Does Progressive Taxation Redistribute Income?
by David A. Hartman on 02/12/2002
16 Pages
Since the Progressive Era of the early 20th century, the prevailing wisdom has been that progressive taxation of wealth is a necessary condition of social equity. This requires that the wealthy be taxed at increasing rates for increasing levels of income and assets. As a result, federal income taxes have risen from modest beginnings in 1913 to rates bordering on confiscation by mid-century.
Progressive taxation has three primary social objectives. The most common is to redistribute the burden of government taxation from those of lesser means to those more affluent. The second and least acknowledged goal is to provide government with the means to redistribute income. The third, which played an important role in the original public support for progressive taxation, is the contention of intellectuals that the economic and political power of wealth requires curtailment.
Whether or not progressive taxation has succeeded in increasing the real incomes of those of lesser means through the disproportionate taxing of the wealthier is the purpose of this study. Theoretically, increasing the tax share paid by the wealthy should increase the after-tax income share of the rest of the taxpayers. Yet a meticulous study of tax share versus income share over the period 1957–1997 has found that this seemingly obvious cause-and-effect did not occur. Instead, there has been an evident negative relationship between tax share paid by the top 10 percent of incomes and the after-tax income share of the other 90 percent. In other words, when tax share of the top 10 percent goes up, the after-tax income share of the other 90 percent goes down!
The evidence strongly suggests that the real income effects of high marginal taxation of financial and intellectual capital has lowered real after-tax income for all Americans, and that more proportionate taxation should be adopted to promote economic efficiency—with equity of income distribution left to the impartial judgment of the markets.
Given that increasing the share of taxes paid by the wealthy does not increase the after-tax income of the remainder of the people, then serious reexamination of public policy is necessary and only one realistic conclusion exists: Progressive taxation for income redistribution has achieved the opposite of its objectives of helping persons of lesser means.
Progressive taxation is a demonstrated failure that demands remedy by fundamental tax reform rooted in an amendment to the Constitution: No tax shall have more than one rate which shall be equally applicable to all taxpayers, and any deduction, exemption, or credit against a tax shall be equally beneficial to all taxpayers.
Americans would find once again that poverty is best dispelled by growth-oriented public policies promoting a growing economic tide that raises all boats, not the unproductive misallocations of government largesse from confiscation of the efforts of our most productive citizens.
As the loss of jobs and income will testify further when the New Economy capital investment boom subsides, the case for fundamental tax reform has been clearly evident for decades.
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