X + X2

IV. Basic Model (II)

So far, taxable income has been assumed to be the appropriate tax base for discussion. However, concerns over fairness and equity often have in mind income before deductions. So, the discussion is amended in this and the next section accordingly.

For any individual, the tax rate in this case is: ti* = Ti/Yi = ti(Yi -- Xi)/Yi = k(Yi -- Xi)2/Yi As can be proven, t*B -- t*A/YB -- YA = k [YB -- 2XB + XB2/YB -- YA]/(YB -- YA)

In this connection, it is of interest to consider the following extreme cases: X = 0; and XB = YB.

If X = 0, then: t*B - t*A/YB - YA = k which is identical to the previous model. Here, taxable income is the same as income before deductions. However, this is seldom the case.

If XB = YB then t*B - t*A/YB - YA = k[YB - 2YB + YB2/YB - YA]/(YB - YA) = k[- YB + YB - YA]/(YB - YA) = k (- YA)/(YB - YA)

This shows, among other things, how a progressive income tax system may become less progressive or even regressive through a system of tax deductions2 (see Table 2). 1In assuming that Xa = 0 and Xb = maximum possible, the model reflects the fact that in Canada about 75 percent of all tax deductions are taken by the richest 33 percent of households. 2Evidence of effective taxation in both the U.S. and Canada does not suggest that tax deductions have made the general pattern regressive. See, for example, [Pechman, 1987; Auld and Miller, 1982].

V. Conflicting Objectives of the Tax

System

It should be recalled that any income tax system must satisfy a variety of tax objectives. For one thing, there is the pressure to come up with a certain level of T, which may or may not match the level of government spending. Secondly, there is the pressure coming from those asking for various kinds of tax exemptions or deductions. Thirdly, the system must be progressive. Given the level of national income and its distribution, the government must then choose between these objectives, which are also conflicting objectives. In other words, government must make some hard choices. It does not have unlimited freedom in this matter.

The foregoing points may be illustrated with the help of the model in this paper. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Income Tax Progressivity and Reform
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.