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Saturday, July 16, 2011

Discussion Question: Is It Important for Taxes to be Progressive? Or is Progressivity in the Net Benefits the Only Important Consideration?

In Europe, the VAT is used extensively. VATs are  regressive, but they're an important source of revenue for the highly progressive tax-and-transfer systems in Europe. That is, although the tax itself is regressive, it is very good at producing revenue and once the distribution of benefits is accounted for (both cash transfers and other benefits), the systems are highly progressive overall.

I have always argued for progressive taxes, in particular for the principle of "equal marginal sacrifice" (the lost dollar paid in taxes should lower utility by the same amount or everyone, and since the marginal utility of a dollar falls with income this implies a progressive structure). But increasingly I'm wondering if a flatter structure that brings in more revenue and ends up more progressive once the benefits are accounted for might not be better.

The political right seems to think there is something valuable about the pain from paying taxes, that's why they complain when people are able to avoid them (unless you are rich and manage this through legal avoidance). When people are forced to feel the pain from taxes, they argue, that helps to keep government small (this seems to argue for equal marginal sacrifice and progressivity so that the marginal pain is the same).

My argument for progressivity is a bit different. It is based upon equity. It seems fair to have those with more pay proportionately more. But why shouldn't the overall outcome be the important consideration?

So the question is:

Is it important for taxes to be progressive? Or is progressivity in the net benefits the only important consideration?

Click on the question to answer.  (The answers to previous questions are in the outermost sidebar.)

    Posted by on Saturday, July 16, 2011 at 10:35 AM in Discussion Questions, Economics, Taxes | Permalink